Maximizing Profitability in the US Staffing Market:

Contract staffing has become more attractive to staffing firms as it offers a flexible and cost-effective solution for companies needing temporary workforce solutions. Unlike permanent recruitment, which focuses on long-term placements, contract staffing addresses immediate, short-term needs, allowing businesses to adjust more easily to workload fluctuations without the long-term commitment of hiring full-time employees. This model not only helps companies manage their workforce efficiently but also provides independent recruiters with a stable revenue stream. By placing professionals in contract roles, recruiters can earn ongoing income from each contract placement, in contrast to the one-time fee typically earned from permanent placements. This continuous revenue model can significantly increase the profitability for independent recruiters, making contract staffing an attractive option for diversification. This is particularly the case with the market expected to grow in 2024, with increased demand for contract roles in IT, healthcare, and engineering.

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Table of Contents

Overview of the US Staffing Industry
The Profitability of Contract Recruitment
Operational Advantages of Contract Staffing
Building Long-Term Value Through Contract Staffing
How to Expand into Contract Staffing as an Independent Recruiter

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Overview of the US Staffing Industry

Contract staffing has become the leading revenue source accounting for 85% of US staffing market revenue, and generates more revenue than permanent recruitment, which many independent recruiters have historically preferred. This shift reflects the changing needs of businesses with the demand for contract and temporary staff rising amongst uncertain economic conditions.

By providing temporary placements that cater to the immediate or project-based needs of businesses, contract staffing can cater to businesses that are approaching recruitment conservatively. This arrangement allows companies to adjust their workforce based on their fluctuating demands without the commitment and expenses tied to permanent hiring, such as benefits and long-term salaries. This allows independent recruiters in the US the opportunity to offer a cost-effective staffing solution, particularly valuable in industries experiencing rapid changes or seasonal demands.

Staffing firms that offer contract staffing and temporary staffing solutions benefit from a consistent flow of income through billable hours, in contrast to the one-time fees generated from permanent placements. This continuous and predictable revenue stream allows for better financial stability for independent recruiters. Independent recruiters can also look to cater to sectors like IT, healthcare, and engineering, where there is a significant need for specialized skills on a project basis.

Incorporating contract staffing alongside permanent recruitment offerings doesn't detract from the value of permanent placements but rather indicates an agency's adaptability to market trends. Maintaining a balance between these services allows recruitment agencies to meet a wider range of client needs, ensuring long-term growth and competitiveness. For agency leaders and recruitment professionals, grasping the financial and operational differences between contract and permanent staffing is crucial for crafting strategies that allow them to meet market demands and enhance their profitability.

There are significant differences in the profit margins, fee structures, and success metrics such as EBITDA, of the two models which can determine how an independent recruiter may choose to incorporate contract staffing into their business offering or pivot away from permanent recruitment entirely. Find out more in our comparative analysis of the two [Link to cluster 2] but to summarize:

Comparing Profit Margins: Contract vs. Permanent Recruitment

Contract recruitment often shows higher profitability than permanent recruitment. This is due to the continuous revenue stream generated over the contract period, unlike the one-time fee in permanent recruitment. In the US, contract staffing can provide a margin between 20% to 30%, depending on the sector and contract terms, with the median average being 23% according to the American Staffing Association. Permanent placements, however, typically offer a fee around 20% of the candidate’s annual salary, paid as a one-time fee. This means that while a permanent placement can provide a significant initial payout, the long-term revenue generated from a single contract placement can surpass this, especially for long-term or high-value contracts.

Operational aspects also differ significantly. Contract recruitment involves ongoing management of the contract and relationship with both the client and the contractor, requiring significant back-office resource. This includes managing timesheets, billing, and payroll, throughout the duration of the contract. Despite additional long-term operational commitments, there is an opportunity to develop on-going working relationships with both clients and contractors. Permanent recruitment, by comparison, focuses on the upfront process of sourcing, interviewing, and placing a candidate. Once placed, the recruiter’s job is done, but so is their opportunity for making additional sales. Thus, for agencies looking to build consistent revenue streams, contract recruitment offers a more reliable model.

Per-Hour Fees vs. Contingent Fees: A Financial Analysis

Contract recruitment operates on a per-hour fee model, which contrasts with the contingent fee model typical in permanent recruitment. The per-hour fee structure offers agencies a steady income stream, calculated by multiplying the number of hours a contractor works by the agreed hourly rate. This model benefits independent recruiters by providing predictable, ongoing revenue. For example, placing a contractor in a role that pays $50 per hour with a markup of 20% generates $10 per hour in profit. Over a standard 40-hour workweek, this equates to $400 in agency profit, recurring weekly for the duration of the contract.

In contrast, contingent fees in permanent recruitment depend on successfully placing a candidate in a role, after which the agency receives a one-time fee. This fee is contingent upon the candidate's acceptance and continued employment, usually for a guarantee period. While a single permanent placement can yield a substantial fee, it lacks the recurring revenue that contract placements provide. The per-hour fee model thus offers a more stable and potentially profitable source of revenue, essential for agencies aiming for steady growth and financial stability.

EBITDA as a Success Metric in Contract Recruitment

EBITDA, which stands for Earnings Before Interest, Taxes, Depreciation, and Amortization, provides a great insight into how the profitability of an independent recruiter is impacted when incorporating contract staffing to their service offering. Using EBITDA as a success metric enables recruitment leaders to make informed decisions about scaling their contract staffing operations. This can be seen when comparing the EBITDA potential of permanent only independent who generally achieve between one to two times their EBITDA in terms of business value. Independent recruiters who have incorporated contract staffing can see their business value increase to being seven times the EBITDA or more. This is particularly important for independent recruiters who are focusing on increasing their business value before sale and use this as a metric for their success.

Contract staffing is becoming an increasingly valuable service for independent recruiters looking to grow, expand their service offering, and streamline their operations. It's a practical solution that not only opens the door to multiple sources of revenue but also serves as an economical option for their client’s workforce management needs. Recruiters that leverage contract staffing can scale more effectively and pursue steady business development. The advantages of adding various income streams and achieving cost savings allow independent recruiters to better meet their strategic goals.

Diverse Revenue Streams and Cost Efficiency

Contract staffing presents a valuable opportunity for independent recruiters to diversify their revenue stream while minimizing overhead costs. This approach enables agencies to better meet client needs, ranging from short-term assignments to more extended contracts, effectively distributing financial risk across several income streams. Unlike permanent placements that offer a singular fee, contract staffing provides a continuous flow of income throughout the contract's duration. This consistent revenue stream improves financial stability and positively influences Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA), ensuring a steady and reliable income.

Scalability and Business Growth

Contract staffing better addresses current market demands, allowing independent recruiters to offer flexible staffing solutions to their clients. It allows clients to scale their workforce up or down without the long-term commitments associated with permanent staffing. It also allows independent recruiters to work with the same client and contractors multiple times developing relationships that can bring repeat business allowing them to grow their operations by developing their portfolio of new clients while maintaining commitments to their current clients.

Contract staffing also benefits independent recruiters by allowing them to place contract workers quicker than permanent hires due to a less intensive vetting process which is more focused on specific project needs rather than the long-term cultural fit of the worker. This efficiency not only meets client demands faster but also increases the volume of placements the recruiter can make, boosting revenue.

Contract staffing can also allow independent recruiters to expand into new markets and sectors. As placements are short-term and often project based, it is easier to build and maintain a portfolio of skilled contractors. By focusing on multiple sectors, independent recruiters can also reduce the risks that come with being reliant on a single sector. The ability to quickly respond to market needs with a flexible staffing solution provides a competitive advantage over other recruiters who are solely focused on permanent recruitment.

Unlike direct hiring, contract staffing offers flexibility and a tailored approach to workforce management, which is sought after in the US due to uncertain economic conditions.

The ability to allow your clients to adjust their workforce based on current projects and market demands without the long-term commitment and the associated costs of direct hires, means that you become their long-term partner with the ability to provide them with multiple contract placements across a sustained period of time. This means a continuous revenue stream for independent recruiters while they focus on making future placements.

How to Expand into Contract Staffing as an Independent Recruiter

While contract staffing is an attract option for independent recruiters in the US, it isn’t as simple as just deciding that you are going to enter the market. There are significant differences between contract staffing and direct hiring, which means adjusting back office operations to ensure compliance and maintain smooth operations. That is why we have created tailored services for independent recruiters looking to incorporate contract staffing into their service offering.

Agile EOR, makes the hard work of managing contract hires simple. With Agile EOR, you can be sure that we'll take care of the complicated processes of managing contract workers like payroll, billing, and compliance with labor laws and insurance coverage. This lets you focus on finding the best people for your clients.

We understand that the stress of complying to legislation is often off putting to independent recruiters looking to expand into contract staffing. The legal requirements of contract staffing are complex and ever-changing. We're always up to date, making sure all workers have the right insurance and that your business meets all the necessary regulations.

We also understand that financial risks, such as late payments, can be detrimental when you're trying to grow your business. Our payroll funding service is a factoring solution, ensuring that you are paid on-time and allowing you to focus on placing contractors and building your client list.

In short, Agile Partnering is here to help you develop your staffing business into a more profitable one. We take care of your contract staffing back office needs, so you can concentrate on finding talent and filling job openings. If you're an independent recruiter who wants to expand into contract staffing, we are the perfect partner to help you enter the market risk free and without the back office burdens or overhead costs.

For more information on how Agile Partnering can support your recruitment efforts, schedule a call today. Let's grow your business together. 

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