We hope you have enjoyed the first four blogs in this series. Today’s blog is on that common question: “what is the markup?” In truth, there is value in markup – if you read between the lines and ask questions.
Today’s blog is for hiring manages, human resources professionals, finance manages, and others involved in identifying and choosing a staffing company.
In our experience, there often is confusion in client’s understanding the concept of markup. Focus on these four things will keep you out of trouble:
- Do use business objectives to make your decision.
- Do look for value in choosing your staffing partner.
- Don’t use markup as the primary deciding factor.
- Don’t put goals at risk by focusing on markup (price) alone.
Markup vs. value can be confusing – and some staffing agency sales people use FUD (fear, uncertainty and doubt) to make it a false mystery. Ask questions and dig deep to understand the value you get from your agency’s markup. CFO’s and a reputable staffing agency will respect your interest in understanding more.
The answers to these questions ensure your company’s goals are met through the temporary staffing agency you choose. Look for value first. Markup (price) is important, but not the overriding decision factor.
Here are the basics:
- Pay Rate is the pay (typically per hour) that the staffing agency pays the employee.
- Markup is the amount the staffing agency charges to deliver service value.
- Markup Rate is a percentage multiplied by the pay rate to compute the markup amount.
- Bill Rate is combination of the pay rate plus the markup amount, and is the rate charged the client.
In math, that is:
Bill Rate = Pay Rate + Markup
Bill Rate = Pay Rate + (Pay Rate * Markup Rate)
What is the value a client gets for the markup portion of the bill rate?
Markup primarily covers the overhead costs the agency incurs to deliver quality service, and qualified temporary staff to your enterprise. These typically are:
- Recruitment costs to find the best temporary employees to meet your job specifications.
- Contractor management, training, and safety program costs to train the workforce you receive.
- Marketing, outreach, retention programs, benefits, and other programs to retain the best workforce.
- Regulatory costs of unemployment insurance, workers compensation insurance.
- Eligibility costs of E-Verify and validate Federal and State worker eligibility requirements
- Compliance costs of applicant drug testing in parity with your full-time employees for a safe workplace.
- Investigative costs for background checks in parity with your full-time employees for a safe workplace.
- Overhead costs of facilities, front and back office IT systems offloading these activities from the client.
- Any unique customized client requirements and activities incurring a workforce cost.
- …others, ask prospective staffing agency for a list.
In the industry, this is often called Human Capital Management. More simply as a service, it is “a fair exchange of value for fees.”
What is left after all costs are paid?
A small fraction of the markup which is the profit required for your staffing firm to stay in business and continue to deliver quality service to your company. A common misconception is that markup is the same as profit margin. Finance-savvy managers know that profit margin is always considerably less than markup. The list of ten (10) costs above give you some idea.
The industry is full of staffing firms that will “beat any staffing agency’s markup!” But, buyer beware! If you are a decision maker, understand that taking the lowest price might affect your own performance review at the end of the year if goals you have are not met, or costs you don’t anticipate happen because of a bad temporary staffing agency choice. Be sure to get value for the markup you pay.
Be suspicious of the staffing firm sales manager that makes these claims but is unable to tell you “what value will be delivered, or withheld at varying markup rates.” The staffing firm sales manager that is willing to walk away from an order is likely your better choice.
Long-term, as a hiring manager, human resources professional, or finance manager, you need to build your organization’s bench strength with qualified and competent full time AND temporary employees.
Lower Markup = Lower Value and Higher Risk
Be aware that many lesser staffing agencies pay recruiters on commission. If you take the lower markup, and push payment terms out, you can expect your staffing agency to send the better applicants to clients that pay a higher markup and shorter payment terms. The service level you receive is going to be negatively affected.
A lower markup might mean no drug testing, no E-verify for statutory eligibility to work, or weak candidate screening and qualification.
Consider the long-term consequences of one safety mistake are enduring in terms of worker’s compensation costs. The consequences of your facility undergoing an Immigration and Customs Enforcement (ICE) investigation are expensive. However, the costs to production, quality, and your own customer’s satisfaction ratings for your goods and services is the greatest and most enduring.
Give Barton Staffing Solutions a call today – we’re here to help you understand the meaning of value in markup in your temporary workforce. In staffing, there is truth to the adage: “you get what you pay for.”