Stranglehold on the Market – The Dark Side of IT Recruiting


This entry is based on a conversation I had with a friend recently. He informed me he had moved from Nashville due to the recruiters having a strangle lock on the market and not paying decent rates. Having seen some rate sheets at clients, he was aware the clients were paying more, but the recruiters were not and simply chose to bail than to fight any more.

I have a lot of recruiter friends who I like and respect. And I realize there are recruiters out there who are being fair about things and setting decent margins. I know you guys are running a business and trying to do the best for both the talent and your families. As a whole, however, the recruiting industry has control of many markets and is exercising that control. With the downturn in the economy, and having full control, the recruiting companies are skewing who makes the money and who does not. And, as you might guess, the contractors are not on the winning end. In some cases, I have seen the recruiters making out like bandits while asking the talent to sacrifice. Sorry guys, I don’t see that as right and I really hope it bites you hard once the market turns around or the talent realizes they are in short supply and can ask for a lot more. In fact, for the most egregious of you, I hope you find it impossible to continue to make a living after you are exposed.

My real beef, which I have personally seen, is the subcontracting “industry” where both the company writing the contract with the client and the subcontractor who supplies the talent are both making huge margins, forcing the talent to work for peanuts.

I Can’t Afford to Pay You That Much, It’s the Economy

This is the primary story I have heard over and over again. And it is legitimate in many cases. Prior to the economic downturn, many recruiters were getting X dollars per hour for mid to senior level talent. As the economy turned down, the rates went down, so contractors have to be paid less. Sounds fair, right? But this is the curve you expect due to a downed economy. Note the curve is based on money, and should be adjusted to margin (I just did not have the time?).

Best

Notice the nice symmetry and how the margins stay pretty much the same for the recruiting companies. Unfortunately, this is not what happened in many instances, something I now have evidence of. Instead, as the economy went down, the recruiting companies often shifted the risk of doing business to the talent, having him/her pay for the fact they had fewer contracts. This is represented by the following curve:

Worse

This would be nearly impossible without control of the market, as there would be competitive pressure. The company(s) still offering higher rates would have more business. Making it even worse, I saw companies doing this:

Worst

The more the the back end of the line flattens out, the more the talent is taking it in the shorts and the more the contracting companies are making out like bandits.

Note that this would not have been possible by market control alone. We needed some desperation on the part of the developers to get this much disparity. I was sitting in a cafe awhile back and overheard recruiters talking about how they were making much more during the economic downturn as it was easy to convince contractors to take less due to the economy. I am all for capitalism and making a decent living, but if you were struggling before the economic downturn and you are now making good money, despite having fewer contracts, you are part of the problem.

As a follow up, I have personally witnessed the rates rising on the recruiter end. Yet I still see many companies low-balling the contractors. This means all of the money is going to the recruiters, some of which are making a really good living off doing less work.

Take Something From Each Contractor

At one time during this economic downturn I was told by a recruiter that it was unlikely they could find me a position at the rate I was looking for as the company was asking current contractors to take a hit per hour due to the downturn in the economy. Now, I am not talking about new contracts being negotiated lower, but rather that current contractors were being told that the rates had to go down due to the economy. With the way the message was conveyed to me, it did not sound like the companies were renegotiating in mid contract.

If I were ever in this situation, as a developer, I would ask the company to show me the contracted rates and prove they were in fact going down before I would agree to a lowering of my rate, even if it was less than a dollar per hour. And, if the margin was high enough, I would not agree to do it regardless. There is a cost of doing business and some of the risk of doing business should be borne by the business and not the contractor.

The ability to pull money mid-stream from a contractor is an artifact of controlling the market. If the recruiters were fighting to be middle men, this type of activity would end up with a penalty flag. The fact it has not is probably a sign of the desperation of some contractors, but I feel companies doing this will have to pay the piper some day.

Subcontracting

Subcontracting is huge now, as finding proper talent is hard. The problem is this generally means higher rates for contractors, and that is not happening. Businesses are demanding better candidates and rightfully so.

The general idea behind the split of money between the recruiter and the contractor is each person is being paid for the value they bring to the proposition. The recruiting company has two roles to pay: one who gets the contract from the business and another who gets the talent to fulfill the contract. When a subcontrator gets involved, there should be a split of the contractor money where each makes a share based on what they bring to the table. Realistically, overhead forces the contractor rate to go down a bit in a subcontract situation, but it should not be significant.

This is not what is happening today. The subcontracting companies, who have a lower risk as far as reputation, are trying to make a full cut out of the contract. At the same time the company securing the contract wants a nearly full share. This cuts the contractors share from 65% – 75% of the take to around 35% – 40% of the take. To make it even worse …

The H1B Factor

Currently, there is an entire industry around peddling H1Bs. The general business model is to sell the talent at nearly double what the talent is being paid. The problem is this generally skews the talent pool.

As an example, I know of a situation where talent is being paid about $50k over the life of a contract on a corp-to-corp rate (talent bears the risk and pays all expenses and taxes). The subcontract company is going to make more the $40k over the life of the contract and the company with the contract is going to make more than $45k over the life of the contract. In this particular instance, the talent is making around 37% of the total, while still bearing most of the risk of his position.

It is perhaps understandable that H1Bs can be taken advantage of in this manner, as they have a threat over their heads: they can be deported for not playing the game. It is less understandable that these companies are trying to use the same model on natives and a bit befuddling that they are getting away with it. I guess the talent out there, especially the unlearned talent, does not know.

Please note that I understand there is some risk and overhead with working with H1Bs, but the slight added risk is not worth $50,000 or more a year you are taking out of their pockets. Instead the rates should be lowered to reflect the talent.

If I take a step back to the example where the talent made about $50k, the contracting company about $45k and the subcontracting company making $40k. That’s a lot of money. In fact, with this much money on the table, I could hire an employee for a six figure plus salary and still make a decent margin. And, since the talent would not be squeezed on salary, it is very likely I could hire someone with serious talent rather than try to find as much talent as I could for as little money as possible. Sure, only one company would be making margin in this example, but they would end up with talent less likely to bolt when “the market improved”.

For those of you I know that are offering fair rates, I will continue to send people your way, as I know you  will treat them fair. For those I know are not, I wish you the best of luck.

The natural end to continuing down the road of “me first” in recruiting is something like the current model in India. When companies hire an employee in cities like Bangalore, they often do not set up the employees/contractors account up until after their first day of work? Why? Talent simply does not show up. Here are some common scenarios:

  1. Talent is offered X more per hour and simply leaves one company for another company.
  2. Talent seeks another position for X more per hour. When offered the money, he goes back to his own company and asks for a counter offered. If agreed, he simply does not show up for work at the new company.

I, personally, don’t want to see this model in play.

All Subcontractors are not Created Equal

You would think the way to get treated fairly is to incorporate yourself, get errors and omissions insurance, and start collecting like the subcontract company. There are two issues with this.

  1. The H1B companies have driven the rates down so the contracting company can make a killing.
  2. The contracting companies rarely pay higher than H1B rates to other subcontract companies, except those at a certain level. As an individual, you will not be considered a person worthy of a higher rate.

This is what is leading my friend out of Nashville, which is heavily controlled by the recruiters. Even with his own corporation, he was still seen as talent, and not a subcontractor, with the exception that the deal was corp2corp. Rather than throw out fair rates for his reducing their overhead, they were trying to increase their margin. This is disgusting guys. And you wonder why so many developers call you guys pimps?

Advice to Recruiters

First, I understand we are dealing with capitalism and you can make what ever market you want. I also realize there are recruiters out there who are not putting 100% of the risk on the talent and are offering decent rates. For those who are raping their contractors, the market will eventually turn.

  1. Figure a decent margin and set your rates around that margin. You have the power to set whatever talent will accept, of course, but if you head this direction it will turn around and bite you when the talent discovers what they should be making. I can’t tell you what this margin is, as there are wide variety of factors:
    1. Corp2Corp, 10-99 and W-2 have different margins
    2. Any benefits offered or added increase margin
    3. If you have to include per diem, travel, etc, you have to increase margin
  2. If you are getting the contract and subcontracting the rest of the work, you don’t deserve the same margin you get when you handle both sides of the contract. The same is true if you are the subcontracting company. To take full margin on both ends only screws the talent.
  3. The H1B gravy train is coming to an end due to legislation already signed. It may be accelerated based on buzz that the Obama administration has to create a political sign their are trying to keep jobs in America. Once the H1B stream dries up, you will find far less talent willing to accept only 1/3rd of the take.

Hopefully the recruiters who do not practice the “anything to make more money” game will step up and join in the chorus. The main reason some talent considers ALL recruiters “pimps” is these bad apples. If you are not one, you should be as sick of this game as I am. And playing party line is not a wise decision, in my opinion.

A good movie to watch to understand the concept is Public Enemies. While I did not enjoy the movie too much, I did find an analogy for this entry. At one point, the syndicate (mafia) realizes that Dillinger and Floyd’s bank robbing is pushing the government to give Hoover’s FBI greater power, due to the “interstate” nature of the crime. The syndicate backs off support of the bank robbers in the process, seeing that more FBI means more regulation of their lower key illegal activities.

The point to recruiters is talent, in general, considers you a festering sore. Business sees you as a necessary evil, at least for now. This is due to those who are adding less and less value for more and more money. When it reaches the point where it is cheaper for business to go back to a more HR-centric model, the party is over for most of you. And when the talent discovers they are making a very small percentage of the pie for doing the heavy lifting, they may become motivated to find their own positions. At minimum, you will likely see more of the talent gravitating to the companies who are not making more off less during this “downturn”.

I pray my recruiter friends will understand that this is not aimed at me and forgive me for exposing what is under the kimono, but something has to be said when companies are working off margins so high they are taking the lion’s share of the money and pushing all or almost all of the risk on the talent. After sourcing a few positions over the last few months, I am disgusted at where we are today. And the picture, when I run real numbers, is uglier than I thought it was when I was examining this completely from the outside.

Summary

Earlier this year, I ranted about the new healthcare legislation. The main thrust of the legislation was to ensure nearly every American an insurance card, yet the real problem with our healthcare system is the cost of healthcare not the lack of insurance. Certainly, there are some who fell through the cracks  who needed better access, but rather than solve that problem, they overhauled the entire system for everybody.

How this relates to recruiters is one of the issues with cost is the insurance company having near complete control over the market. The insurance companies have embedded themselves as middle men in almost every transaction. Replacing a middle man with another is unlikely to solve the problem.

In like manner, the recruiters have near complete control of many markets. And many have abused this control, especially since the “downturn” in the economy. What is interesting is some are still playing this game as the market heats up. In many markets, it is very hard to find talent, yet the rates are still set as if it was a buyer’s market. I wish you luck if you are going to try to sustain it that way.

Peace and Grace,
Greg

Twitter: @gbworld

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