Differences in Staffing, Recruiting, & Consulting Agencies

This was originally posted on my blog in 2011 and has been moved here for archival purposes. The points are still relevant today.

Throughout my years in the professional services industry, I have worked with many kinds of agencies. I receive a lot of employment questions that are often explained by the type of agency, but the only way to understand is to know the differences.

In an effort to help, I’ve provided a breakdown of my experience and observations within the industries. The first point of attention is that I chose the word “industries” instead of “industry”.

There are two overlapping industries that each staffing, recruiting, and consulting fall into. The first is contracting and the second is business development. Some may argue that HR is a third industry of it’s own, which I agree with to a point. However; I consider HR to be a function or sub-industry of business development. From a CEO perspective, HR is a critical factor in the direction of an organization.

Each of the three types of agencies can work in either industry. When you’re considering working with an agency, it’s important to find out which one they see you fitting into. There is a different revenue model for each, which is the driving factor behind the hiring decisions.

Contracting Industry

Contracting scenarios are often deliverable-based, meaning there is a tangible goal a client expects to reach. For example, producing a website in 3 months is a tangible deliverable-based contract scenario. These are the kinds of roles that can be outsourced, normally on a temporary basis (even though temporary can sometimes mean a few years).

Staffing & consulting agencies are the most likely to be seen in this scenario. Consulting groups are often considered specialists & are brought in temporarily to complete new deliverables. Consulting groups provide thought leadership & sometimes staffing, but staffing groups typically don’t provide thought leadership. A common scenario is to see a staffing company follow a consulting group. In a sense, consultants are more specialized and staffing groups are more of a commodity.

From a job seeker perspective, it’s important to know where you stand. If you’re working for a consulting firm, your chances of extending a contract are lower, but you’ll probably be paid better. You’ll also be expected to lead in some fashion because the nature of thought leadership is to fill knowledge gaps, not just hands on work. If you are working with a staffing agency, you’re more likely to be following a pre-defined strategy and doing more hands on work. In some ways, it relates to the analogy of “Give a man a fish and he eats, teach him to fish and he won’t go hungry”. Staffing typically does the fishing while consultants do the teaching.

Don’t try to position yourself in front of these agencies beyond your own capabilities. Consulting may sound like the more enticing route to go, but remember there is a greater responsibility. If you cannot deliver on what you promise, you won’t last long. The best way to learn is to take staffed roles and learn from the consultants until you know what they would tell you before they tell you.

Sometimes contracting is cutthroat. Other times it’s wonderful. There are different approaches to contracting based on what kind of agency you’re working with. Consulting groups often find a strong employee and call on them repeatedly. Staffing groups do this too, but you have be careful for the “churn ‘n’ burn” shops. This is typically found in temporary staff augmentation where a company just needs extra bodies to get the job done. There really isn’t any harm in working with these groups as long as you don’t mind being a number for a while.

Churn ‘n’ burn shop harvest lots of resumes and submit them to a client with little (if any) review process. Larger customers, like several Fortune 500 companies, consider them commodity dealers & maintain many of them on their vendor lists. As a result, it’s possible for more than one company to submit your resume. You need to be really careful about the professionalism an agency presents. Most groups won’t tell you who the client is until a deal looks imminent, but you need to watch out for firms that position you as their employee without telling you. There’s no harm in working for someone, but it’s important to know upfront. I’ve seen people walk into their first day and be told they need to represent another firm than the one that hired them. Again, there’s no problem in that (considered white label solutions), but it only gives you a few minutes to prepare to speak with the client, and first impressions are a big deal. Most people who are let go from a contract are let go within the first 5-10 days if the client feels something is not right.

Recruiting is a little different in the contract world. Recruiters can work both sides of the fence, meaning they could work for an agency or the direct client. Know your recruiter & don’t be afraid to ask who they work for and how the engagement is setup. Recruiting is not quite the same as headhunting. Headhunters are a form of recruiter, but typically aren’t involved in the contracting industry with the exception of interim higher level positions (C-Level/Executive).

Contracting Revenue Models

Revenue is typically generated by an agency in two ways.

The most common way is to have a fixed price for a deliverable. Sometimes the deliverable is a helping hand over a specific period of time. This is converted to an hourly rate. To make the math simple, lets say a project is budgeted for $16K. If the project is expected to take a month, the gross revenue earned by agencies is approximately $100/hr ($16K/160 working hrs per month). There are costs that come out of this that can differ from client to client. Most corp-to-corp engagements require the agency to provide insurance. How much and which kind varies. Professional liability insurance will significantly increase agency costs. Additional costs include travel & expenses, administrative overhead, and the cost of acquiring the client.

Remember that the people who land deals for the agency don’t get paid to make proposals. They get paid when a sale is made. Commissions or other forms of financial compensation come out of the gross revenue. Then there has to be a profit margin too, otherwise there is no incentive for the agency to take on the responsibility of supplying a workforce. Margins fluctuate based on the level of experience. It’s not uncommon to see pay rates going to a consultant that are 50% of the gross revenue ($50/hr in our example) after costs and margin.

It’s also possible that a “food chain” may exist. Some agencies will subcontract to another agency. They require less in margin because there are fewer costs, but whoever hires you typically has the most expenses. This is common & necessary within the industry, but you want to watch out for too many players in the food chain. There are bottom feeders that try to supply everything to everyone. The easiest way to find these is to look for lots of listings for the same position on a job board. If there are lots of identical descriptions, then look at the rates. The higher the rate, the higher the group is in the food chain. I’ve personally taken some deals like this because they can still be valuable. It may seem frustrating to see an invoice for $100/hr when you’re only making $30/hr, but $30/hr is more than $0/hr and remember that these deals wouldn’t be possible without the connections offered by vendors. Obviously you want to make the most you can, but don’t let hesitation kill your opportunity, especially if you’re trying to gain field experience. It’s all about balance in an industry that moves very quickly.

Some of the most lucrative contracts I’ve ever had are the fastest moving. I won the deal because I moved fast and was prepared. My top deals went from interview to office in under 24 hours.

The other common revenue model is the hourly basis. A deliverable may be somewhat open ended. This can be a positive and negative sign. It could mean the project isn’t planned properly, or it could be a continuous improvement effort or R&D. It’s important to ask about the nature of the work to help take a guess at how the agency is making money from the deal. Hourly revenue is a pure margin-based model. Every hour you work means the agency gets paid more. There are typically caps on this to keep costs under control and employees from milking hours unnecessarily. In these cases, it is best to be honest.

Regardless of the revenue model, it is important to figure it out. Your chances of landing a deal are best when the agency can see a clear profit margin. Remember you need to be competitive, and the best way to determine your price is to understand their price. However; it can be a guessing game because nobody is going to come out and tell you how much they’re making on a deal. That doesn’t mean they’re being dishonest. Get talks going with some recruiters to gain some experience in communicating the situation and finding a mutually beneficial arrangement.

Body language and the specific terminology someone uses can say a lot about the situation.

Business Development Industry

If contracting focuses on deliverables (products), then business development is the equivalent of a service. The revenue model is similar to the second most common contracting revenue model mentioned above. However; it tends to be less open ended.

“Deliverables” in business development are typically documents. These can be best practices, business processes, and sometimes just research. Consulting is more dominant in this industry. Some staffing groups try to get into it, but there is often a struggle to get out of the routine contracting offers. There is comfort in routine, and business development typically isn’t routine. Each engagement is different. There may be similarities from one to another, but each business has its own factors to be considered.

The industry focuses more on thought leadership. Conceptually, it’s a much simpler business than contracting. However; the actual work is far from simple. People in these roles really need to understand a business and how it communicates. It’s sort of like designing a car as opposed to building one. You need to know how the parts work and talk to each other.

The question I get most often that relates to this industry is “how do I get there?”. Answer: It’s all about experience.

I started my first business in college, but at the time I had already worked for 2 Fortune 500 companies & done some independent contract work for small time shops. I remember talking to people about joining me as founders, so my first question would be “what do you want to do?”. I’d ask that first because it’s important to partner with people who have the same values and goals as you do. I got “I want to be an executive” more times than I can count. I mention this story because it showed a naive approach but a clear desire. Most people like the prestige that comes with being a leader, but they don’t understand the steps to get there.

One of my employees will tell you the importance of baby-steps. You can’t skip steps in becoming a leading consultant. You have to act and observe. You have to start small and work your way up. The sooner you stop trying to skip steps, the sooner you can get on with gaining experience.

There are lots of ways to increase your experience. The easiest is to get involved in your local community. However; I recommend getting involved with groups outside of your comfort zone. If you’re a web developer who wants to manage a web team, try going to a lean startup or sales event. You may feel like a black sheep in the room, but seeing other aspects of business and industry are invaluable to becoming a well rounded leader.

Personally, I attend all sorts of events and get involved in as much as I can. I talk with entrepreneurs all the time, and I really like talking to those outside of my own expertise. It opens my mind to different points of view.

The key factor in progressing towards leadership is understanding how to communicate at different levels with different kinds of people. Once you get into a consulting role, keep going. Try to work in different industries if possible. You’ll learn different business processes & it will make you stronger. As your experience grows, so does your portfolio of business processes that work/fail.

Some of my best consultations have been developing new business processes by borrowing from industries outside of my client’s industry.

Staffing and recruiting agencies can be a good launchpad to get started in business development. Really pay attention to what’s around you. Talk to other team members and ask questions about why something needs to be done. Most people are happy to share knowledge about things. If nothing else, people like to talk about what they do. It’s a great way to learn from other people’s experience.

Wrap Up

In the end, contracting and business development can be similar, but the big difference is in the approach agencies take to each. You can learn a lot about the agency by assessing their approach to a scenario. If the approach isn’t right for the scenario, it says something about the agency. The key is to take in all the facts before making a judgment.

Overall, each type of agency can be a springboard to career development. Try to observe and find value, for both you and the agency. Learn about risk factors and benefits on both sides by talking to people. Communication is always key.