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Marginal_Cost_Curve and Temporary Staffing Pricing

Is your staffing agency’s Affordable Care Act – ACA surcharge a rip-off?  How would you know?  What questions would you ask?  It comes down to marginal cost economics and alignment of business philosophy and values with your agency.

[Note: There are many factors that drive pricing. This blog initializes a dialog focused on ACA factors.  Not all factors are discussed here – but many common principles apply more broadly.]

Simple Models Build Confidence

Barton Staffing Solutions’ ACA compliance plan is receiving positive feedback since we shared it with clients last year.

Our model is a carefully developed and reasonable flat fee per invoice. The fee is tiered and weighted by volume.  We’re excited about it, and invite you to call or contact us today to meet and learn more.  If the rest of this article makes you curious to learn and discus more – we’re ready to share more.

A Rip-off Can Be Disguised as “Simple”

Our clients compare Barton Staffing Solutions’ client-centric partnership pricing model to poorly contrived approaches that apply across-the-board increases in markup rates applied to ALL billable hours for ALL temporary workers regardless of the real cost factors.

Without thinking, or perhaps being unable or unwilling to do the detail cost analysis required to develop pricing into a scalable business model for an industry change like ACA, some staffing firms have chosen to just increase their mark-up rates — across the board. Clients have told us that some agencies have increased markup percentages by as much as 2.5 or more whole percentage points (e.g., CurrentMarkup%  +  2.5%  =  NewMarkupUnderACA).

Increasing markup on every hour worked is an easy approach that does not adequately address pricing focused on a balanced outcome and equitable partnership between a client, their staffing supplier and the employee under the ACA.

Cost Factors To Understand

Fundamentally, there are three primary factors: 1) insurance costs, 2) benefits administration costs, and 3) enrollment (volume).  Adding whole percentage points to existing bill rates and then applying to all hours billed, may be ripping your company off for perceived costs that are not actually incurred by your agency (read on to learn why…).

What are we doing differently that many other staffing providers don’t seem to understand – or communicate to their clients?

We’re aligning pricing philosophy with Barton Staffing Solutions’ core values with the objective of strengthening our client partnerships.

Increasing the markup on all hours worked by all employees is not the approach we have taken. We have taken an approach based on deep analysis and understanding of the staffing industry, our goal of working collaboratively with clients  and built upon unique costs of the healthcare program options we’ve offered our employees.

It Comes Down To Economics

In economic terms, what we are doing differently is considering marginal cost.  We’re also communicating clearly how this works.  Stop here if “marginal cost” sounds like a foreign language.  Share this with your finance manager, CFO, finance controller, accounting manager or someone at your firm that can provide you perspective and explanation. Or, invite us to come visit with you to discuss more with your Human Resources, Operations and Finance team members.

Warning!!! 

Economics-speak To Follow. 

Don’t Be Alarmed – It’s Easy.

Marginal Cost — Why Is It Important?

The definition of marginal cost is: “In economics and finance, marginal cost is the change in the total cost that arises when the [total] quantity produced has an increment by [one] unit. That is, it is the cost of producing one more unit of a good. In general terms, marginal cost at each level of production includes any additional costs required to produce the next unit.” (source: Wikipedia)

In terms of fixed and variable costs: fixed costs are fixed per unit, however variable costs decline on the margins of production.  For Staffing, translate the “total quantity produced” to mean the “total temporary worker’s needed/assigned.” And, translate the  action “increment by one unit” to the action of adding “one more temporary worker,” or requesting “one more billed hour of work” from an existing temporary worker.

Applying this definition to the three primary costs (above), the total marginal cost [1) insurance and 2) administration] to add one more additional (eligible) temporary worker to the staffing firm’s existing healthcare program declines with each additional employee added [3) volume].

This is a fundamental principle of a “group” and a core tenet of actuarial science. Therefore in the staffing industry, it is hard to understand some agency’s pricing logic behind adding “2.5%” more markup on every hour of every individual worker’s total billable hours.  That is to say, the first worker’s billable hours to the 10th, 25th, and 50th worker’s billable hours.

The same consideration (difficult to understand pricing logic) applies to percentages applied to different worker’s pay rates when the cost of insurance is generally not a function of pay rate. There are exceptions – of course, but as a whole, on the margin, and relative to economics, this makes no sense either.  [Consider a 2.5% markup increase on $10.00 pay rate and the same 2.5% increase on a $20.00 pay rate.  The latter increase is twice as much in terms of dollars, but we know that the insurance coverage for each worker is likely the same or similar in cost to your staffing agency.

Workers Choosing Other Options

A staffing firm’s enrollment rate will never be 100%.  Workers electing another coverage option should also be factored out of the pricing equation.  Enrollment is never 100% because people may be on their spouse’s employer’s insurance plan, they may choose to go to the exchange on their own, or they have some other means to comply with the ACA individual mandate by 2014. This effects actual cost spread across the group, and changes the perspective of economics, on the margins.

Like in all partnerships, You will get back, what you put in.

The specific numbers (percentages and dollar amounts) of these factors are a function of the partnership and relationship capital you have developed with your staffing firm – combined with key factors like workers comp rates, unemployment insurance rates, safety programs, and so on.  These all vary – so it is imperative to look deeper than just the mark-up.

Philosophy & Numbers — You Need To Know

While an agency’s pricing factors legitimately fluctuate, understand that managing these factors are an agency’s trade secret that effectively create value and generate competitive advantage (both for you, and for the agency).

What you should know is the core philosophy behind your agency’s approach and pricing model.  The philosophy behind your staffing firm’s pricing should align with your own company’s values at the highest levels including parity with ideals and practices around regulatory compliance, partnerships, and how employees are treated.

Recently, a client told us: “You guys at Barton are the smartest guys at the table.”  We like to be humble but it feels good to know we have done our homework.

Remember, the lowest price is not necessarily the best price.  There’s a lot of room to fail un-recoverably.  Don’t put your operation at risk.  Don’t take it for granted, ask questions and really understand what the philosophy and values are behind your staffing firm’s pricing to support the ACA.  Call Barton Staffing Solutions today to schedule an appointment to discuss pricing philosophy and learn more.

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