IT Staffing needlessly suffers terrible margins
By Mark Knowlton
The expression ‘you get what you pay for’ seems widely applicable, unless you ask someone who buys IT contract services.
IT Staffing firms often hear gripes from clients regarding the fees or contract mark-ups they are required to pay. The analysis usually goes no deeper than “You bill me $100 an hour and I heard the guy you gave me is getting paid $72. You are making $28 an hour off me??!!”
The buyers of IT contract services often feel like they are getting gouged by aggressive mark-ups, but the painful truth is that IT Staffing firms grind to the finish line every year with a profit margin between 4–5%. This would seem impossible to the many buyers of IT contract services, especially the larger firms who often have vendor management middlemen handle the back office minutiae to oversee the eight figures they spend every year in services.
The TechServe Alliance is one of the leading organizations that support the IT staffing industry, and they have the numbers to prove the margins. They also have the data that explains why profit margins are so low when you finish all of the accounting.
TechScreen has partnered with the staffing industry for its full five years it has been in business, but the focus has been on helping elevate the recruiters’ effectiveness in screening technical candidates. This is a fairly tactical type of enablement, one that has delivered a lot of value over time.
Helping staffing firms take a shot at expanding 4–5% profit margins seems like a much more impactful strategic problem. That is why we are hosting a webinar Thursday, March 18th at 1 p.m. EST, “Shorten the Path to Profitability” specifically meant for staffing executives. The webinar will break down very tangible ways for staffing sales people to become productive on Day 1 and engage with hiring managers at an entirely new level. A link for registration can be found here.
A recent operational report from TechServe showed that 14% of sales people produced over $1M annually in gross profit and about 32% generated between $500,000 and $1M in gross profit; the $500K is generally regarded as the benchmark to indicate that a sales person is paying for themselves. That means this report shows that 54% of IT Staffing Sales people are not paying for themselves. The low profit margins are starting to make sense.
The same report showed an even more troubling trend when looking at the median production of sales people over a span of years. In a 6-year stretch between 2014 and 2019, the median production number only surpassed the $500K mark once, meaning that the sales people tracked in this report were significantly under-performing expectations 83% of the time.
If you consider the fully loaded cost of hiring a staffing sales person (base, benefits, computer, software licenses, etc.) and it is going to cost between $4,200 to $6,500 per month for every sales hire. If that person is given a minimum of a 90-day window, this means the firm is investing between $13,000 and $20,000 just to see if this person is someone they can afford to keep employed. Multiply that across 3–5 sales people and we are now talking about a significant amount of cash an owner must commit to grow their business.
“Staffing firms have no easy challenge in winning the trust and confidence of Engineering managers,” TechScreen CEO Mark Knowlton said. “The sheer volume of firms chasing business make it appear they are everywhere, and the pace at which the hiring takes place only exacerbates the frenetic feel to the hiring process. Combine that with the need to beat the competition to the submittal and you have an intense, asynchronous free-for-all in pursuit of filling seats. Doing anything to show a true differentiator is critical.”
Profitability is no slam dunk for staffing firms, even if they have eye-popping revenue numbers. The key to minimizing the impact of sub-productive sales people starts with preparation to more effectively engage with Engineering managers and candidates. The quicker they can build trust and credibility means more of their outbound efforts will yield productive, focused meetings. The TechServe report said that there is a 7% email-to-client visit ratio, so there is dramatic room for improving that metric.
“Our webinar walks executives through a real game plan on getting their people prepared to be productive from the first phone call and email,” Knowlton said. “We see this as a real opportunity to have a seismic impact on the IT staffing industry. We would like to put our clients in position to see profit margins in the double digits because they can cut off the fail rate much more effectively at the outset of their new sales hires’ tenure.”
Mark Knowlton is the CEO and Founder of TechScreen, the SaaS platform that serves the industry’s only technical engagement equalizer.
