No release or non-ongoing extension fees?

One of the more controversial practices emerging nationally and even within Canberra is asking recruitment firms to commit to long-term contractual agreements that specify that no further fee will be charged when a contractor is extended, or goes permanent, within a 12 month period.

There are two common scenarios:

1. Panel contracts or ‘preferred supplier agreements’ (PSAs) that include clauses restricting recruitment consultancies from charging a fee for an employer choosing to retain one of their contractors; or

2. One-off contract fees payable at the start of a contract period at low set rates that don’t vary based on the term of the contract, level of the employee, or if the contractor extends or goes permanent.

Additionally, the contract placement fees organisations are asking recruitment firms to commit to are heavily discounted, almost as much as one quarter of standard market rates.

Putting it into perspective

Multiple recruiters are competing for the work under these ‘preferred supplier agreements’. Only the successful recruitment firm will be paid, and they will only be paid for the initial contract placement.

Imagine if this approach was taken with, say, the provision of accountancy consulting services. An organisation appoints an accounting firm to provide tax consultancy services, however any subsequent work ensuing from the initial project will have to be provided without any further charge. Throw in the fact that competitors will also be providing the service, and the organisation will only pay for the best piece of work. With no guarantee of getting paid, this scenario is preposterous!

This may initially seem like a great win for a client, but what is really happening is that the quality of service is being eroded and the access to quality candidates is being diminished significantly. It is forcing experienced recruitment specialists to prioritise their services towards more realistic and fairly remunerated work.

To be fair, this approach could potentially make sense if there was access to exclusivity or a restricted panel (say 2-3 suppliers) with a predictably large volume of work that would allow recruiters to structure their team to succeed under different circumstances. However, in most cases these panels are the large, ‘multi-list’ variety with often more than 15 suppliers with little or no commitment to offer that supplier a minimum volume of work for ‘signing up’.

Organisations are really forcing companies into a corner where they have to accept certain panel conditions or potentially walk away from the business relationship.

Why does this approach not work?

Typically our clients appreciate our professional approach to providing a quality service and rely on our access to the best candidates in the market. They are open to paying fair recruitment fees for our service and do not hold us to unreasonable contractual clauses.

However, we do come across this request occasionally and need to step clients through the following logical argument from time to time.

1. Recruitment agencies are penalised for providing outstanding service

The agency recruiter has responded quickly, taken a detailed brief, delved deep into their networks or conducted a market search to present an outstanding candidate. They have fully vetted that candidate, ensured the candidate is a strong culture match with your team and organisation, will replace them should they not fulfil the contract in full, and they stay in touch to monitor performance.

As it turns out the recruiter did an excellent job! The project was completed on time with the contractor achieving outstanding results. The contractor is encouraged to apply for a permanent role (or they are offered a new contract) as a means to keep them in the organisation.

The client has ended up with fast, efficient access to the best talent on the market ideally suited to their needs. They have achieved a great result on their project, and now have an employee that will be a future great asset to the organisation.

But the recruiter is penalised for delivering a great result on the project, with no further fee. The recruiter is in the position where they have made a minimal fee for a great placement, and they are unable to place one of their star contractors again – this is not a small opportunity cost.

2. Illogical reasoning

Occasionally we will hear in the market “but the agency hasn’t done any more work to earn the fee.” While this approach may seem prima facie ‘fair game’, in reality it does not hold water. Why?:

The service does not stop there

A quality focussed recruitment agency like HorizonOne commits significant time and resources, and we stand by contract staff and support clients through:

  • Replacement guarantees for the full duration of any contract period up to 12 months;
  • Staying in contact with the client and candidate to make sure things run smoothly, stepping in to help proactively resolve issues, if required;
  • Helping clients with performance management issues as a third party; and
  • Helping contractors understand obligations and expectations around performance.

Clients don’t pay every time the upfront work is done

If a client only paid for ‘the work upfront’, recruitment companies would charge every time they did work for a client. Every time an agency refers great candidates to a client and the job opportunity is withdrawn, a fee would be payable. Every time a recruitment freeze halts a placement process, a fee would be payable. Presumably not a palatable arrangement for clients.

An extension or release is a new service, not part of the initial request

The reality is the supply of a contract staff member for an initial period is one service. An extension of that contract is a new service and a fee is payable. Similarly, the contractor achieving a permanent role with the organisation is also a new service, and a fee is payable.

3. Strong recruiters with the best candidate networks will not recruit for that client

Highly experienced recruitment consultants have high demand for their services and the best access to the strongest candidates. Leading recruiters offer the best service and superior ‘vetting’, they know their candidates very well, and provide access to potential ‘game-changers’.

Why would they offer their services to a client at a fee often less than half standard market rates? Why would they run the risk of losing a strong contractor for peanuts?

4. Recruitment companies will avoid supplying their A-grade contractors

It stands to reason that the principal ‘you pay for what you get’ will eventually come into play with these commercial arrangements. For candidate short markets like Canberra’s, this could be one very quick way to reduce your supply of talent flowing through recruitment agency contracts.

Agencies are more likely to supply average candidates to do an average job and ‘see out the contract’, rather than a stellar candidate that sets the new standard. Think of how many great staff members are sitting around you in permanent roles that started their career in recruitment agency contracts?

As recruitment expert, Ross Clennett blogged recently, “The increasing habit of companies and not-for-profit organisations expecting recruitment agencies to sign up to a one-size-fits-all-in-all-circumstances free temp-to-perm fee is an unjustified and disrespectful rip off. Please resist this practice with all your might.”

No release or non-ongoing extension fees?