Should placement companies use a markup %?

To expand on what I talked about in Should a placement firm tell you what they are billing the client?: If you are a consultant working through a placement firm, should the markup percentage (client bill rate divided by consultant rate minus one) be the same no matter what the hourly rate is?

Some placement firms use a fixed hourly rate markup, but many use a markup percentage.  One placement company I am talking with does just that, and they like to have a 68% mark up.  I can never understand why they use a percentage for mark up, especially one that high.  After all, 68% of $50/hr and 68% of $150/hr is a $68/hr difference in margin!

In talking with a recruiter who has been in the industry a while, and is now a recruiter for his one-man shop, here was his response:

My answer is that each deal should be dealt with on a case-by-case basis.  Percentages are dangerous for the reasons you mentioned – and that goes both ways.  The candidate is punished when the rate is high, the vendor is punished when the rate is low.  Having said that, most mid to large vendors (probably those at $50M or more) will have a percentage based formula where they bake their fixed costs into an Excel spreadsheet (insurance, rent, management overhead, vendor mgmt. system fees, etc) and use a percentage system to evaluate a deal.

I’ve worked in a few decent sized companies.  At those firms we used excel spreadsheets pre-populated with the fixed amounts mentioned above (rent doesn’t change often, maybe annually, same goes for overhead, vendor fees, etc).  In my experience, the spreadsheet was probably updated once a year, but the fixed costs are essentially left alone for the most part.  The spreadsheet allowed for two variable data entry points: (1) employee cost and (2) the client bill rate.  Employee cost was basically a candidate’s salary (or hourly rate) and health benefits (how many people are being insured – single, married or family benefits).  The client bill rate is what it is, the rate the end client is paying the vendor.  These two variables were set against the fixed costs mentioned earlier and the end result was a percentage.  There were guidelines as to what percentages were acceptable (if above “X” percent, the sales guy gets a better cut, if below a certain percent, the sales guy wouldn’t make anything on the deal).

Publicly traded companies definitely follow this model because they have to report their quarterly earnings to Wall Street and these firms are typically graded on their margins.  So management will bake in rewards or penalties for the sales/recruiting teams to keep everyone rowing in the same direction.  So when a sales guy says he can’t do a deal, it is probably because the deal is at a certain margin where he’ll get punished with minimal commission.  Some percentage systems involve a sliding scale that accounts for how high/low the bill rate is and higher rate deals would allow for a higher percentage to go to the candidate.  This makes sense for the reasons you mentioned (20% of $50 if far different than %20 of $150 – and things like rent, insurance, vendor fees are all fixed costs, they don’t go up or down based on the amount in the bill rate).  Having said that, some factors (insurance, workers comp, unemployment) do go up with a candidate that has a higher compensation, so those are some things to keep in mind.

All of the above basically applies to bigger and/or publicly traded companies.  It doesn’t apply to the small guy – at least in my mind it doesn’t as we don’t have the overhead, the same pressure from Wall Street or from a parent company – we don’t answer to anyone but ourselves.  For me, my rule of thumb is pretty simple: I have a “walk away” point where I won’t do a deal if it falls below a certain NET hourly amount.  I don’t care about the percentage.  I care more about the bigger picture:

- Who invested the most time in making the deal work?
- Does the vendor have some additional value (for example, are they a preferred vendor?)
- Supply and demand (and market rates) also come in to play (did I find this guy in a day, or did it take me 6 weeks?)
- Did the candidate bring the deal? (and did the vendor do nothing?)
- Dd the client give a low bill rate?  Is there much room to work with?

If I’ve spent a lot of time cultivating a relationship with a client, to the point that when I make a suggestion, my candidate gets to cut to the front of the line and basically gets an interview on my recommendation – now I have value and my margin reflects that.  Additionally, if there turns out to be multiple candidates available for that role, then that also comes in to play.  If I talk to 5 candidates that have the same skill set (and assuming all things are equal) then it comes down to which candidate is cheapest.  My rate will go up and down some to show the end client who is more expensive but generally the lower cost candidate gives a bigger margin.  I guess I work backward and factor in the above points – since running my own firm I have never (and will never) start with a percentage in mind. It is all of the above (and some other things that I’m forgetting) that factor in to what type of a NET margin I’ll accept, then a percentage comes out of it and I look at it more as a reference point, nothing more.

And to put that in perspective, I don’t charge clients $150/hr then pass on $60/hr to my teammate and keep $90/hr for myself.  My teammates make the lion’s share of the bill rate, and my hourly NET is still a nice little number that supports me and my family.  I live by the rule that “pigs get fat, hogs get slaughtered”.  Take what you need to live a nice life, but don’t get greedy because it’ll eventually catch up with you.  I want candidates that have worked with me to feel that they got what the deserved.  It leads to future referrals and repeat business with candidates.  It is a small world, no need to get greedy…

For percentage markups, it seems that a common ground of was 80/20 (in favor of the consultant) was a good deal and 70/30 was more the norm.  In my opinion, the ratio slides from bigger companies needing more (like 60/40 or 65/35) to smaller companies who can tolerate 80/20.  The reason I say this is that I lived it first-hand 19 years ago and am living it again now.  When I stated my own career in 1994, it was for a midsize company (a $400M company that went through an IPO, they are still doing well to this day).  When they were a smaller company (pre-IPO), they signed up a lot of employees for 80/20 deals.  As the company grew, and the company overhead, infrastructure, service offerings, sales/recruiting force, etc. grew, those once “decent” 80/20 deals became the company albatross, putting a serious drain on the overall company margins.  It was my job to meet with the employees and try to re-work those 80/20 contracts.  The message to the employee was “don’t worry about the split anymore, worry about  your Net hourly take home pay”.  If you were making $40/hr on a $50/hr bill rate, don’t focus on maintaining 80% of the new bill rate, instead give me a new hourly number (you are at $40/hr, do you want $45/hr?) and let me worry about the hourly bill rate to support that.  Then I had to go to the client and fight for whatever bill rate increase I could get – and I was challenged to get it away from an 80/20 margin because the company had outgrown that.  So sometimes focusing on the percentage or the split can be the wrong way to look at it.  And for the past four years running my own small firm, I never look at it (other than as a reference point).  As I said above, I have a walk away point based on a NET hourly number that starts my negotiation (or ends the negotiation) and I go from there.  The many different factors (duration, amount of work, supply and demand, amount of money tied up in the deal, risk) all go in to what number I’ll tolerate.  It is a case-by-case situation – at least for the small guy.

To answer about the 68% markup: For a large firm that seems pretty high.  Note that W2 employees have FICA, FUTA, SUTA, Liability and Workers’ Comp which could arguable account for roughly 20% of the margin.  But even after you take off the 20% and get it down to 48%, that is still too high in my opinion.

About James Serra

James currently works for Microsoft specializing in big data and data warehousing using the Analytics Platform System (APS), a Massively Parallel Processing (MPP) architecture. Previously he was an independent consultant working as a Data Warehouse/Business Intelligence/MDM architect and developer, specializing in the Microsoft BI stack. He is a SQL Server MVP with over 25 years of IT experience.
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