The recruitment landscape in the United States and Canada is highly dynamic, with many independent recruiters striving to carve out a niche in the market. While many start with a focus on permanent placements (also known as “direct hire” recruiting), many recruiting entrepreneurs get worn down by some of the challenges of the business. While direct hire can provide substantial one-off fees and cash injections, it might not be the most profitable solution. Fortunately, recruiters don’t have to be stuck only providing permanent placement services. Contract staffing is often overlooked service offering that can offer a steadier revenue stream while significantly enhancing the market value of the business. Independent recruiters are often intimidated by the legal complexity and demanding back office needs of contract staffing, but there is a way to mitigate these risks and demands.
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Table of Contents
The Challenges of Direct Hiring and Permanent Recruitment
Solving the Problem with Contract Staffing
Financial Benefits of Contract Staffing
Entering the Contract Hiring Market
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The Challenges of Permanent Placement Recruitment
Direct hiring is the easiest entry point into starting a recruitment business. While it’s easy to get into, it’s not always the steadiest and can be hard to stay in as a business. One problem is the lack of recurring revenue. Recruiters match a candidate to a permanent position and, upon successful placement, receive a one-time fee. This fee is a percentage of the candidate's starting salary, and once the transaction is complete, the recruiter's financial benefit from that placement typically ends. It’s a nice upfront cash injection, but this cycle can lead to inconsistent cash flow, making it difficult to manage finances and invest in growing the business.
In addition (or as a result) of lump revenue cycles, another frustration point felt by many recruiters is the low valuation given by investors for a permanent only recruiting business. Permanent recruitment businesses typically command a valuation of around 1-2X earnings before interest, taxes, depreciation, and amortization (EBIDTA), reflecting a more modest return on investment for owners. For a recruiter who has spent years building a solid permanent recruiting business, the idea of selling for only a year or two’s worth of profit is often quite unappealing.
Another significant concern with a direct hire business model is the vulnerability of the permanent recruitment model to economic downturns. During a recession, companies often freeze hiring, severely impacting recruiters who depend on direct hiring. This can be stressful for permanent recruiters because so much is out of their control and can change so quickly.
It's clear that successful recruiters have reasons to desire a more sustainable and resilient businesses. The question is, how?
Solving the Problem with Contract Staffing
Contract staffing fosters a long-term relationship with both the client and the recruiting (or ‘staffing’) agency. This model involves the recruiter placing professionals in temporary or project-based positions. Unlike the one-off payment structure of direct hiring, contract staffing ensures a consistent revenue stream for the duration of each contract. This can translate to regular weekly or monthly income for the recruiting agency, based on the markup they receive on the contractor's hourly rate. As contractors move from one assignment to the next, the potential for repeat business with both clients and talent increases. This helps to create a more consistent and sustainable revenue model. This continuous stream of income provides stability and can significantly improve a recruitment agency's cash flow.
Financial Benefits of Contract Staffing
Including contract staffing into your portfolio means unlocking a stream of consistent revenue, increasing the value of your business, and safeguarding against market fluctuations. By expanding into contract staffing, recruiters can enjoy stability and scalability. Here's a closer look at why contract staffing is a wise strategic choice:
Recurring Revenue
Contract staffing provides a recurring revenue model. When placing a contractor, recruiters earn a margin on the hourly rate for the duration of the contract. This ensures a predictable and steady cash flow which has multiple benefits.
More Profit
First, let’s examine the straight profit benefit of a staffing model by comparing the likely fees for three similar placements who each earn $100,000 salary:
| Type of Role | Salary/Rate | Fee Structure | Duration | Total Profit |
| Permanent Hire | $100,000/year | 20% contingency | N/A | $20,000 |
| Contract Hire | $100,000/year ($48/hour) | $73/hour billed to client | 6 months | $20,800 |
| Contract Hire | $100,000/year ($48/hour) | $73/hour billed to client | 12 months | $41,600 |
This table showcases that a contract worker who is billed at $73 per hour, with the recruiter earning a gross profit of $20 per hour, can surpass the one-time fee from a permanent placement significantly over time. If your contract worker goes from one assignment to the next, the profit of a staffing model can easily be 5X what you would have earned in a permanent placement model.
Increased Business Value
Contract staffing firms are valued more highly than permanent recruitment businesses. While the latter might secure a valuation of 1X EBIDTA, contract staffing agencies can achieve valuations as high as 5X EBIDTA, significantly increasing the worth of the recruiter's business. This can be a life changing difference for many recruiting entrepreneurs.
Recession Resilience
Contract staffing is less susceptible to economic downturns. When companies cut costs, they often prefer the flexibility of contract workers over adding to their permanent headcount, allowing recruiters to maintain revenue even in challenging times. During the recession caused by the pandemic, temporary and contract staffing sales rose by 17.9% to $144.2 billion in the US.
Entering the Contract Hiring Market
Expanding into contract staffing requires a different skill set and operational structure compared to permanent recruitment. Training an in-house team to manage this transition can be both complex and time-consuming. This is where a partnership with an experienced Employer of Record (EOR), such as Agile Partnering, can make the difference.
Agile Partnering makes contract staffing recruitment as easy as permanent placement recruitment by assuming responsibility for and managing all the back office obstacles for independent recruiters.
By leveraging Agile Partnering's expertise, independent recruiters can begin offering contract staffing services within days, not months or years. This strategic move can diversify their revenue streams, increase the value of their businesses, and provide a safeguard against market volatility.
If you're an independent recruiter looking to expand your services and build a more robust business, reach out to Agile Partnering today.
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