RPO & StaffingTalent Acquisition

The Art (and Science) of Pricing

Determining the true cost of a recruiting resource is a necessarily complicated endeavor. 
By Albert R. Grimaldi
HR practitioners who are accustomed to HRO pricing models will find recruitment process outsourcing (RPO) pricing a bit of a departure from the norm. HRO models consisting of resource baselines tied to numbers of employees or numbers of participants—and priced on a per-employee-per-month or per-employee-per-year basis—don’t fit the bill when it comes to RPO. 
Most RPO pricing is tied to hiring volumes and priced on a cost-per-hire or placement fee basis. This might sound easy enough, but getting to the right price point involves a mix of art and science.
The key to achieving the right placement fees involves understanding the cost structure under which the service provider operates. Some of the leading RPO providers have demonstrated a willingness to provide transparency into their resource costs, including their margins and associated mark-ups—a true “cost-plus” approach. Starting with a cost-plus approach contributes to a good faith dialogue and potentially eliminates costly and time-consuming iterations that are common in pricing negotiations. Once a full understanding of the service provider’s total cost structure is understood, it is much easier to move to a model that incorporates an accepted level of fixed fees and variable costs.
For example, from a pure recruiting resource perspective—excluding common pass-through costs for items such as advertising and job boards—a service provider will supply pricing based on the resources required to support the hiring volumes projected by the client. The client should ask for a cost breakdown by resource level and location that represents fully loaded costs. This itemization should include the most common components of resource costs, such as base compensation, benefits, and incentives, but should also include cost components that round out the true cost of a recruiting resource. This might include technology infrastructure costs, property cost allocations, training, shared services allocations, management overhead, and statutory considerations. If the scope of the transaction encompasses the European market, other cost drivers such as national insurance and pension contributions might also be included. Once the cost drivers are identified, a full picture of the total cost of each resource is understood.
This kind of transparency enables the client to evaluate whether the service provider is likely to hire the kinds of recruiting resources required to deliver the services at the contracted levels. After comparing against the client’s costs for recruiting resources in the same markets, the client is quickly able to discern the feasibility of the pricing model. It frees up both sides to have meaningful dialogue around resource costs and goes a long way toward minimizing posturing that might otherwise be engaged in by both sides during pricing negotiations. In the end, the true variable component of the cost structure will be the margin the service provider is attempting to achieve. Full transparency allows clients to feel confident about their internal business cases, while knowing a good probability exists that service providers are operating at a level that will allow them to deliver excellent service while still earning appropriate margins.

The Art of Variable Pricing
The next step is often to introduce a component of variable pricing into the pricing structure. The two most common RPO deal structures include a fully variable model supported by minimum hiring volumes or minimum revenue guarantees, or a structure that includes a fixed monthly management fee in addition to a variable pricing component tied to actual placements (hires).
In the former model, an agreement is reached on a placement fee for each hire, based on the recruiting resources that are estimated to deliver the services. When developing its resource model, the service provider considers factors such as the in-scope geographies, the number of internal versus external hires, exempt versus non-exempt positions, and repetitive hires for positions that are commonly filled on a regular basis—sometimes referred to as pipeline hires. A placement fee is identified for each category of hire based on the recruiting resources needed to provide the services, and the monthly placement fees are calculated by multiplying the number of requisitions filled within each category by the corresponding placement fees. Naturally, a fully transactional model introduces a level of risk for the service provider, and to mitigate this risk the provider will typically require a minimum guarantee from the client—tied either to hiring volumes or revenue—with a “true-up” performed at the end of each contract year if the minimum volume or revenue levels were not achieved.
In the latter model, some of the risk of the variable pricing component is mitigated by a fixed monthly management fee. The management fee is meant to protect the service provider during periods of decreased volumes by providing a constant revenue stream that will enable the provider to retain staffing levels and key recruiting resources. The management fee mix normally falls within the 20 percent to 40 percent range of the projected monthly fees. This allows the client to have a greater say on the retention of service provider resources, and often this model makes it easier for the client to manage internal chargeback mechanisms by having a partially fixed structure in place. 
Determining the sweet spot for the fixed fee/variable fee mix is something of an art. Too high on the fixed side, and it does not drive the behavior the client might desire on the part of the provider; too low, and it becomes difficult for the provider to manage resources in a cost-efficient manner, which often results in service delivery issues over time.
Resources typically comprise the largest component of an RPO agreement, and with a full and complete disclosure of resource costs, both parties are well served. The pricing models discussed above have their merits and drawbacks, so buyers should implement a model that best suits their needs and drives their desired behaviors. For those with large hiring volumes for lower-end positions, a fully transactional model can be a good fit, although it typically entails a more tactical approach to recruiting.
If you desire a more strategic partnership with your RPO provider—especially if key high-end hires that sustain your business are included—then a pricing approach consisting of a fixed fee/variable fee mix will allow the provider to sustain a more stable delivery model, retain key recruiting staff during periods of low volume, and ensure that strategic recruitment planning continues during low-volume periods. Do you want your RPO provider to place less emphasis on your account or remove key personnel who understand your business and have established trust with your hiring managers just because volumes are low? If not, make sure your pricing model drives your desired behaviors. Both parties will reap the rewards.
Al Grimaldi is a director on the TPI CHRO services North America team. He may be reached at albert.grimaldi@tpi.net or 678-596-6547. 

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