Temp to perm fees. Are we absolutely stark raving mad?

Here is a prediction. As the market recovers the first impact on our industry will be a revival of the temp and contract market.

Employers will see increased work volumes as the economy recovers, but will “dip their toes” into the labour market at first, hiring flexible solutions initially. But then, as momentum is gained and confidence returns, they will start to hire permanently. But the first place they will go for their permanent hires will be to transition tried and tested contractors onto their permanent payrolls.

And then it will happen! The dreaded “temp to perm” fee debate.

And this is one thing our industry has all wrong. We give away our temps at discount rates. Why, I have never understood. A temp on your payroll is a precious asset. In talent-short times (and they will return, trust me on that) I simply cannot fathom why anyone in our industry would give a substantial discount on the fee when a temporary employee goes permanent.

It’s just so illogical. A perm fee is a once-off hit which is nice when it happens, but we seem to forget that we have lost a tried, tested, and hard to replace revenue earning asset - our temp worker.

I have heard all the arguments on this from clients and they don’t wash. Let’s start with the classic “But you really should discount the permanent conversion fee because you have already earned so much margin on the temp”. What hogwash. The temp margin is for the temporary service rendered. The perm fee is for the acquisition of the permanent staff member. There is no leveraging one against the other. We need to be confident with the client, that far from a celebration for us when a temp goes perm, in fact the perm fee is scant compensation for the lost revenue that temp could have earned on future assignments.

Some clients will even try and use the ‘hire purchase’ argument. “But can’t you see” they say “ It’s like me renting a TV and then buying it. It’s always cheaper to buy a previously rented TV”.

Sounds neat, but its fallacious. A TV is a depreciating asset. A human being, in a contract assignment where they are getting trained, absorbing the company culture and learning the systems, is an appreciating asset.

The perm fee should be more, not less.

And one more thing…

Don’t pro-rata perm fees for long-term contact assignments. That’s dumb. We lose. Keep the distinction between temp and perm crisp and clear. (I know in some countries our hands are legally tied on this, but in many it’s just about negotiation.)

If it is a fixed-term assignment, it’s a contract role and therefore it’s a timesheet hourly rate with our margins on top, or it’s a fixed weekly or monthly rate. Don’t for a minute think “well it’s a six month role so we will take our perm fee and divide it by two because it’s half a year”.

Do the arithmetic!

A perm fee at 20% for 75,000 placement is $15,000

If a client wants to pay half the perm fee because it’s a six-month gig then you get $7,500

But the margin you will earn on a $75k level person on a temp basis for six months at a 55% markup is approximately $19,000

$7,500 vs $19,000

You can see why the client likes the idea!

Sure, if the client wants to pay a perm fee instead of margin for a six-month gig for example, that’s cool. But it’s the full perm fee. The client will still be paying less than the equivalent margin i.e. $15,000 vs. $19,000.

But you get a full fee and that’s fair and proper.

If you are not convinced, think about this. If you owned an investment property, and rented it for five years to a nice young couple, and then they wanted to buy it from you, would you give them a 25% discount off the sale price because of the rent they had previously paid? I don’t think so. So why do you give your temps away cheap?

Believe me on this. We have NOTHING else to sell, apart from our service and our talent skills.

Don’t give away the farm.

Views: 3128

Comment by Michael Glenn on July 10, 2009 at 9:51am
Hi Greg,
The gravy train has ended. It's called competition.

I had a contractor earning $45/hr and the agency was getting $195/hr. I fired the agency when I came on board because they were ripping us off.

Maybe I'm stark raving mad, but a 55% markup fee is extremely high in this economy.

You maybe right about temp to perm demand but don't kid yourself - are companies willing to pay 55% markup these days?

A lot of staffing companies willing to pay 10% placement fee. Plus, the option of using contract to perm.

I hear what you are saying about "giving away the farm", but nobody is buying that high right now.

Nobody wants to buy GM SUV for $45K like the did in 2005
Comment by Greg Savage on July 24, 2009 at 10:21pm
Hi Michael
One of the challenges of blogging is context. A 55% markup where I am based (Sydney Australia) is in fact our AVERAGE markup across all our hundreds of working contractors across the country-so yes, "companies are willing to pay a 55% mar up these days" as far as I am concerned. But regardless of local conditions, I guess I am hoping the theme of my message rings true everywhere, and that is that discounting T/P fee earns the recruiter far less than generating ongoing margin.
You are right of course about times being very tight and therefore it's a buyers market, but again you will see that my first sentence on the post is "Here is a prediction". I am in fact talking about what is going to happen and how recruiters need to respond — all of which I remain convinced off. Cheers Greg

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