This blog is blunt. It’s about the commercial reality of making money in recruitment. If you run a business, and are making no money, this will probably explain why.

Or if you are a recruiter, it could explain why you can hardly scrape by on your income, or why you will get fired.

And the data suggests lots of recruiters, companies and individuals, are losing money. Many of them are managing to do that in an improving economy!

Want proof?

The latest Plimsoll Report in the UK certainly highlights that some companies are taking advantage of the improving UK economy. But closer inspection of the data tells us that 234 of the ‘Top 1,000′ UK recruitment companies, are actually losing money! And 163 of the ‘Top 1,000′ are ‘in danger’, and ‘likely to fail’. And that is in the strongest UK economic environment for the best part of a decade.

Australia is no better. We are all aware of the high profile failures of listed recruitment companies HJB and Bluestone in the past year. But let’s dig deeper. The RIB Report tells us that 27% of Australian recruitment companies made a loss in 2013. In fact, 4 out of 5 firms showed a decline in profitability on 2012 results. In other research, we learn that 17/24 Australia’s biggest recruiters saw a OP decline in 2013. And 2014 financial reporting shows further decline in profitability across major companies, with a few exceptions.

And the RIB report tells us why too. Consultant productivity is at an all time low. It’s bizarre, because sales are going up for many Australian and NZ recruiters, but profit is going down. And if anything is a sure slippery slope to recruiting hell, this is it. Profitless growth. Why is it happening?

Because individual recruiters are billing less as a percentage of their salary and on-costs than ever before.

In fact, from a ratio of almost 3 times GP to salary cost in the 5 years from ’03 to ’07, we have seen that ratio declining for the last 4 years, reaching an all-time low of 2.2 in 2013-14 financial year.(in Australia and NZ). And that is not enough to guarantee corporate profits.

And yet, even now, I often hear owners and managers of recruitment businesses say things like. “Oh she is not my best recruiter, but I only pay her $80,000 a year and she is billing $120,000 a year, so she is covering her cost, and more”

Wrong. Very wrong.

Let’s examine the real cost of a recruiter to your business.

Base Salary: 80,000

Direct on costs: Varies from country to country, but includes statutory pensions, superannuation, payroll tax, insurances etc. In Australia, this is comfortably 15% of salary, and maybe more.

Additional employee benefits: Could include obvious thing like a car provided, but there are other costs that can slip under the radar, such as car parking, membership fees etc. Include these in the cost of the individual if they are direct benefits to the employee that would disappear if the employee disappeared.

Cost of seat. This is the big one. This is the cost that most managers don’t truly factor in. I define it as follows, ‘The average cost of each recruiter, not including recruiter salary’. This is how you work it out. Go to your P & L. Take a period of a year, preferably. Go to the total expense line of the business, or for a branch or business unit. Subtract total consultant salaries and bonuses from that number. Leave in the salaries of the manager and the admin staff, as these are there to support the recruiter. Once you have that number, divide it by the number of consultants in the team. That number represents the cost to you for each consultant to put their delicate derriere in your seat before you have paid their salary.

And here is my shocking prediction. That number will be between $80,000 and $100,000. Normally closer to $100,000. (In Australia. £50,000 in the UK). Per consultant. Before you take into account their salary.

So now lets add up the cost of a consultant on a basic salary of  $80,000 pa.

Salary: $80,000
On costs (15%) $ 12,000
Benefits: $2,000
COS: $100,000

Total cost before the business makes a single dollar, equals  $194,000.

So now we know that if this person bills anything less than $194,000, they are costing you money. That’s why we want every recruiter to bill three times his or her base salary. Typically it works like this;

1/3 for the consultant salary
1/3 to cover COS
1/3 for return to the business

The sad fact is that many recruitment companies are happily paying the first 2 thirds, and never seeing the final third.

The key business imperative across our industry is to improve consultant productivity. To do that we need to hire the right skills, train, coach, mentor and provide all the modern tools they need to thrive.

Carrying long-term mediocre recruiters is like running a sheltered workshop. Now, running your business as a not for profit charity, to help enrich your mediocre consultants, while you mortgage your house, is fine, if that is really what you want to do.

But if you are going to be giving your hard-earned money away while you carry all the business risk, wouldn’t it be better if you give the money to ‘Save the Children’ or Cancer research?

Take your time now. Have a think.

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