When considering Recruitment Process Outsourcing (RPO), understanding the various pricing models—management fee, pay-for-performance, and hybrid approaches—can guide employers in selecting the most effective strategy for their organization's hiring needs and budgetary constraints. The management fee model offers budget predictability. But, it can stifle flexibility. Pay-for-performance aligns costs with hiring needs. Yet, it risks overemphasizing recruitment outcomes. A hybrid approach aims to merge the strengths of both. It offers a balanced strategy for organizations. This article, based on the author's deep experience, examines each of these models in detail. By the end, you'll know which pricing structure best fits your hiring strategy.
1. Management Fee Pricing
Under a management fee pricing model, the employer pays a monthly or hourly fee. The fee covers staff costs, technology, sourcing, account management, overhead, and other expenses. You may have heard this model referred to as a fixed-fee model. Organizations can easily budget for these fees. They don't vary with the number of placements.
Advantages
The benefit of a management fee model lies in the ease of budgeting. It's much easier to budget because the cost tends to stay the same every month. Organizations, such as nonprofit healthcare firms, prefer RPO costs to stay the same every month. They find it simpler to budget. They know their costs, and they like that certainty.
Another advantage exists in keeping the core recruiting team intact during slower hiring periods. Recruitment for an employer may slow, but by deploying this model, your key recruitment staff remain in place. A large Wall Street financial institution presents a case in point. For them, the majority of hiring happens between February and July. Why? Because they pay out earned bonuses at the beginning of the following calendar year. These bonus payments prevent employees from moving to new employers. If they leave, they lose their earned bonus payment. So, in New York's financial world, hiring for financial firms largely blooms in that half of the year.
But what about the other half of the year? The management fee model keeps that core recruiting team intact after hiring ends. See, the employer needs this group to prepare for the surge of new hires in February. Without the management fee, those essential recruiters could and would walk away. If and when they leave, the employer faces the grueling task of finding new recruitment staff. These newcomers may not fit in and will require training. The management fee model keeps that core team ready and steadfast for what lies ahead.
Disadvantages
The main disadvantage of the management fee model exists in its difficulty in scaling. The difficulty of scaling creates a misalignment of costs for the employer. When hiring becomes sporadic, the cost per hire misaligns with real-time needs. An employer's hiring could and more than likely vary monthly and yearly. As a result, the cost per hire could look higher when hiring decreases. While the cost per hire looks lower when hiring increases. Ultimately, the costs don't match the needs. Employers struggle to adjust their recruitment workforce to match their hiring requirements. They can't find the right balance and cannot scale up or down as needed.
Another major disadvantage exists in less shared risk between the provider organization and the employer. The provider receives payment without regard to hires. Simply put, the provider has less skin in the game based on their performance.
Recommended Research Report: What Employers Need to Know about Buying and Optimizing Recruitment Process Outsourcing Solutions
The Best Scenarios For The Management Fee Model
The management fee model works best for:
- Short-term projects
- Nonprofit organizations like healthcare
- Employers hire for a specific time
- Organizations need to maintain a core group of recruiters when hiring decreases, e.g., financial firms
- Situations where consistent hiring may exist, e.g., healthcare
2. Pay for Performance Pricing Model
Pay for Performance offers employers an appealing structure. This model lets employers match recruitment costs to hiring needs. It makes recruitment expenses predictable and scalable. This pricing model shows employers the RPO provider's commitment. The RPO takes on most of the risk and wants its recruitment program to succeed. Each job requisition has an open fee, and each filled position has a close fee. This model brings clarity. It holds providers accountable. The employer doesn't need to worry about cancellation fees. Many organizations favor this model.
Advantages
The pay-for-performance model creates equal risk for the employer and the RPO provider. The employer only pays for jobs filled by the provider. If the provider fills only some jobs on the requisition, the employer pays only for that work. Many organizations like this model because providers have skin in the game. While the management fee model creates the perception that the provider lacks risk.
The employer's hiring costs consistently align with current hiring needs. When hiring goes up, the costs of recruitment go up. If hiring needs go down, costs of recruitment also go down. For many organizations, employment stays in constant flux. They like this model. It keeps hiring costs in line with their fluctuating hiring needs.
The pay-per-performance pricing model is scalable. The RPO provider sees an opportunity if a company's hiring needs arise. They bring in additional resources to meet the client’s increased hiring requirements, along with the opportunity to generate more revenue to cover the additional expense. However, with a management fee model, providers may try to make do with what is already in place, even when demand rises. They may stretch their resources thin, and in many cases, it simply isn't enough to meet the increased hiring needs.
Disadvantages
Two disadvantages exist with the pay-for-performance model. The first disadvantage lies in that this model makes a riskier solution for the provider than the management fee model. Providers charge a higher overall rate to cover the greater exposure and risk. Employers then face higher overall recruitment expenses with a pay-for-performance compared to a management fee model. Therefore, simplicity lies in managing fees instead of pursuing results. Yet, the cost does not align with your real-time hiring needs.
The second drawback of this model is that it might drive away the provider's core delivery team. With the pay-for-performance model, employers risk losing members of the core recruitment team when hiring needs decline. The provider may and will reduce the team to keep cost in alignment with revenue. They simply don’t have the offsetting revenue.
Suggested: What is Recruitment Process Outsourcing (blog post)
3. Blended Pricing Model
Employers can pay for RPO solutions using one of two blended pricing models. First, a monthly management fee plus a pay-for-performance model. Second, a true-up pricing model.
Management Fee + Pay for Performance Fees
The advantage of this blended model lies in capturing the best aspects of both previous models. The monthly fee allows the employer to keep the provider's core recruitment team in place. Even during a slowdown hiring period, the provider can continue to keep the key core team members on the account. Then when open jobs increase, the provider organization will add members to the team to meet the new hiring requirements given that there is offsetting revenue to cover the added expense.
The blended model also creates a risk versus reward spectrum. On the one hand, the provider can't rely on the monthly fee alone for financial stability. Therefore, the provider bets on getting jobs filled at the projected, forecasted level. To win that bet, providers add resources to ensure they meet the projected hiring requirements. See, it is a win-win. The employer benefits when the provider meets hiring goals.
In recessionary times, this model works well both for employers and providers. When hiring decreases, the provider may receive some revenue to remain financially healthy. A financially healthy RPO partner can deliver the needed services on time. The employer keeps key members of the hiring team. This approach maintains consistency within the organization. The employer gains peace of mind knowing a core team stands ready for the economic rebound while the provider stays somewhat financially healthy during a slow hiring period.
True Up Pricing
The True Up Pricing model protects pricing integrity and hiring volume shifts. Employers pay a minimum monthly management fee. The open and close fees are then compared to the minimum monthly management fee. The employer only pays for the higher of the two amounts. If the scope and the minimum fee are established correctly, the minimum rarely applies. This model somewhat reduces the provider’s risk and allows both parties to navigate through slower hiring periods. It allows the provider to keep core team members in place during these slower periods while positioning themselves to handle an uptick in hiring once everything returns to more normal levels.
In Conclusion
RPO pricing models mold and form the partnership between employers and their RPO partners. The three main pricing models are Management Fee, Pay for Performance, and Hybrid. They have unique traits, benefits, and drawbacks. Organizations can make informed decisions by knowing the details of each pricing model. These should align with their recruitment strategy, hiring scope, and budget. A company's ability to adapt to changing hiring needs can and will depend on its pricing model. The right model will impact financial stability and the ability to meet your ever-changing hiring requirements, especially during these economic times. These models aim to meet client requirements at competitive price points while satisfying the varying complexities of the talent acquisition strategy.
About the Author
Kim Davis is a prominent RPO consultant known for helping firms start, grow, and optimize their RPO businesses. He serves on the RPOA advisory board, where he offers an RPO certificate program to business leaders who want to start or grow an RPO business. Kim has helped major corporations like Pontoon/Adecco and Sourceright establish their RPO practices and led Yoh RPO to achieve recognition on the Everest Group's RPO PEAK Matrix. He grew Spherion’s strategic account sales from $10 million to $750 million in just two years. He serves as an operating partner at Vistria Group and is a Senior Advisor at Future Solve. An experienced speaker and author, Kim shares insights on talent acquisition and RPO through articles and whitepapers.
This article updates the previous article about RPO pricing models published in 2014.
