Despite record breaking sales, most Australian recruitment agencies failed to increase their profit in FY19. Find out why – and what to do differently.
If you’ve been following our Insights, you know FY19 was huge for Australian recruitment agencies. Record breaking sales in the first two quarters set the tone for positive growth across both the temp/contract and permanent revenue streams.
With this in mind, you’d expect recruitment agencies to report strong profits for FY19. However, when Nigel Harse of Staffing Industry Metrics reviewed the results of 104 Australian recruitment agencies, he found this wasn’t the case. Despite the boom in sales, only 1 in 5 firms increased their profit in FY19.
Considering the market conditions were the most buoyant in recorded history, it begs the question: what went wrong? The answer, according to Nigel, comes down to the two key drivers of profitability – productivity and costs.
The best way to measure productivity is to determine how much gross profit (or net fee income) is produced by each staff member. Unfortunately, for many recruitment agencies, the increased volume of work in FY19 wasn’t matched by increased productivity. On average, productivity per staff member fell from $216,894 in FY18 to $207,814 in FY19 – an annual decline of 4%.
Even the most productive firms struggled to make gains, with the top 10% reporting just 0.1% improvement at $296,842 per person.
The main cause for the productivity slump was the ongoing problem of staff turnover. However, low fill rates on perm orders were also a deciding factor, with a lot of effort going unrewarded (and unbilled) in FY19.
Operation costs rise
Profitability is greatly influenced by operational costs, and human resources account for a large percentage. For many recruitment agencies, operational costs hit an all-time high in FY19. The average operational cost per staff member was $162,491 in FY19 – a 5% increase from FY18.
The second half of the year was particularly expensive with management and staff costs blowing out to an unacceptable 60% of gross profit. These costs include remuneration, training and recruitment – plus any other perks and expenses associated with keeping a healthy team together.
However, not all recruitment agencies spent with abandon. The top 10% of most profitable firms recorded an average decrease in costs of 7% per staff member.
Highs and lows
Results show that, for many firms, FY19 was a turbulent year. The increase in sales led to more hard work and increased cash flow pressure, but not to an increase in profit. On average, profit per staff member in FY19 tumbled 27% from the year prior.
However, some recruitment agencies had reason to celebrate, with results well above average. The top 10% reaped the rewards of productivity and cost control, increasing their profit per staff member by a 14% to a record $114,711. Congratulations on a job well done!
Tips for boosting profits in FY20
So, what needs to change in the year ahead to improve profit margins?
Here are 4 ways to boost your recruitment agency’s bottom line.
- Resolve the internal staff turnover issue
- Focus on improving productivity
- Review and control operational costs
- Aim to get better before you get bigger
Many recruitment agencies prioritise growth, without having the right systems in place. Instead of constantly working harder, work smarter with the resources you have. Start by driving greater engagement with your staff and creating and then sticking to a cost budget. Once you have the foundations right, you can build from there.
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