Introduction

Contracting a recruiting agency involves negotiation, much like any other vendor agreement. Most founders tend to negotiate by simply asking for lower rates, but successful negotiation is about understanding both your needs and preferences as well as those of the agency.

In this article, I will explain how hiring managers and founders should communicate with agencies, from expressing preferences to negotiating better contract terms.

The Basics - The Iron Triangle of Recruiting

Recruiting involves balancing three main factors: speed, quality, and cost. The more talent you screen, the better your chances of finding high-quality candidates, but this takes time, so you can’t make quick hires. Additionally, offering higher salaries can help you find quality talent faster.

This triangle doesn't account for differences in productivity between recruiting efforts, such as having powerful media channels or applying technology. Within certain capabilities, improving any one of these aspects usually requires a sacrifice in the other two. We discuss how to choose an agency in The No-BS Guide to Hiring Latam Engineers.

• If you want to hire quickly, you need to pay more or accept less qualified talent.
• If you want to hire cheaply, you need to lower the bar and be patient.
• If you want to hire top talent, you need to pay more and be patient.

Recruiting Firms Operating Model

Recruiting firms have largely fixed operating costs, mostly salaries for recruiters and salespeople. Their income comes mostly from placements, which can be volatile and unpredictable.

The mismatch between income and expenses is the core risk of every firm. A company might hire a recruiting firm purely on contingency, meaning it only pays upon a successful placement. However, if the firm doesn't make a placement, it incurs a net loss.

There are other risks, such as positions being closed, filled by the company's internal efforts or a competing agency, payment delays, or the company going out of business.

This means that commissions need to account for clients that do not result in placements to compensate for this risk. Conversely, reducing this risk allows companies to negotiate lower fees while maintaining the agency's profitability.

For example, companies sometimes contract multiple agencies on contingency, but this competition divides the value of the contract. Agencies are less likely to accept lower commissions if there's competition, but they might if they get exclusivity.

Clients where no placements are made are net losses for agencies, which happens frequently when companies close positions or change their hiring plans. A company that offers contractual guarantees or payouts for these cases significantly reduces risk for agencies.

Reducing risk for the agency is the fastest way to get better pricing.

Pricing Models

📊 Contingency Fees (8% - 20%)

This is the traditional pay-per-placement model. It’s convenient because companies don’t need to pay any upfront costs, making it easy to create or terminate contracts if the agency doesn't deliver as expected.

U.S. agencies typically charge around 20%, while regional recruiting agencies may charge around 8% but with extra guarantees.

🗓 Subscription Models

The best way for an agency to reduce risk and income volatility is to charge monthly fees. These can be mixed with placement fees, and the core idea is to cover ongoing expenses with the subscription.

Subscription models also promote exclusivity. Once a company commits to a monthly expenditure, hiring other agencies on a full contingency basis makes less sense.

Subscription models are less suitable for companies that aren’t constantly hiring and churning, so they tend not to be very popular.

🛗 Staffing Model

Many firms offer staffing services, meaning they place talent for you and handle payroll. Staffing allows companies to test talent and make quick hiring decisions, as the contractors are readily available.

However, the talent from staffing services often lacks long-term commitment and domain expertise. Additionally, staffing is expensive because agencies need to pay talent during downtime, so the fees when talent is placed need to cover these costs.

I discourage startups from hiring through staffing models.

Levers

🤑 Straight-up Fee Negotiation

Always ask for a discount! Start with a request and aim to get an immediate deal or a “no.” Firms usually have a few discount options ready, such as discounts for first hires or permanent fee reductions.

If you get a “no,” you may need to offer something else in exchange for a fee reduction, primarily reducing the firm's risk.

💡 2023-2024 are challenging times for agencies. Companies have significant leverage, and agencies desperate for clients might offer substantial discounts. It’s good to pressure while you have the advantage, but be aware that if the commission is meager, the agency may have to devote fewer resources to survive than other clients.

💵 Kick-off Fees / Advances / Retainers

An advance is money paid upfront and deducted from the eventual fee negotiation.

A firm's worst nightmare is working for a client and making no placements, resulting in a net operating loss. Advances or kick-off fees can help cover operating expenses even if no placements are made.

Companies risk paying for a service they may be dissatisfied with, but realistically, advances signal commitment and reduce risk so significantly for agencies that they may offer a discount in return.

👑 Exclusivity

Companies often consider hiring multiple agencies on contingency for the same role, but this is often a mistake.

A competing agency for the same role cuts the contract value in half, as your chances of making a placement drop to 1 divided by the number of agencies. A 15% exclusive contract is worth more to an agency than a 20% non-exclusive contract with one competitor, and the value decreases further with more competitors.

Agencies quickly find out about competing agencies, as they share media channels and talent pools. Once they know about competition, they may stop sourcing for you, resulting in worse outcomes than exclusive agencies.

That said, it's reasonable to have two agencies competing for the same role. If you plan to use only one, exclusivity is a powerful lever to negotiate a better price. If you don’t mention it, you’re giving away leverage!

📣 Referrals & Recommendations

Firms often gain clients through referrals. Writing testimonials, and use cases, and referring other companies are valuable to agencies. Committing to provide these in the case of a successful relationship can be worth extra discounts for an agency.