Summary: Contingency recruitment* generally isn't good for growing companies or industries that need dedicated resources outside the organization. The situation is equally challenging with organizations that are experiencing higher turnover, why?
Don't get me wrong, contingency is great in certain situations. And I like most contingency recruiters that I have met. However there are 4 main reasons why a contingency recruitment structure isn't good for most companies to use very often, if ever
Most organizations will try to avoid paying fees like the plague to begin with because it is an expensive way to recruit. So they feel the best option is to go as long as they can recruiting fully in-house and pay contingency fees only as a last resort when internal resources are insufficient to fill the position with the best talent.
This sounds a lot like me when I was in my early 20's regarding my health. Go without insurance, go as long as I can without seeing a doctor, and just pay cash out of pocket when I have to go to the doctor. Not a wise strategy. Needless to say, I no longer choose to self-insure against health risks.
The former is basically self-insuring for recruitment risk, because paying a large amount of contingency fees in any one quarter is similar to paying a large claim when business insurance is not in force. These companies invariably feel the pain while looking in the rearview mirror when the organization's recruitment efforts fall short.
Paying a large amount in contingency fees is also a bad idea for a company that wants to make a lot of hires in a short period of time, and wants to use as much free cashflow as possible to grow the business. This is why many companies evaluate and incentivize internal HR and recruitment resources based on how much they can decrease the usage of contingency recruitment.
Most of us wouldn't go with a contingency plan for unexpected losses on our business, cars, health, etc., so why do we do it for recruitment?
The reason why several contingency hires in a quarter are so hard on a growing business, is that businesses generally prefer paying relatively level, recurring bills so that they can be budgeted more easily. However contingency recruitment is designed to have the employer a large fee within a short period of time (or several large fees when making multiple hires) and distorts the profitability numbers for the quarter, because these fees and cannot be spread out throughout the entire year. Unless of course, the agency sets up some sort of longer term payment plan.
And on top of that, it is very difficult to gauge how productive the new addition(s) will be over the long term in order to figure out the return on investment for the fees paid.
The contingency arrangement often creates awkward moments between the clients, candidates and the agencies involved. How so? Clients are incentivized to to cut corners and take lesser qualified candidates that do not have a 'fee'. This involves putting very good candidates on hold while the client continues to vet through candidates that were introduced to the organization directly. Clients sometimes find themselves confronted with the dilemma of offering a higher salary for an employee that will impact the amount of the placement fee, as well as passing on stretch candidates because there is a fee attached. Things can also be strained further when the client discloses to the candidate that this is part of the reason why they are not moving forward with the candidate!
Agencies, like ours, have the ability to provide most of our clients with more service and can generally help our clients hire many more people than we do now. We have been able to offer 2-5 times more value when compared to contingency recruitment without increasing our internal costs. However, for the ones that we work with on a contingency basis, our fees will often get in the way of making more hires and therefore creating more value for them.
Since the contingency recruiter only gets paid when there is a placement, the recruiter is being incentivized to work on the jobs that are easier to fill, and for clients who are prepared to make quick hiring decisions. The contingency system also encourages the agency to send as many candidates as reasonably possible in order to increase their chances of making a placement, instead of really vetting down to the 2-3 most qualified candidates.
The contingency system also does not work well for positions that are harder-to-fill, take a more concerted effort, or that take longer than other jobs available to the recruiter. Which is why clients see a huge drop-off in efforts after a short period of time. It may not be because the recruiter isn't good at what he or she does, it is often because the business arrangement itself makes it difficult.
When does it work?
What is the alternative?
Agencies and clients should create new and more flexible business arrangements that work well for both parties. We have done this at our firm, and the experience is far more rewarding and enjoyable for all parties involved.
We believe that the best way to address this is through RPE (Recruitment Process Enhancement). This is where the recruiting company is not paid per placement. We are paid for services rendered that help to improve and facilitate the recruitment process. We call it the HR Maximizer, which includes sourcing, job advertisement, passive candidate calls, reporting, recruitment strategy and more.
This is what companies should look at when it comes to working with agencies.
I believe that a good firm will strive to find the best possible arrangement, whether it involves a mixture of recruitment process enhancement (RPE), retained search, recruitment process outsourcing (RPO), and even contingency (if it is best for the client).
*Contingency Recruitment is referring to the type of recruitment where the client pays a flat fee or percentage of salary to a recruiter if the client hires a candidate and the candidate works for a period of time. This article is directed toward companies that need outside help to hire more than 10 direct hires per year at over $60k salary.