Unlocking the hidden profits most recruitment companies are missing
“People buy from people”
Correct; never more so than in recruitment. However, when it comes to procurement, buying from the person you like the most, with no strategic direction, has been costing businesses millions and cutting into hard earned profits.
So, with such great sales and negotiation skills within this massive industry, why is value for money not being achieved by so many organisations when it comes to the purchasing of everyday goods and services?
Finance Director, Top 20 global recruitment business
Our largest expenditure is people – candidates, salaries and commission. Therefore our finance team is set up to focus on them, whereas all other areas of spend have fallen by the wayside. It simply is a matter of time and resources.
Finance departments in recruitment are made up, primarily by two teams; Payroll to ensure candidates and staff are paid, and Credit Control to ensure that invoices get paid.
With everyone focusing on weekly and monthly targets, procurement is invariably viewed as a much less important exercise than the "business of relationships" (even though this is cornerstone of what drives the most effective procurement).
Procurement has historically been overlooked…
Consequently, procurement has - until recently - been under-resourced and largely overlooked in most recruitment companies. This is in spite of the fact that spend on areas such as IT, Telecoms, Facilities, Marketing, Travel, HR, Professional Services and Office Administration can make up around 20% of all expenditure. – a tidy sum when added together. And a big drain on profits because most firms are paying well over the odds across virtually all of these areas.
Many recruitment companies do not have any dedicated procurement teams at all. Instead, buying power is spread out throughout the business.
HR, IT and Marketing Directors generally have free rein to buy whatever they require, whilst Office Managers or Administrators are often responsible for the procurement of stationary, workwear, print, postage and general office supplies. Very rarely is any rigorous procurement best practice applied.
For companies that do have dedicated internal teams, those resources are often limited (in terms of numbers of people on the ground) and lacking in capability (when compared to high maturity procurement teams outside of the sector).
Furthermore, in certain instances the internal team is faced with an uphill battle, with a complete lack of backing at a senior leadership level required to do the job in any meaningful way.
…but some of the smartest companies are challenging this view
This has all been fine in years gone by. But today, the recruitment industry faces new and constant challenges – caps on agency fees, margins being squeezed, minimum wage increases, expensive rent and rates for city-based offices to name but a few.
If you add to this mix an environment of fierce competition, client pricing pressure, disruptive innovation and a rising cost base (with external expenditure up by as much as 25% in 3 years according to one global recruitment company) viewpoints about the role of procurement are starting to change.
Group CFO – International Recruitment Company
Previously we’ve let directors buy what they need and they’ve just reported back to me. But now we are seriously having to look at things differently. Getting an understanding of what we spend, where we spend it and why is quite a modern concept for us. But having this transparency is an eye-opener when examining options to protect and enhance our margins.
With external spend often running into tens (sometimes hundreds) of millions, the 'prize' for delivering enhanced procurement can be a significant contributor to EBITDA numbers with substantial six and even seven figure financial savings possible.
For certain firms, this has provided a two-fold financial gain against their competitors.
In the short term, immediate in-year cost enhancements are possible, with recurring savings over the following 1-3 years often achieved. Longer term, savings achieved in procurement can be used to fund broader transformation and change initiatives as well as providing funds to re-invest in talent.
CFO - £800m t/o Global Recruitment Company
We’re using a third party to work alongside our finance team to get our procurement house in order and drive out savings. The saving will contribute significantly to our EBITDA in 2018 and act as a catalyst for other organisational efficiencies in years to come.
Points to consider
- Recruitment companies face a fiercely competitive trading environment
- Attitudes to the role of procurement are changing
- Working in partnership with an external procurement specialist to create spend transparency and support cost reduction activity can be a highly effective way of examining what can be achieved in the short to medium term.
- A growing number of recruitment companies are getting ahead of the game and are already enjoying the financial and transformation benefits that can be achieved