Posted tagged ‘risk/reward’

Avoid Getting Stung: Pre-Contract Due Diligence on RPO Providers’ Financial Stability and Pricing Methodologies

August 13, 2009

As I’ve noted in previous blogs, RPO can lower the cost of recruitment by 24 percent on average and reduce time-to-hire by an average of 43 percent. Beauty! But what if your provider goes bust or eliminates its RPO offering due to lack of financial stability and you get caught mid-contract up the proverbial creek without a paddle?

Without naming names, at least a couple of providers have ceased delivering RPO services, primarily due to multiple large contracts based on pay-per-hire pricing schemas. This is a solid provider pricing strategy when business is booming and hundreds, even thousands, of positions are being hired for each client. But when recessionary times hit and hiring demand drops to a slow to null crawl, the provider is stuck holding the bag with fixed costs for technology and resources, which may force them out of the RPO business line. Granted, one of the benefits of outsourcing is to be able to scale up quickly as well as down to meet demand, but scale to zero, without being burned? My words to the wise buyer here are to carefully vet the financial stability and long-term commitment to delivering RPO services prior to signing a contract.

Which brings us to RPO pricing methodologies. Our 2009 “Targeting RPO” market analysis found that 84 percent are paid per hire, of which 72 percent have a monthly fixed cost, sometimes known as a program management fee. This 84 percent is broken down as follows:

•  64 percent are in conjunction with monthly program management fees

•  8 percent are 100 percent variable (only paid when there is a hire)

•  8 percent are in conjunction with the number of provider FTEs supporting the contract

•  4 percent are per hire only, but with a guaranteed minimum number of hires

Further, risk/reward is used by 56 percent of vendors for SLA performance (but only in approximately 25 percent of contracts as clients don’t want to pay when providers exceed targets), pricing by number of FTE support is a relatively new pricing method, and gain-sharing is not common, but could be a move to benefitting both sides when client costs are reduced below those anticipated in the contract.

But there are, of course, risks associated with any pricing model. Looking specifically at variable and fixed costs:

Variable – If the contract states 100 percent variable and volumes are low, or if demand drops too sharply, providers risk recovering fixed costs, e.g. technology investments, core team, etc., which could up-end their ability to continue providing RPO services

Fixed – If fixed costs are too high, clients risk paying too much for low volumes or if demand drops steeply

We’re beginning to see an emerging trend whereby both clients and providers agree to a more variable cost structure. But to reduce risk, providers should gain some assurance of a minimum level of volumes clients are willing to pay for, or a minimal level of dedicated FTE support the client requires. And buyers can mitigate risk by committing to some minimum volume of hires or some minimum fixed level of support, with lower cost-per-hire fees, and still reduce costs from what they could internally provide.

Gary Bragar, Lead HRO Analyst, NelsonHall