The most expensive mistake most recruitment leaders make
Know it so you can avoid it!
Last month I asked the wise people of LinkedIn what they thought was the most expensive mistake most recruitment leaders make. I even asked them to estimate how much the mistake would cost.
Having read their responses, I can tell you that my answer wins hands-down for being the most expensive. The good news? You can avoid it.
So here’s the biggest mistake most recruitment owners make: believing that non-contingent work - usually called ‘retained’ - means some fancy service that you aren’t capable of offering to your clients.
It’s a pretty common belief, but is it really so expensive? Let me break down just how much it costs.
Let’s say an agency bills £1m a year in perm revenue, which comes from 100 placements at an average £10k fee (we’ll stick to round numbers for now).
The agency specialises in mid-level developers, and only bills their client when they make a placement. Because they believe that’s the only way.
Their fill rate is 25%.
Assuming every role they work on is real (and the work they do on the role is real, even if the client was never going to hire anyone), those 300 roles they don’t fill are worth £3m a year.
Now let’s wave a magic wand and persuade this agency to bill part of the fee when they start working on a role. We don’t need to call it a retainer… but they’ve stopped working contingent.
How do the numbers look now?
First of all, asking for money up front is going to scare off some clients. Maybe the role wasn’t actually live, maybe they’ve got other agencies working on it already, maybe they just enjoy not paying recruiters until they absolutely have to.
So let’s remove 200 of the 400 roles from the calculation. Because the client has committed money to each role, the fill rate goes up to 90% (reasonable in my experience).
Filling 90% of 200 roles at £10k each is… £1.8m.
So the mistaken belief that they have to work contingently is costing this agency £800k a year. In other words, the business could be billing 80% more if they changed their belief.
Note: if you don’t like my numbers, cut them in half and you’ll still find that the agency could be billing 40% more than they do.
Now let’s say the agency is run for 10 years (after 10 years the owners get exhausted of only filling one in four roles). They’ve billed £10m… but their one mistaken belief costs them £8m during that time.
If you’re interested in talking about how challenge affects your business, simply reply to this email and we’ll start the conversation.
Jon
P.S. Here are the top four best-of-the-rest suggestions to my LinkedIn question. Not as expensive, but worth avoiding too.
1. Someone said they’ve calculated that a toxic employee costs a business a six-figure sum. Expensive, but not 80%-of-revenue expensive.
2. Relaxed pricing controls (an issue close to my heart) - settling for 15% when you should be charging 20% - costs you a quarter of every deal. Expensive, certainly worth solving… but not as expensive.
3. Getting emotionally involved with a £1m client, then splitting up and losing the lot. It’s definitely a good lesson, but if you’ve not got all your eggs in one basket then losing one client shouldn’t cost you 50% of your revenue.
4. Opening a big office in Dubai six months before the 2008 financial crash. I’m sure this was a massive headline figure - and a hugely painful write-off - but it’s a one-off that shouldn’t equate to 80% of your revenue.
P.P.S. Let me know what you think by answering the poll below: