Tim Dunn – Partner and Recruitment sector specialist
From our experience financial insight needs to extend beyond simply “how much money are we making?”
Whilst I don’t dispute that for most businesses making a profit is a good thing, every business owners knowledge of performance needs to extend beyond the overly simplistic; “Profit good, loss bad!”
Businesses need to further understand the factors contributing to why they are making a profit or otherwise. An enhanced understanding allows business owners to:
- consider how profit levels can be improved,
- make an assessment as to whether the current position is sustainable,
- benchmark performance against peers.
In our experience, successful businesses gain this level of insight by identifying and monitoring KPI’s relevant to their business. This does not mean ignoring traditional profit and loss reporting, just simply adding further context to the reporting of business performance.
KPI’s will be a mix of financial and non-financial data, and whilst they will vary from industry to industry, KPI’s can broadly be categorised into 4 main headings:
The recruitment sector is complex
It is easy to over-simplify the UK recruitment sector as simply the “supply of labour”, but this ignores the different business types and business models that operate within this industry. Recruitment agencies cover a complete spectrum from the provision of temporary short-term staff , to the recruitment of high-level permanent staff. Further variations can be seen in the permanent placement models ranging from simple contingent fee work to exclusive retained searches. We are also seeing businesses adding an element of consultancy services in order to help differentiate their offering and enabling their clients to gain an advantage in the increasingly competitive labour market place. Candidate and skills shortages mean that competition within the industry is increasing and the outlook for the UK sector will undoubtedly be impacted by the current high level of economic uncertainty. If your recruitment business is going to be successful you need a sound financial insight, in order to make timely and informed decisions.
In terms of KPI’s there is often not a right answer or value. Target levels can be set, and it is useful to monitor performance against targets, but there will also be great value in monitoring trends over time. Trends will provide a feel for how performance is changing – if your monthly level of fees per fee earner is consistently reducing over time then it is potentially an indication that either your staff levels are incorrect, or perhaps your client management and opportunity creation is reducing in effectiveness.
The complexity and divergence of the business models does mean that there is not one simple set of KPI’s that recruitment business owners should be analysing. However, in our experience some of the main areas for consideration are below:
Operational insight is really around how effective certain aspects of the business are. Typically, we would be expecting nearly all agencies delivering permanent placements to consider some kind of assessment of “fees generated per fee earner”. Put simply how good are your fee earners at closing deals, such a ratio will also provide a feel to resourcing and how effectively staff are being utilised.
Although quite rudimental, a simple monthly target for “number of placements” can at a very basic level give a feel for performance in respect of permanent placements. The key here is ensuring targets are set at the right level to motivate staff and also assess performance.
The business model for many recruitment businesses includes a mix of temporary and permanent placements, the idea being that the income from regular temporary placements should cover business running costs and operational cashflow with the lumpier, less predictable permanent placement income being the business profit. Analysing the “revenue mix” [split between Permanent Income and Temporary Income] is therefore a good indicator of business risk. A movement overtime with an increasing bias towards permanent placement income probably indicating a rise in business risk.
The lifeblood of temporary agencies, is the “number of days filled per month” or “billable hours”. These are absolute values, but are helpful in comparing activity against the break-even point of the business. This analysis could be extended to consider “days filled per month compared to size of admin team” [admin team days]. This ratio looks at effectiveness of the business support function and resourcing/utilisation levels.
Businesses involved in permanent placements will also be interested in “split between contingent and retained work”. This split could be analysed in terms of revenue generated from each activity or indeed number of vacancies actively being worked on. Again, a shift towards more contingent fee work, would indicate business risk increasing.
“Time to fill” is a common KPI used by many agencies to assess efficiency of recruitment process. Again, it is an absolute value which looks at the time taken from receiving a mandate through to candidate starting work.
Operational KPI Summary
– Fees generated per fee earner
– Number of placements
– Revenue mix
– Number of days filled per month
OR Billable hours
– Days filled per month compared to size of admin team
– Split between contingent and retained work
– Time to fill
Financial KPI’s are primarily focussed on financial performance or financial well-being of the business at a point in time.
The model for temporary agencies [delivering either staff or contractors], is very much geared around volume and margins made are often tight. These agencies should be monitoring “gross profit”, which is very simply the margin being made on placements. Are the margins being achieved in line with expectations and consistent with the business model?
Analysis of gross margin can also be relevant to businesses engaged in permanent placements, although it does to some extent duplicate insight obtained from any “fees per fee earner analysis”. Gross margin analysis can be more insightful when extended to monitor performance of a number of business units – for example a permanent agency supplying a number of different markets with clearly identifiable staff and other direct costs, can use gross margin analysis to compare performance and staffing levels between individual business units.
“Net profit” refers back to the main profit and loss account and how profitable the overall business is. Although I started this article saying that analysis does need to extend beyond just profitability, there is no getting away from the fact this remains an important metric. A position of continued loss making, will put pressure on cashflow and is ultimately not sustainable, unless there has been considerable investment in the business and losses are accepted as part of a longer-term strategy to drive market share.
It is also important not to lose sight of indicators of financial stability and performance. “Debtor days” being an obvious example which calculates the average time taken for customers to pay. Cashflow is often a challenge for temporary agencies, and KPI’s that identify liquidity issues should form the part of any analysis. The “current asset ratio” looking at level of current assets to current liabilities, will identify the level of asset cover and ability to meet liabilities as they fall due. This a KPI that should be monitored over a period of time, trends here could indicate a worsening liquidity position that will manifest itself in future cashflow issues.
Financial KPI Summary
– Gross profit
– Fees per fee earner analysis
– Net profit
– Debtor days
– Current asset ratio
Market insight can be a gauge as to the health of the wider economy, but it is also an assessment of how effective your business development activities are. For any permanent recruitment businesses, it is important to have understanding of the “number of vacancies” and “number of candidates” registered at any point in time. This provides more of a barometer as to the short-term health of the organisation. Assuming success rates remain constant any drop in the level of registered vacancies will mean a drop in income levels in the short term. It is important that business owners can really understand movements in vacancy or candidate numbers to assess if this this is driven by market conditions [eg a slow down within the wider economy], or as a result of reduced interest in the actual business.
Linked to the above, many agencies choose to analyse the “number of new vacancies/candidates registered a month” This analyse is very focussed on current market conditions and BD activities, and looks solely at activity during the past month.
As well as work obtained from existing clients, successful businesses need to be regularly adding to their client base For both Permanent recruitment agencies and temporary agencies alike the “number of new clients” added per month is a good indicator of performance of BD focussed staff.
“Sourcing channel effectiveness” is a very popular KPI for recruitment businesses and is used to assess what works well and what does not. Understanding where your opportunities are coming from and how you are reaching good candidates allows you to focus future efforts. The idea of a “Net promoter score” is used widely across many industries, and it is a powerful way to assess how well you are delivering your services, based simply on the likelihood of your clients recommending you. There is a prescribed formula for calculating NPS, driven from the question – “on a scale of 1-10 how likely are you to recommend……?” Monitoring movement over time in the NPS is a good barometer to assess how positively your clients are feeling about their relationship with you.
Markets KPI Summary
– Number of vacancies
– Number of candidates
– Number of new vacancies/candidates registered a month
– Number of new clients
– Sourcing channel effectiveness
– Net promoter score
Recruitment businesses live and die by the quality of the staff and the customer relationships they hold. Good employees moving to competitors or even branching out on their own is a real risk for owners of recruitment business.
I recently saw an interesting post on LinkedIn which suggested successful businesses recognise the value of their staff, the post went on to advise: “your number one customers are your people. Look after employees first and then customers last”
Maximising the return that you get from existing staff, and minimising costs associated with replacing are both important, but we find that staff satisfaction and engagement is an often-ignored metric.
“Staff turnover” or conversely “retention rates” should be reviewed regularly. Simply looking at the number of departing staff as a percentage of your overall workforce, provides as useful indicator that can be used to identify trends over a period of time, or indeed benchmark performance against your peers or an industry average if you are lucky enough to be able to locate relevant statistics.
Whilst an employee survey in itself is not a KPI, Surveys can be used as a means to obtain further information regarding current levels of “employee engagement” within an organisation. Surveys will often include a few specific questions around level of engagement that allow a quantified value to be calculated around employee engagement. Again, comparing this to an industry norm or looking for trends over a period of time, allow a business to understand if they are investing sufficiently in their teams.
Summary of Employees KPI
– Staff turnover
– Retention rates
– Employee engagement
Your next steps
Including KPI’s as part of your regular management information is an excellent way to provide further insight into business performance. Choosing KPI’s relevant to your business is an important first step in this process.
The comments above, identify some common KPI’s that we see used by businesses operating within the recruitment sector, the list above is by no means exhaustive.
Frequency of analysis will depend upon how easy the data is to collect, there will be some data that will lose accuracy or relevance if collected too frequently. For example, a monthly staff survey is likely to provide very limited insight and would almost certainly be counter productive in terms of staff attitude and lost productive time.
Analysis of KPI’s needs to look at trends and benchmarking performance against targets, peers and industry norms. This insight available can be really powerful and will add real value to your regular management reporting.