Buggy Whips

That’s right, I said buggy whips. (Oh God, where is he off to now!) The buggy whip industry has long failed and ceased to exist (except for a few remaining artisans making a handcrafted product for a very small and discerning equestrian client base and one small community in the Pennsylvania Dutch country). But, despite popular opinion, it was not the advent of the automobile that caused the demise of this once prosperous industry. The industry failed because makers of buggy whips thought they were actually in the buggy whip business. Clear? No? Really? Ok, let’s look at it this way, they were so involved in worrying about their “product” they forgot to focus on the “industry” in which they existed. More to the point, they failed to clearly define the “service” their product provided to their client base. Therefore, with product moving off the shelf everyday, it was difficult for them to see the end of the need for their product was approaching. They confused “product” and “product sales” with “market” and “market potential.” It is like throwing a rock into the air: before it falls, it reaches it highest point. So up until the very last minute, you look good. What service did the buggy whip industry provide? When automobiles were still in the minds of visionaries, everybody who had somewhere to go within a certain radius of their home rode a carriage, coach, or a buggy. It might have been his or her own buggy, a rental, or a cabbie, but whatever it was, it inevitably had a horse on the front end to make it go. To make the horse go, you had a buggy whip. In essence, a “personal convenience starting mechanism.” The “new fangled automobiles” had starting cranks located in the front of the car. This item had to be provided for every automobile manufactured. Why? Because this item was used to make the engine start, a “personal convenience starting mechanism.” The original cranks were often lost or broken and needed to be replaced – the first replacement “auto part.” Therefore, isn’t it logical that, rather than disappear as the need for its existing “product” declined, buggy whip companies convert from a “buggy part” company into an “auto part” company? But they didn’t. They just kept making buggy whips until nobody was buying them anymore. So the buggy whip industry disappeared not because cars made their product obsolete, but because they forgot the service that their product provided was “ignition.” As the product needs of the client change, you change your product or service or go the way of the buggy whip. Is this a unique instance of self-directed obsolescence? No, not really. The railroad passenger business all but disappeared in this country, as they competed with the airline industry in the 1950s and 1960s due to the fact they forgot they were transportation companies that happened to own trains. They could have just as easily become transportation companies that owned trains and planes. The steamship industry waited twenty years to shift their focus from “transportation” of travelers to the “partying” of vacationers, a shift in “end product” that saved an industry that has been in distress since the late 50s. (Of course, movies like Titanic” do not help a lot.) Every industry needs to look at its product offerings periodically to insure that it is making the needed changes in those products, product delivery, and product cost to provide needed and relevant services that will help in the mission of building client base. It is very difficult to do this when unprecedented growth has blinded the industry to changes in its clients’ service needs, requirements, or conditions of business. Well, it is not quite as busy now as it was six months ago, and that gives the recruiting industry an opportunity to review our business, services, practices, and client costs to determine if we are truly relevant – or a buggy whip seeking a market. Our current business practices have not changed all that much in the last half of the last century of first years of this new century. True, we have gone from mailing resumes, to faxing them, and now to emailing them to clients. (Phew, feel the breeze of progress.) More “recruiting” consists of pulling resumes off the same “posting boards” and websites as the clients we represent. We still base our fee for services on providing candidates for full-time employment on a “regardless of success or failure” search charge or a contingency fee based on the candidate’s final salary at the time of offer acceptance. These concepts originated back when hiring a new employee also carried with it a greater than 50% likelihood that, barring death or dismemberment, the new hire would get a “25 Years of Service” gold watch and a retirement party at the beltway Holiday Inn. (“For the banquet, your choices are chicken or fish. But they both taste like hamburgers.”) This was also during a period where fees ranged, on average, from 10-15%. So let’s look at the Return on Investment (ROI) of our industry, then and now. For the sake of this discussion, we will assume the same company is staffing in the 1950/60s at an average salary of $12,000, in the 1970/80s at $36,000, and in the 1990/2000s at $60,000 for a company of 100 full-time personnel with an annual staffing need based on an average turnover from the time period involved of 15%, 25% and 35% respectively, with 25% of new hires the result of contingency agency fees. Fees will be adjusted as well for industry averages during these periods of 12.5% (10-15%), 17.5% (15-20%) and 27.5% 25-30%) respectively.

Total New Hires Cost if 25% Agency Hires Fee as a % of Annual Payroll
1950/60 15 $5,250 (3.5) .0043
1970/80 25 $39,375 (6.25) .0109
1990/2000 35 $144,375 (8.75) .0240

Well, with fees at an average cost of currently only .0240% of total payroll, what is the big deal? Well nothing scares “bean counters” more than accelerating cost curves. The first question they ask is, “Are we getting more for the increase?” More importantly, $144,375 may only be .0240%, but it is still money. The finders fee for less than nine hires is almost equal to the cost of two employees salaries. (Sometimes you have to stop thinking like the guy getting the check, and think like the guy writing the check to understand your clients concerns.) Another way your client’s “bean counters” are looking at staffing costs are also based on the cost of acquisition against the period of utilization. In other words, if you keep your hire for an average of 10, 4, and 2.5 years respectively, what is the cost of acquisition using an agency, then and now using the above model and it’s numbers?

Average Fee Average Years Retained Cost of Acquisition
1950/60 $1,500 10 $150 per annum
1970/80 $6,300 4 $1,575 per annum
1990/2000 $16,500 2.5 $6,600 per annum

I know, costs have gone up over the last fifty years. (Tell me about it, Three Musketeers bars used to be half again as large and only cost…ah, sorry, off on a tangent again.) You may say, “Consider the impact of increased salaries on fees.” True, but during a period that salaries have increased five fold, fees have gone up eleven fold per hire, a rate twice the salary increases. During a time salaries have gone up five fold, the cost of acquisition per annum using an agency has increased by 44 – a rate almost nine times faster than salaries. (Yeah, that seems fair.) Now, before I get a bunch of irate emails about “not understanding the value of the service we provide,” calling me Benedict Arnold (he was a nasty traitor for those who slept through High School History), or think this is information best kept secret, remember: I may be writing this, but it is the industries we service and our very own clients that are thinking it. Sales mantra for the day: “Identify a trend, or get run over by it!” Many of my senior contacts in emerging and established companies have expressed many of the following sentiments, and other less polite ones, to me on several occasions;

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  • “We met our hiring goals in 2000, and almost went bust doing it!”
  • “I do not know if we can afford another two years of staffing costs that we just absorbed!”
  • “We did not do a lot of other things we wanted to, just to pay for staffing costs!”
  • “As a CFO, this is my third start-up, but the first one where the number I factored for staffing as a line item in the second round financing business plan became an issue!”
  • “A significant percentage of our current staff are not contributing at the level they are compensated because the work had to get done, profitability or not!”
  • “I feel like the Angel of Death at budget meetings, I keep giving everyone bad dreams.”

Is this the agency and third party industry’s fault? No, of course not! But when a client feels that they are not getting a good ROI on their hard-earned money using your product offering, I would not play that “Not my fault” card with any confidence. The last ten years have been a progressively indulgent “staffing orgy.” Everyone was so intent on meeting staffing requirements in an environment of “endless money supply” that little thought was given to the “morning after.” Well, the party is over, the sun has risen, and everybody is looking for the staffing bottle of Excedrin. As companies prepare for the next hiring binge, rest assured, they will be looking for more cost effective and industry reality relevant services. The last ten years were just too expensive for business to do otherwise. So if the end result of the last ten years is that the cost of staffing has grown out of hand, and you represent the most expensive line cost of a “per annum” review of qualified (please note I said, “qualified”) staffing, is it any surprise that in any economic turn down or other business tremor, agency fees become one of the first victims of an economy drive? Here are some ideas whose time may have come:

  1. Timeliness Pays. In this new fast-paced economy, speed is everything. Should fees be based on “timeliness”? A flat-fee rate for filling a requisition with a declining bonus based on the time taken to close the requisition. (The “day” a resume is submitted is used as the timeline, instead of interview or hire date, to preclude clients from lowering fees by slowing the process.)
  2. Monthly Utilization Fee. Since so few employees stay on ten years, as they did just two decades ago, the traditional 25% fee is not paid all at once. Rather, 10% is paid on the first day of employment, with a monthly payment to extend over twenty-four months. In this way the company knows that if the candidate terminates sooner than 24 months due to a better opportunity, they are not out a huge “thanks for nothing” fee, only the portion that applied to the candidate’s actual time on site up to 24 months. After that, the candidate is free and clear. The agency maintains a “cash flow” instead of periodic cash “lumps.”
  3. Free Employee Replacement. For a period of “Industry Standard Turnover” with terms and conditions that insure the client does not “engineer” a voluntary or involuntary termination.
  4. In-house Resource. You accept an annual “stipend” for a fixed number of hires, with a reduced fee structure, but a fee structure, for hires in excess of that agreed number.

All the above have issues and implementation problems of their own, I know, but when is the last time you reviewed your business practices with an eye to make them more acceptable to your clients? Considering the “feeding frenzy” environment of staffing for the last decade, I doubt ever. The recruiting industry was able to get away with a “who needs you” frame of mind with many of its clients. But considering the current economic environment, maybe now is the time to rework the relationship. Or at least discuss it. It is not easy to “change what works for you.” It is tough to give up “buggy whip” manufacturing once you get the hang of it. But taking a serious look at your business is never a bad idea. Conduct some user group sessions with clients. Review with them what they felt worked, what did not work. If they feel your service is too expensive, find out why! The issue may not just be the money, but the expectations that are not met “despite” the money, or the mechanism of payment. If nothing else, your efforts to include them in improving your product will shock the heck out of them. There is the story of two peddlers selling sunglasses on a street corner in New York. One was asking for $2.50 a pair, the other was asking for $275,000 a pair. The one peddler turned to his overpriced friend and said, “How many sunglasses do you plan to sell at that price?” The other replied, “At $250,000 I only have to sell one pair!” You got to love optimism, just don’t try to pay your bills with it. The end users of the recruiting industry are short of cash and looking for a better and more cost effective way to recruit. Offer a solution, but try not to make it just another version of the old “Buggy Whip.” The buggy whip industry is gone; it ran out of people who wanted to buy the product. But the world was still full of people spending money on “personal conveyance starting mechanisms.” Have a great day recruiting! <*SPONSORMESSAGE*>

Ken Gaffey (kengaffey@comcast.net) is currently an employee of CPS Personal Services (www.cps.ca.gov) and has been involved in the Department of Homeland Security, Transportation Security Administration project since its inception. Prior to this National Security project Ken was an independent human resources and staffing consultant with an extensive career of diversified human resources and staffing experience in the high-tech, financial services, manufacturing, and pharmaceutical industries. His past clients include Hewlett Packard, First Data Corporation, Fidelity Investments, Fleet Bank, Rational Software, Ericsson, Astra Pharmaceutical, G&D Engineering, and other national and international industry leaders. In addition to contributing articles and book reviews to publications like ERE, Monster.com, AIRS, HR Today, and the International Recruiters Newsletter, Ken is a speaker at national and international conferences, training seminars, and other staffing industry events. Ken is a Boston native and has lived in the greater Boston area most of his life. Ken attended the University of South Carolina and was an officer in the United States Marine Corps.

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