Recruitment | Ben Fletcher Advisory

Why do recruitment agencies charge so much?

Recruitment agencies are a solution to a market inefficiency. To see clearly the problem they solve, let’s look at a simple example. A small firm wants to hire a financial controller, they only need to hire someone in the finance department every few years, but in order to fill that job with a good candidate they would need to do several adverts and see lots of candidates, incurring huge costs. The costs for a recruitment agency would be about the same, but they can pass the good candidates on to a number of different companies – a more efficient system.

Unless you are recruiting a huge number of the same type of people, recruitment agencies are a good solution, so why don’t all companies use recruitment agencies all the time? It all comes down to cost. Recruitment agencies are often too expensive. If you have a high margin business and ensuring you always see the best pool of candidates is your main priority you can bear these costs. If you do not have such high margins you may have to compromise on quality.

This begs the question of why the fees are so high if the agencies are creating market efficiencies. The answer is that in order to win business from employers, they need to employ large teams of sales people. Because they need to cover the wages of these sales people, they need to charge high fees. This in turn distorts the market – the successful agencies are likely to be the ones that are most effective at promoting themselves. They may also be the ones that are best at attracting the best candidates and matching them with vacancies, but they might not be.

Despite predictions of the internet revolutionising the recruitment market, recruitment agencies have not been disintermediated. Now, however, on both sides of the Atlantic new services are springing up that could solve this problem. BountyJobs in the United States and Talent Puzzle in the United Kingdom are two examples of companies using web 2.0 concepts to create market efficiencies in the recruitment market.

By providing a web-based tendering platform for sourcing recruitment agencies, they bring the jobs directly to the agencies, lowering the cost of acquiring new clients, and by allowing employers to rate the agencies, they make the market more efficient by enabling other employers to identify the best agencies.

The end result is that the incentives are aligned in the right direction for both parties. The agencies have less of an incentive to focus on selling themselves and more of an incentive to focus on identifying and matching the tight candidates. Less focus on selling means lower costs, which in turn means lower recruitment fees.

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