The complex world of modern RPO.
By Kim Davis
Talent acquisition has changed dramatically during the last 15 years. It is no longer a simple process of connecting a person to a job and a job to a person. Jobs and people are more visible than ever before, which is both good and bad news. People are difference makers, and they are the organization’s number one asset, even though, at times, it may not look or feel that way.
Organizations that are the best at talent acquisition become the leaders of their respective industries. few of the companies identified in the recent 2012 Fortune 100 Best Companies list include Google, SAS, CHG Healthcare Services, Zappos, and Mercedes-Benz USA.
During the last 15 years, there has been significant change in how organizations can best connect the dots to assist in hiring best-fit talent. Concurrently, there has been heavy emphasis on reducing the overall cost of acquiring talent. Next, consider the increased emphasis on legal compliance. The complex question is this: Can all these dimensions coexist?
Where are the new jobs today? According to recent statistics, roughly 70 percent of all new jobs are coming from the mid- to small-company market. Even though large organizations receive all the press, the majority of openings are with smaller firms. These smaller organizations receive minimal attention and tend to struggle through the talent acquisition process. They lack internal recruitment resources, have smaller recruitment budgets, and typically have no enabling technology.
In 1998, recruitment process outsourcing (RPO) began to become a separate, stand-alone recruitment segment. The concept was to outsource all recruitment within an organization to a third-party professional firm, an organization that only does talent acquisition. The premise was that they could do it better, because that is the only thing they do. Natural market resistance to this concept was giving up the keys to the shop. How can we entrust our number one asset to a third-party firm? To a firm that does not understand our unique environment? For many, that was heresy. During the last 15 years, RPO has gained in popularity, yet only a minority of the employers embraced the concept. Those employers typically tend to be large organizations. It is one of the fastest growing outsourcing segments with reported annual revenues at $1.2 billion, according to Human Resources Outsourcing Association (HROA).
During this same time period, job postings have all but eliminated costly media advertising as a method to source candidates. Job boards touch the masses quickly and cost-effectively. The added problem for organizations is being able to identify the needle in the haystack. It is still labeled a “post and pray” process. Are employers sure they are driving the right candidate traffic? How does one identify the right candidate among the masses? It takes a lot of time to properly digest this mass of candidate information. Right or wrong, it has lowered the perceived need to direct source passive candidates for the open positions.
HR technology platforms’ popularity also has grown as a direct result. Applicant tracking systems (ATS), job board aggregators, contact relationship management (CRM) tools, and search engine optimization (SEO) platforms continue to prosper. Screening and assessment instruments continue to help predict best-fit hires. In order to use these additional tools effectively, while reducing overall recruitment expense, in-house subject matter expertise is required of the firm. This helps explain today’s underuse of the tools. This is especially true for mid-size to small organizations. These smaller firms are often devoid of technology.
In recent history, much of the buzz in the recruiting industry has been around the topic of social recruiting. Many organizations have struggled with the definition. What is it? How to use it? How to measure its value? There has been a proliferation of tools released into the market to assist organizations with the development and execution of social strategies. Many offer cutting edge technologies that if implemented and managed effectively can prove useful. But, unfortunately, many are still not proven as driving longterm ROI. Social, by its nature, requires consistent bi-directional interaction. In many cases, this has required the acquisition of additional recruiting staff (recruiters and marketers) just to manage and execute the added work, which increases the cost of the ROI calculation. To date, it has been the direct sourcing professionals who have had the most success in identifying and engaging passive candidates via social media. This is likely due to the fact that the very nature of direct sourcing lends itself to personal one-to-one interaction.
Lastly, we still have our traditional recruitment methods. Larger organizations in many instances still have their own internal recruitment groups (in some cases the groups are quite large). There has been a shift in the past few years to centralize this activity even though their businesses might be decentralized. The one visual issue with an internal recruitment group is the lack of flexibility in meeting the ever changing hiring requirements along with fixed vs. variable expense. We also need to consider our mature industry recruitment segment, traditional recruitment firms, focusing on retained search, contingency recruitment, and temp staffing. They continue to provide value, but are an expensive alternative.
RPO firms continue to sell the vision that they are a complete recruitment answer. They can be effective for some organizations, and in many instances, for the majority of the hiring. However, not all RPO providers are the same. Only a few firms can deliver full life cycle talent acquisition services. Just because the firm delivers traditional recruitment services—such as temporary staffing, contingency recruiting and/or retained search—that does not qualify as a true RPO provider. RPO is a very different beast from traditional recruitment. It requires a different approach and different delivery resources enabled by best-in-class technology to be successful.
The major problem facing RPO firms today is the price point, and, unfortunately, the RPO industry itself helped create this dynamic. The RPO firms accepted an aggressive pricing strategy for the past few years in order to grow their business. In candidate processing solution scenarios, the aggressive price points can still work. However, if the openings require a direct candidate sourcing strategy of passive candidates to fill difficult-to-fill openings, they frequently fail. The price points are simply too low to allow for direct candidate sourcing. They simply cannot make money on those assignments, and if there are too many difficult assignments in the mix, they are unable to have a profitable account. This obviously creates tension between the provider and the client organization. It is not uncommon in an RPO environment for the client organization to pay traditional third-party recruitment fees for these difficult-to-fill positions in addition to their RPO fee structure; 10 percent, 20 percent, 30 percent or more of the openings might be filled by traditional search firms. This is an expensive alternative and not one that was planned at the lower price. The difficult-to-fill positions require more dollars.
What is a difficult-to-fill assignment, anyway? How do we define it? It could be based on job complexity, which includes job requirements. It could be based on the size of the candidate universe. A small candidate universe commonly makes the assignment more difficult-to-fill. It could also be based on the time the job has been open. A job open for 120 days, six months, nine months or longer is generally considered a difficult-to-fill opening. A tier fee schedule based on this definition might be the answer. Some form of governance to prevent abuse/misclassification of the job opening is required. One method could be labeling the job categories that fall into the difficult-to-fill bucket. However, things do change over time. To say the least, it is complicated and not a perfect science.
As we look at traditional recruitment, we ask why third-party search firms charge high fees—20 percent, 25 percent, up to 33-1/3 percent of the new hires’ base compensation. Does it really cost that much to fill these jobs? The answer is both yes and no. Talent acquisition is a relationship business. In order to drive costs down, it requires a partnership. In many third-party recruitment engagements, a fee is only paid once jobs are filled by that third-party provider. Given these price points, the employer continues to identify talent on their own in hopes to avoid payment of an expensive third-party fee. In other words, in most instances it is not a partnership. As a result, the traditional search firm only fills a fraction of the jobs it writes. According to some statistics, contingency search firms on average fill about six percent of their assignments. If they write and work a job, but do not fill the job, does that mean the third-party firm incurred no costs? Obviously not! They charge higher fees in order to make up for the ones they do not fill. This relationship between the provider and the employer ends up being a “Catch-22”resulting in the higher fees.
Why Go Traditional?
The next question is why use these traditional search firms anyway? One obvious answer is if the opening is a difficult-to-fill position. Second, the organization might lack the resources to do it by itself. It also might be a confidential replacement. They might also want access to direct candidate sourcing. They might want access to passive and not just active candidates. Some traditional recruitment firms do this well while others do not. Retained search firms typically do it best, because they receive guaranteed payments. That guarantee allows them to invest in candidate research. If the employer goes with contingency recruitment, they commonly give the assignment to multiple recruitment firms.
Having multiple providers, of course, often causes market confusion. There is a high probability that the same candidate will be contacted about the opening by more than one firm. This makes the employer appear desperate. The fact is that the targeted candidate universe is the targeted candidate universe. It is limited. The employer also has the problem of figuring out which firm receives a fee payment if one of those candidates contacted by multiple firms gets the job. Another major issue is that good contingency recruitment firms will not work the assignment if they hear it was given to multiple firms. These good search firms see this as a shotgun approach. The chances of them filling the assignment diminish significantly. They know they will not receive preferential treatment; there is no partnership; and there is a high probability they will not get paid.
Last, are internal client recruitment groups good at candidate sourcing? The answer depends on how you define sourcing. They tend to be good in sourcing active candidates off of job boards, media advertising, and the like. Internal recruiters also tend to be active on social recruiting sites like LinkedIn. (According to LinkedIn, they have 74 million users in the U.S. today. However, BLS reports more than 139 million employees in the workforce. This means a lot of great talent does not have a LinkedIn profile. In addition, a number of LinkedIn members do not have an updated profile reflecting current job, experience, and skill set data.)
In-house recruiters also do not typically direct source passive candidates. It is a perceived industry taboo to direct source candidates out of competitive firms or area organizations. It is a more accepted practice to perform this task through third-party organizations. Simply said, internal recruitment groups are better known for candidate processing. They do it both effectively and efficiently, as long as they possess the bandwidth. In-house recruiters commonly are pulled in multiple directions performing other HR (non-recruiting) related tasks along with carrying a high job requisition load.
The Great Recession has caused the marketplace to shift its thought process. It became crystal clear to most organizations that employment is not a constant, and unfortunately for many, their recruitment costs were fixed. With the added pressure to meet profitability targets in a down market, the methods of acquiring talent needed to change. Again, most organizations were not and still are not ready to outsource their recruitment to third-party providers. However, they recognized that they could not continue to do business the same way carrying their fixed recruitment staff to fill jobs that simply did not exist. Employment data indicate that as many as 60 percent of all recruiters during this time period were displaced. This did not mean employers had no recruiting needs, and at times hiring requirements exceeded their capacity to perform. The market demanded a new recruitment solution. Employers wanted external recruitment assistance on an on-demand basis. And they did not want to pay traditional third-party search fees for on-demand services. These traditional fees were simply too expensive.
The problem for many recruitment providers was how to deliver on-demand recruitment services cost effectively. Most recruitment firms lack a variable delivery infrastructure to support the solution. A recruitment provider cannot use its existing expensive commission recruitment staff to deliver this type of service. A recruitment organization to support this model has to be able to scale up and down or turn resources on and off. This approach cannot just be about shifting risk from the employer to the provider organization. If done this way, the on-demand solution will fail. This is still a relationship business. The big question became how to make this a “win–win” for all parties. It is complicated, but worth pursuing. It is what today’s recruitment market demands!
The market demands a new on-demand recruitment solution: one that can be turned on and off or scaled up and down based on real time hiring requirements; a solution that is both efficient and effective; one that is predictable, repeatable, and consistent; a model with price points that are a fraction of traditional recruitment services, but are somewhat higher than that of RPO; a price point that will support direct candidate sourcing to satisfy difficult-to-fill positions; a solution that is enabled by best-in-class technology and compliant with all legal requirements like those from the Office of Federal Contract Compliance Programs; a model that compliments and augments the existing employers’ recruitment solutions which might include RPO; a solution that dramatically reduces the dependency on expensive third-party recruitment firms; a recruitment solution that fits all types of organizations—large, mid-size, and small firms from all market verticals. What is required is an on-demand product that can be delivered for just one and/or multiple openings.
So how does one accomplish this? To start, it requires a partnership between the employer and the recruitment provider. It cannot be shifting risk. Both parties have responsibility and ownership. Both have an important role to play. The best on-demand model is based on retained search principles. Each recruiting assignment is lead by candidate research of targeted passive qualified candidates. In order to properly identify the candidate universe, the process starts with a thorough intake call with client stakeholders. Candidates are identified, prequalified, and screened to the benchmark candidate profile created during the intake call process. To be effective, the recruiter has to sell the job opportunity and employer brand as much as they screen for fit.
Each assignment requires a single point of contact with a professional recruiter who understands the company, the function, and the industry. The payment model is based on measurable activity and not a placement. If done correctly (roughly three to four qualified candidate–client interviews), it will result in a hire. That is the desired outcome. That outcome will only occur through mutual commitment and both parties performing their respective roles. It is not good for either party to interview many candidates, especially when that activity does not net a hire.
A good on-demand model requires both parties to take financial risk. It is unfair for an employer to expect 100 percent of the fee to be at risk and to be based on a hire. That is a contingency recruitment model where the price points are 20 percent, 25 percent, or higher. Employers today want price points that are substantially lower than this. In order to accomplish that mission, employers must accept more financial responsibility. The only way this can be done is to have this fee based on measurable activity and to have a partnership.
To be effective, the on-demand recruitment provider needs an infrastructure to support the model. The delivery staff needs to be enabled with best-in-class talent acquisition technology. They need a candidate research group that focuses on identifying the targeted passive candidate universe. This information is then driven back to the recruitment team in a timely manner.
The market is constantly changing. Most employers are not ready for an RPO solution, be it right or wrong. Since 2008, employers are seeking a complement or an augment to what already exists (including those with an RPO provider). They can no longer afford fixed recruitment expenses. They need their cost to be based on real hiring requirements. They seek an alternative to expensive traditional third-party recruitment providers. They want best-fit hires. They want a direct candidate sourcing model, targeting qualified passive candidates that is based on retained search principles. Again, they cannot afford to pay traditional recruitment fees.
Employers are willing to explore a new recruitment delivery model. They are willing to absorb some but not all of the risk. They are willing to entertain a partnership with the right recruitment provider. They recognize their role and ownership. They demand a new and innovative recruitment solution. They are looking for an effective/efficient on-demand recruitment solution.
Kim Davis is president and CEO of DreamJobs.