Many staffing agencies offer additional services like HR, payroll, and training to businesses in their area in addition to temporary and permanent staffing.
This guide covers the issues you need to consider before starting your own staffing agency
This article will cover the following key sections:
- 1 What is a staffing agency?
- 2 Research the staff agency market
- 3 Know your market
- 4 Business clients
- 5 Jobseekers and temporary placement personnel
- 6 How much competition is there?
- 7 Temporary staff placement
- 8 Permanent placement
- 9 ‘Temp to perm’
- 10 Other services
- 11 Estimating your income
- 12 Income from temporary staffing services
- 13 Income from permanent placement services
- 14 Pricing policy
- 15 Fees for temporary staff placement
- 16 Fees for permanent placement
- 17 Other services fees
- 18 Using a factor
- 19 Buying an existing agency could be an option
- 20 Buy a staff agency franchise
What is a staffing agency?
A staffing agency is also is known as a recruiting firm or agency. The agencies sole purpose of the business is to satisfy the hiring needs of companies by matching their needs with the search of candidates as requested.
The use of a staffing agency by companies allows them to save time and resources, at the same time find opportunities that they otherwise would not have been able to get.
Job seekers also benefit from agencies also, as they will be contacted with roles that normally will not be advertised.
Research the staff agency market
You need to thoroughly research the staff agency market before you launch your business. Learn as much as you can about the demand for services you intend to offer, as well as the level of competition within your chosen agency sector.
Carrying out in-depth research into your market is extremely important. Get as much information as you can about the degree of demand for your services, as well as how much competition is out there to meet that demand.
Know your market
You should have extensive contacts within the community you plan to serve, and you should already be well acquainted with it. Those that are not should find out as much as they can about the companies they will be targeting, the labour market in their area, and the state of the local economy.
Changes in government policy may also have an impact on demand. Consider the effects of the UK leaving the EU on existing skills shortages.
You should learn as much as possible about businesses and other employers in your area who might need your services. Examples include:
- Businesses of a certain type (for example, construction companies or accounting firms)
- Businesses with a high need for specific skills (for instance, businesses with complicated IT needs)
- Organisations that are likely to need temporary staff or permanent staffing services from time to time
You shouldn’t ignore other organisations in your area that might need your services, particularly those in the public sector. Some public sector organisations may allow you to join their ‘preferred suppliers’ list. It would be a good idea to tender for the right to supply NHS staff through framework agreements.
Find out who is responsible for personnel at as many of the key organisations that you intend to target as possible. In order to run a staffing company successfully, you need a network of personal contacts.
Other staff agencies may be interested in your recruitment services. So-called ‘rec-to-rec’ markets exist to supply temporary workers to other staff agencies who are unable to fill contracts from their own pool of ‘temps’.
Jobseekers and temporary placement personnel
Understanding the local labour market is a very important part of your market research. There will need to be an adequate number of qualified temporary placement employees, as well as jobseekers seeking permanent employment.
You should find out whether the type of personnel you need is available in your area. Higher education institutions in your area might be able to help. Also, it may be a good idea to talk to business support organisations, many of which monitor closely trends in the local and regional labour market.
Job centres are becoming more willing to work with private sector recruiters, and can also provide additional useful information. You should keep an eye on the predominant types of industries in your area – this will influence the types of skills and training obtainable among local workers.
You can set your own charges for temporary employment services based on how much workers in your area are paid. Recruitment advertisements provide details about salaries in your area.
You should build a database of names and contact information of suitable individuals who you think might be attracted to a new employer at some point in the future, especially if you plan to offer permanent recruitment services, such as executive search. You should have excellent networking skills.
How much competition is there?
You have a number of competitors in your catchment area that offer services similar to your own. You can find a list of staffing agencies and consultants in your area by browsing Yell.com (classification ’employment agencies and consultants’). You can also find other recruiters active in your area by searching the ‘jobs’ section of your local newspaper – many of the ads will have been placed by recruiters.
Using the internet, you can also find local recruitment agencies. It is important to remember that some staff agencies operate as ‘virtual agencies’, meaning they have no physical location, conducting all of their business via telephone or online.
Find out which staffing agencies are active in your area – and active in the market sectors you want to target – by visiting the main online job or recruitment portals. It is important to be aware that recruiters are usually active on a regional basis rather than just in their local area.
You should keep a record of the range of services your competition offers as well as any specializations they may have. Recruiters such as Manpower and Reed have branches nationwide and around the world. Consider visiting the offices of five to ten recruiters in your area that you think will be your greatest competitors. Note the look and feel of their outlets, their location, and their attitude. Do they project a certain image? What are their prices?
At times when there is strong demand for labour, a number of new recruitment agencies may establish themselves in business.
Employers can recruit personnel through other means, including Jobcentres, free recruitment websites, or directly through candidates, perhaps through their own websites. As it seems, employers are using online services such as Staffbay and social media more and more for permanent recruitment. You need to determine what your company will do in order to attract clients away from these options and add value to the recruitment process.
Decide which services to offer
Take a moment to consider the services that you will offer to your clients. Determine whether you will provide:
- Temporary staffing services
- Permanent staffing placement
Both may be offered by you.
Temporary staff placement
The temporary staffing sector is the larger of the two main industries. A temporary or contract worker is hired to provide employers with particular skills. Temporary employees, or temp workers, are usually classified as employees of your business and are hired out to other businesses on an hourly, daily, or weekly basis.
The margin is the amount that you charge to hirers minus the amount that you pay your temps. Contractors usually work through umbrella companies or their own limited companies, but once again, you take a commission or margin of what the client pays them.
The temporary staffing industry has many different sectors. Nurses’ agencies, theatre agencies, and secretarial agencies are well known examples of specialisation, but there are specialists for industrial operatives, accountants, farmers, teachers, construction workers, leisure industry professionals, and information technology personnel as well. A number of ‘rec-to-rec’ specialists specialise in providing temporary workers to other recruitment agencies in order to assist them with large staffing contracts.
Depending on your client’s needs, you might also offer them a range of different services as a temporary staff specialist. These services might include:
- On-site supervision of temps
- Provision of any specialist equipment required by the operatives
- ‘Outsourcing’ of specific areas of the client’s business, for example IT
You may choose to operate locally or regionally, or you may opt for a broader national market. Perhaps you will provide temporary workers overseas.
Temporary providing of staff is a smaller sector than permanent placement, although most staffing agencies in the UK provide both services. Employers that use permanent placement pay a fee for the service of finding suitable candidates for long-term positions. As part of your fee, you usually take a certain percentage of the starting salary.
Depending on the type of position you need to fill and the type of requirements your client has, you may offer several different levels of service as a permanent recruitment specialist. For example:
- An advertisement or personal approach is used to find a suitable candidate who is then contacted in connection with the search
- A selection service involves identifying candidates (usually by advertising), interviewing and short-listing them for a position
During the above procedures, clients may wish to be involved to varying degrees.
‘Temp to perm’
It is common for clients who hire a temporary worker to decide that they would like to employ that person permanently. When that happens, you may choose to charge a ‘temp to perm’ fee to reflect the fact that you have lost one of your temporary workers. Temporary to permanent fees are often comparable to those charged for permanent placement. Regulations on staffing agency fees, such as temp to perm fees, can be found at Gov.uk.
You may decide to provide a range of complementary services to your business since it will regularly interact with so many workers, jobseekers, and other businesses. You may consider:
- Managed outsourcing
- HR and payroll services – you might offer payroll services to contractors under an umbrella company
- Reduction in the number of redundancies
- Staff training, such as in IT and secretarial skills
- Preparation of CVs
- Services such as typing and secretarial work
- Business support services, such as photocopying
There are only a few exceptions to this rule (notably entertainment and modelling agencies). You will need to ensure your business complies with legislation to prevent temporary workers from being unfairly exploited if you provide paid-for services to workers, such as transportation or lodging.
Estimating your income
Your income from your core services should be estimated when planning your business.
Income from temporary staffing services
You should consider the following factors when making an estimate of your income from providing temporary staff:
- The number of temporary employees you expect to have on your books
- How many days or hours will each temp typically work each month
- What will you charge for providing temps
- The wages of your temps
As an example, if you anticipate having 100 temps on your books by month two, and if 70 of them work 10 days at a rate of £140 a day, your total income from temporary staff in month two will be £98,000 (all figures are included for illustration only). You will have to pay the wages of your ‘temps’ from this account, so deduct what your wages will be for month two from this amount. Be sure to include employment costs such as payroll taxes, National Insurance contributions, and holiday pay.
As a result, the remaining ‘margin’ represents what the business actually earns by providing temporary placement services.
Consider signing up several temp agencies so that you can estimate how many temps you will have on your books and how much work they will get. Consider the size of the local workforce, the potential demand level, and the amount of local competition when you make your estimates – your market research will help you to determine these factors.
Income from permanent placement services
To estimate how much income you will earn from permanent placement, you should consider the following:
- You probably will charge a fee based on the starting salary of the employee you are placing in your area
- Do you expect to place a certain number of permanent employees each month?
- In the case of a successful placement, what will you charge as a commission
According to a very rough estimate, unless you specialise in permanent recruitment, you should expect earnings from your permanent placement services to be no more than 25 percent of your total business income. Note that income from this source is likely to be considerably lower, particularly in smaller cities and towns where labour markets are less dynamic than in bigger cities like London.
Count in any income that you expect to generate from other services such as training as part of your estimate of temporary and permanent placement income. It is important to estimate how much work you will be doing of this type.
Income from other services
Estimate how much you will earn from any other services you plan to offer. You may decide to provide fee-earning services to employers and/or job seekers, including staff training, CV preparation, payroll services, and secretarial services. Considering how much each service will cost and how much demand it’s likely to have.
Setting your fees at the right level is essential. The three most important factors are:
- You must charge enough to cover all your operating costs, including temps’ wages and employment costs, and make a profit
- What the going rate is in your area for the type of service you will be providing
- There is a general acceptance among businesses that the hourly rate paid to a temporary staff supplied by an agency is normally higher than the pay paid to an equivalent permanent employee in your area.
Fees for temporary staff placement
Your margin is the difference between what you charge your clients and what you charge temporary workers. This margin will cover your operating costs, your own drawings, and any additional profit you intend to earn (as well as any income you earn from other sources, such as permanent staffing services).
For most of the active temps on your books, you should take into account the cost of providing paid holiday leave when setting your margin. Don’t forget to allow for the fact that you will often have to pay your temps before you are paid by your client. Temporary workers’ pay packets usually include deductions for income tax (PAYE) and national insurance contributions (NICs). In addition to the national minimum wage, temps must earn a ‘living wage’ if they are over 25 years old.
The hirer may not pay you even though you have paid your temps. Factors or invoice discounters can minimise this risk, but your margin will be impacted by the cost of factoring.
It is fairly typical for a temp to charge between 15% to 20% or more of the total amount received from the hirer as a fee for employing him or her (wages, PAYE, NIC, etc.). These expenses can vary greatly, depending on the type of staff you supply, the length of the contract, economic conditions, as well as regional factors such as competition.
Fees for permanent placement
Typically, you will charge a fee based on a percentage of the new staff’s starting salary when you are hired to recruit a permanent staff member for a business. The size of this percentage depends on the kind of vacancy to be filled, the candidate’s calibre and experience, and the level of service required. Generally, a portion of the applicant’s fee is refunded within a few weeks of the job start date if the candidate leaves.
Most permanent placement companies charge between 10% and 30% of the starting salary for their services. When a temporary staff member accepts a permanent position with a hirer shortly after being placed, you may decide to charge a similar fee. Note, however, that ‘temp to perm’ fees are subject to special legal rules.
Other services fees
There are few exceptions to the rule that staffing businesses cannot charge job seekers for finding them jobs. Showbiz agents are exempt from this rule, as they charge actors, performers, and other workers in the entertainment industry 12% to 15% of their salary. Nonetheless, the percentage charged varies from job to job, and market conditions also influence the percentage charged. A model agency or agency that represents a sportsperson can also charge their clients on a commission basis.
Actors and other entertainers are also allowed to receive small and reasonable fees from their agents (but not model agencies), to cover things like photos and biographical publications. If you charge too much up front for these services, it’s against the law.
Companies that provide services such as training or CV preparation to job seekers and other individuals are permitted to charge for those services. Consider your competitors’ prices for similar services along with what you think the local market will bear if you are planning to offer similar services.
Using a factor
Payroll factoring for staffing agencies allows a third party lender to carry out the credit control activities for the business in return for a fee (usually a percentage of turnover). Staffing businesses may decide to outsource their credit management and payroll back office services to a factor for the following reasons:
- To accelerate the flow of cash (to get the money into the bank more quickly)
- Enhancing credit management procedures and reducing the risk of unpaid debt
- To reduce the time spent dealing with clients’ accounts, as well as performing other similar administrative tasks
Discounters provide up-front finance to businesses while they manage their own credit control, similar to invoice discounters.
For most temporary staffing businesses, cash flow is a particularly important issue since their temps are typically paid every week, but their clients want at least one month’s credit. The law also mandates that staffing businesses pay their temps for all work they do regardless of whether the client actually pays.
Buying an existing agency could be an option
Perhaps you will decide it is the right approach for you to purchase an existing staff agency, rather than starting your own up from scratch. The advantages to this can be that you will be walking into an already reputable establishment, one that has customers, staff, premises, and equipment.
However, keep in mind that buying a business can be extremely risky, as it is a highly expensive approach that and a daunting task if you don’t have the right level of experience. You will need to be armed with experience, knowledge of the industry, and staff members that are professional.
You should predetermine the genuine trading and financial position, so that the price you pay for the business is not too high.
Buy a staff agency franchise
You may wish to buy a staging agency franchise, this can be an excellent ‘middle ground’ between purchasing an existing business or starting from scratch. Purchasing a franchise will still allow you to start your own business, but at the same time you will benefit from the brand name, experience, and resources of an already successful business.
You and your franchisor will sign a franchise agreement or contract that details the above points. Other matters will be covered by the agreement, such as territorial exclusivity and the length of time the franchise will run for.
Comparing the terms of different franchisors before you sign a franchise agreement will ensure that you are getting a good deal. Have a solicitor take a look at any contract before you sign it. See the Franchise Info website for more information on franchising. You can also contact the British Franchise Association (BFA).