Why Bigger Isn't Necessarily Better When Purchasing Services
In the world of manufactured goods, companies dealing in large volumes can often gain efficiencies in cost or time savings. Economies of scale make it possible.
For example: if a company produces T-shirts, as its volume increases, its cost to manufacture each T-shirt decreases. The set-up costs will be amortized over the larger number of units, the materials themselves can be purchased in bulk â€” potentially saving on packaging and/or shipping costs â€” and increased sales may allow for the acquisition of better equipment that allow more T-shirts to be created faster and in greater volume.
It seems only logical that a large staffing supplier should be able to provide candidates at a better price than a smaller one due to these same economies of scale. Except that it doesn't work that way.
When it comes to procuring people for an organization, volume discounts don't apply. Contractors and consultants being recruited are looking for a fair market wage. That wage isn't affected by volume: If the going wage for an electrician is $75 per hour, electricians will charge that rate regardless of how many other electricians are being on the market. Recruiters and account managers do the same. They're looking for commissions based on market rates and don't usually lower those rates based on volume.
Not only are there no economies of scale in human capital, the opposite may actually be true. How is this possible?
- Larger suppliers have more overhead, which usually means higher fees;
- And because the staffing industry is fragmented (meaning niche talent pools may be signed with smaller staffing suppliers), larger staffing suppliers may be required to subcontract from those smaller suppliers, and the agency fees will have to be paid twice.
Large staffing suppliers have significantly more overhead. They're forced to maintain larger brick-and-mortar offices and need more employees to run the larger business. These employees often cover broad geographic and industrial areas. This all costs more to the company.
Because of the extra expense involved, these overhead costs put larger suppliers at a disadvantage. A small staffing supplier can access the same field of talent but will be able to charge lower fees for its services.
Fragmented staffing industry
The staffing marketplace is fragmented, and that's a good thing. Our own research reveals that the 10 largest suppliers in the industry account for only 25 percent of the total business. The next 84 suppliers earn more than $100 million in revenues and control the next 25 percent.
This leaves a lot of space for small entrants. Adopting strategies that allow even the largest clients to make use of these smaller suppliers is an excellent way of increasing competition in the bidding process and getting better value.
The fragmented nature of the industry often leads to staffing suppliers working in niche markets. This means that clients looking for a specific technological skill set can use a range of small niche suppliers to meet their requirements while using larger suppliers to meet the rest of their staffing needs.
As well, when clients use only large suppliers for their staffing programs, they often don't realize that these larger firms frequently subcontract the work to smaller suppliers when they can't fill the positions themselves.
This means that two staffing suppliers - and their overhead costs - are involved in filling a position when only one is necessary. Either the total cost of filling the position increases, or the wage available for the position decreases, lowering the quality of candidates submitted to the client.
But if there are more suppliers involved, doesn't that mean the process is more complex? No. The increased complexity inherent in a staffing program that features many smaller suppliers is where a quality Vendor Management System (VMS) and Managed Service Provider (MSP) comes in.
These create a vendor-neutral, competitive process that has all the advantages of using a high number of small, diverse and local suppliers while still keeping the process simple for the client.