Rethinking Temp-to-Perm

New labor market conditions may undercut the temp-to-perm approach for employers who need skilled workers. The temp-to-perm strategy is still effective for some positions, but increasingly counterproductive for skilled positions in candidate-driven markets. The percentage of accounting temps converted to permanent hires jumped 40 percent in 2006 at Vedior North America, one of the largest staffing firms in the U.S. "The shortage of talent in accounting and finance is well known, and employers are trying to grab labor while they can, CEO Greg Netland says. "From a fee perspective, employers are essentially paying the permanent placement fee, but on a prorated basis."

The temp-to-perm strategy, preferred by many employers as a low-risk approach to recruiting, is still effective for some positions, but increasingly counterproductive for skilled positions in candidate-driven markets.

Unemployment in accounting, nursing and other skilled occupations that require specific degrees and certifications is now less than 2 percent. For IT positions, the time to fill full-time permanent positions now stands at 56 days for staff and 87 days for managers, according to Robert Half Technology.

"Temp-to-perm is a fantastic avenue for employers when you have great pools of candidates and a candidate-rich environment," says Dan Glazier, COO of Snelling Staffing Services, with 200 offices across the U.S. "But demographically, we now have very low unemployment in the major labor markets. Temp-to-perm becomes the least advantageous path for job candidates. Under the current market dynamics, it may not be the best approach for employers."

Employers who rely on temp-to-perm as a fast and effective way to pull in candidates may have to rethink their position. "Particularly at the higher skill levels, temp-to-perm is counterintuitive and not a way to get the best candidates," Glazier says. Snelling, along with many of the major staffing firms, has redirected its focus to straight recruiting.

"We do a disservice in the industry if we don’t steer both candidates and employers in the right direction," Glazier says. "Right now, many candidates are receiving multiple offers for full-time permanent positions, and a temp-to-perm offer goes to the bottom of the heap." He believes that labor markets will continue to tighten, even for lower-skilled jobs. He reports that in manufacturing, for example, finding skilled and semi-skilled workers, even line workers, is now a major hurdle for employers.

Understanding markets
"Temp-to-perm and permanent placements are totally driven by the talent pool on a market-to-market basis," says Eric Buntin, managing director of marketing and operations for Randstad USA, another staffing giant. "In contrast to what we saw in 2002-2003, we now see a critical shortage of certain skills."

Beginning in the first quarter of 2006, the availability of certain skills sets dropped drastically, so employers shifted away from temp-to-perm and toward permanent hires, Buntin reports. The key skills needed for the position and the availability of those skills should drive the decision about whether to fill the position through temp-to-perm or direct hire. At Randstad USA, permanent placement work has grown sharply while temp-to-perm orders have remained roughly constant.

The biggest change that Randstad USA has seen in its temp-to-perm arrangements is that companies are moving toward earlier conversions. The timing of conversions is based on the position and the onboarding and training process required. For a relatively simple job, onboarding and training may take be three to four months. For a more complicated position, it may be six months.

At Spherion, which places 375,000 workers annually, clients would take on more high-skilled temp-to-perm employees if they could, but the supply is limited, reports Don Weis, vice president of national recruiting. "The trend at the lower levels is still ‘Try before you buy,’ and many temporary workers in the lower levels are active candidates," he says. "In the more highly skilled positions, employers would like to use temp-to-perm candidates, but there is a much more limited pool of active job seekers."

At Vedior, the highest levels of temp-to-perm occur in accounting and finance positions, where there is a huge demand for quick onboarding. "It may take one day to hire and onboard a temp, compared with six weeks for a permanent hire," Netland reports. Most of the accounting employees are sent out as temps, but with the understanding that the position may be considered for temp-to-perm.

"We don’t want to lose the asset, so we have a nine-month scenario with a prorated fee," Netland says. There is no fee after the temp has been on the job for nine to 12 months.

Pricing pressures
Like most staffing firms, Vedior is feeling pricing pressures. "It’s an odd market because every measure shows that labor supply is down, but staffing firm pricing is still under pressure," Netland says. "If clients push too hard, however, we have to serve other clients first."

Although there is pricing pressure, in some fields where there is essentially zero unemployment, such as engineering and nursing, bill rates have gone up. "We have an extremely hard time recruiting nurses and bill rates are rising, but hospitals are still struggling, and other businesses are still under cost pressures," Netland says.

Snelling structures its temp-to-perm arrangements based on the components included in each account. Its recruiting costs are rising, but clients are pushing back on prices. "It’s only a matter of time before pricing will have to move up for clients who want the best candidates," Glazier says. He advises employers to look at whether they are getting the results they need from their temps instead of focusing only on transactional pricing.

The transactional focus comes from the overwhelming emphasis on lower price, Glazier reports. Line mangers have budgets they have to hit, so they are very price-conscious. Some of the pressure comes from finance and procurement, which focus only on the contract. "CFOs look at total cost equations for everything except people," he says. "When we talk to them, they understand total costs, but sometimes there is a misalignment with procurement."

Snelling avoids working with companies that only measure price because it leads to miscalculations of the total value of the work. "It may take 15 people to do the work of 10 if a company looks only for the lowest price and ends up with low-quality employees," Glazier says. "Hiring under-skilled people and low-end workers in a tight labor market will cost the company over time in productivity and output."

Snelling recognizes that it is hard for any company in any industry to raise prices, so it works with clients to reduce its costs. "We try to educate clients about how we work," Glazier reports.

Winter, Wyman, a staffing firm based in Waltham, Massachusetts, saw a fairly dramatic uptick in temp-to-perm two years ago, but demand has remained basically steady since then. The firm’s temp-to-perm arrangements vary from client to client based on the volume of business and whether the client is looking for lower or higher skill level candidates. "The fee structure is part of the negotiation," reports Scott Ragusa, president.

Winter, Wyman’s fee structure generally starts at 25 percent and decreases 1 percent for every two weeks, down to a minimum of 20 percent. For large clients, the fee may be waived after the temp has been on the job for an extended period.

"Our clients do not view temp labor as a commodity and we have had some ability to raise prices to cover higher recruiting costs," Ragusa says. "This is a candidate-driven market and will remain so for quite some time. For the higher positions, it is becoming harder to replace the workers we lose to permanent jobs."

Setting objectives
HR executives can help produce an effective temp-to-perm arrangement by letting the staffing firm know upfront that the company is looking for a permanent employee, Ragusa says. "It’s a different pool of candidates," he notes. Also, the client company should be aware that it is selling the job to the candidate and should be sure to give the candidate challenging work. Finally, the HR executive should keep the staffing firm informed of any changes in the status of the position.

Buntin advises HR executives to define the core workforce and the flexible workforce, and actively manage both. "This is far more effective than letting line managers hire temps on a one-off basis," he notes. "We have seen this development in our client companies."

HR executives must look at the tradeoff between the fully loaded cost of in-house recruiting compared with the fees paid to the staffing agency, Buntin advises. "Companies are still trying to drive out costs," he says. "But if the market drives the fees too low, the quality of the workers provided will suffer." He notes that it is more challenging now to recruit workers who will take temp work.

The key for HR executives is to really look at the objectives, the skill sets required, and the availability of those skills in the marketplace. "It may be that a temp-to-perm strategy cannot be part of a permanent recruiting strategy, but only a temporary strategy under certain market conditions or for certain positions," Buntin says. For now, employers in high-demand labor markets may have to chose between direct hires or temps, and forgo the comfortable temp-to-perm middle ground.

[Source: Workforce Management Online, March 2007]