The holy grail of profitability in recruitment businesses was always the ‘a third, a third, a third’ model, which related to how net fee income (NFI) should ideally be proportioned to cover staff costs, central costs, profits. In the late 90s, many followed and ran their businesses by this mantra, and the industry enjoyed a sustainable safe-haven, high-profit culture.

But over the past 25 years, this way of operating has become increasingly difficult to maintain; now only the few can claim to achieve it.

In the 90s and 2000s, it was common for the average biller to invoice 10x to 20x of basic salary. This meant the fixed costs within a business were relatively low. Low salaries were accepted, in return for higher upside on-target earnings (OTEs).

The need for urgency, productivity and results were very much owned at desk level. If you wanted to eat, you had to hunt. However, as the industry professionalised and evolved, and competition has intensified, the salaries have increased to match those offered in other more so-called ‘reputable’ sectors.

While this solved part of the retention and attraction issues, it simultaneously bloated the fixed-cost base. This was seen and accepted as the necessary precursor to the expected and subsequent increase in productivity that would follow.

Unfortunately, the last quarter of a century has seen salaries rise as quickly as average productivity and performance have declined. Today, the average biller is invoicing just 3x to 4x of basic salary. Staffing businesses were quick to hire and hope that higher-paid recruiters would deliver more NFI. Declining margins, diminishing negotiation skills and regular ‘race to the bottom’ price wars have all contributed to the pressure on NFI, profitability and conversion ratios.

In addition to rising salaries, central overheads have risen too. These slow but steady yearly increases in salaries (National Insurance, pensions too), in addition to central services costs rising at the same rate, have meant that the ‘third, third, third’ model has moved out of reach for many. It is more normal now that staff costs and central costs swallow up to 75%-85% of NFI.

The war for talent has affected the recruitment sector as badly as the sectors that it serves to support. Many recruiters have been overpaid in comparison to the NFI that they generate. In too many cases, this has been accepted and become the new normal.

NFI of 4x basic as an expectation should be the minimum expectation when budgeting and analysing performance and returns. This would normally generate 0-20% profit; 5x would deliver 20-25% profit. I believe 6x of basic as an average would revive the ‘third, third, third’ model and restore 33% profit.

I see this done today by the best businesses out there – those that focus on productivity and efficiency, not headcount and ego.

With staff costs and central costs unlikely to come down, salvation comes from increasing productivity, efficiency and results. We need to believe we can do better and raise our standards. Best-in-class operating models, coupled with thoroughness of execution, is the only way. 

Anyone can cut costs, but only true leaders can increase productivity. These will be the businesses that thrive, while many continue to see break-even as the new profit.

Sid Barnes is owner of Mastermind Consulting and Elite Leaders