How staffing agencies are overcharging you by 20-30%

Welcome to The Did You Know Podcast by Varisource, where we interview founders, executives and experts at amazing technology companies that can help your business save a lot of time, money and grow faster. Especially bring awareness to smarter, better, faster solutions that can transform your business and give you a competitive advantage

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Welcome to the did you know Podcast by Varisource where we interview founders and executives at amazing technology companies that can help your business save time and money and grow. Especially bring awareness to smarter, better, faster or solutions that can transform your business. 1.3s

Hello everyone. This is Victor with Varisource.

Welcome to another episode of the Did You Know podcast. Today I got somebody who I could probably talk for hours. He just has so much knowledge in the space and it's super impactful and interesting and can't wait to get started. I have Nick who is the CEO founder of Hire Art. Hire Art is a platform that transforms how you hire and manage your entire contract workforce with visibility and control. Welcome on the show Nick. Why don't you give a quick intro of yourself?

Hey Victor, thank you for having me. I'm the CEO and founder of Hire Art. We're a tech company based in New York. There's about 90 of us internally. We actually 1.2s started way back in 2012 and have been working on this problem for a while now. But I'm happy to get into the story and tell you more about it.

And obviously a lot of people know Varisource as kind of more technology focus areas helping companies with buying and managing on the technology categories. Right. So you wouldn't think of that for staffing. We all know that staffing or people usually are top three spend for any organization, right. You got to have people, you got to have good people. But people cost a lot of money, right? And I think staffing agency is one of those things that not a lot of people have visibility into how the industry works and what the problems are. So kind of that's what I love talking to founder is like, what made you decide on this problem to solve? Was it your experience? Was it like Stewart Dennis, kind of give us how you started, hire Art and maybe what was that Epiphany moment?

Yeah, sure. Well, we started actually with a very different idea. 1.4s Originally, the premise of hierarchy was to create a sort of universal screening platform for jobs. So for any job, we could screen a job seeker and figure out whether they would be a good fit or not. And we were targeting the permanent workforce, targeting the HR department that wanted to make sure high quality folks were getting hired for roles. And we rolled out this solution and raised a little bit of money back in 2012 and pursued 2.4s what happened was we were getting some traction. We're working with some great companies. We weren't able to really charge a lot of money for the solution, but we kind of. 1.2s Inadvertently through our clients, stumbled on this contract staffing industry, which

I'm kind of embarrassing, I didn't really even know existed before. And the way we found out about this industry was through one of our clients. We were visiting them out in the bay area and 1.2s they were giving us an update on the account. They were happy. We hired thousands of people for them, got high quality people. Our screening solution was working very well for them, but they were expressing frustration about the experience of managing these folks through this big staffing agency they were using. And we stopped them and we said, what? 2.5s You're not employing these people directly? We were a little surprised to hear that. And it turned out that all these folks, we thought we were hiring for them, which is very big, well known tech company, of course they're just using their own HR and folks directly, not the case. They're using the staffing agency. And it turned out the staffing agency was charging them 60% markups for the gross pay. And that was their business model. They are the employer record. They mark up the pay, they charge the marked up bill to the 1.3s client, the employer, the company. And we compared that to how much we were charging for our screening solution and realized the staffing firm is making like three orders of magnitude of what we were making. So we thought, are we in the wrong business? 1.3s If we could build our own employment solution, we could go to a market like that, we could have that model, we could 1.6s make those same unit economics. And on top of that, these guys were expressing a frustration. There was a pain point. They

didn't like the employment side and in fact, they hadn't liked the sourcing piece. And they or. That was why they come to IR to begin with. And now they were telling us that in like this employment piece. So we thought we could really do this. And that was kind of how the idea for what we're doing now is born.

Yeah, that's so fascinating. I mean, I don't know if people know, but Slack, right, which got bought for like $30 billion or something. 1s They were actually like a pivot of another idea internally. Right? Like Slack was actually just something they do internally to communicate, and it turned out that was a much bigger business. So it's really fascinating to hear these founder stories on how things came to be. But again, back to why is there source partnering with hire? Even though you guys are kind of in the staffing 1.1s arena category, it's really about your technology because you guys have a platform and it helps companies manage it, gives them visibility and transparency, which is, from what I've learned from you guys, very rare in the staffing agency. And I can see why when you're charging people 90%, 60% margin, you want to hide as much as possible. Right. So that's just crazy to me. But I guess it's been a long time. Why haven't these staffing agencies there's a lot out there. The big ones, the small ones. Like, why haven't they had utilized technology or provide more of a platform? Why do you think? Because I think that's a huge differentiator for you guys. Yeah, it's a good question. Maybe I should start by giving a little bit of an explanation for what this industry is. This is a $218,000,000,000 industry in the US. It is absolutely huge. 1.4s The industry being contract staffing companies, spending money, having third parties to source and employ workers on their behalf. So a lot of people don't know this, but if you visit Google's campus in Mountain View, more than half of those folks that you will see don't actually work for Google. They work for some other company that Google is using 1.8s to manage them and employ them. And this is common in a lot of tech companies. So they might have a core kind of hiring profile. Google might be engineers that are developing their software, but outside of that non core area, they're going to use these third parties to recruit these folks who have expertise in sourcing and screening these folks, but then also to employ them because they don't want to extend the HR and administrative overhead to deal with this potentially very large

HR workforce. And so this industry, like, it's been around for a while. You know, in the 50s, you have temp agencies. 3.7s And then 1.6s in the 90s what you started to see was this thing called the managed service provider which emerged to try to start to bring order to the chaos created by the presence of lots of different staffing vendors. Serving companies and then and more recently there's been this trend towards having these software systems that do that as well called vendor management systems DMs so it is changing and what these solutions are trying to accomplish is to create order. To create process and to create I think with the latest iteration in the form of DMs is a single system of record for the contract workforce you got all these workers working companies there could be thousands of them you want to be able to see and manage them in one place the VMs is trying to do that but I think that one thing that's hard for a VMs. 1.3s Is that ultimately all of the employment data lives with the staffing firm because they're the employer. So they are the ones responsible for monitoring people PTO balance and making sure they get paid correctly. They're the ones who have to execute a termination or execute a pay rate change. So if you want to know the truth, you have to ask them. But these staffing agencies, they're really good at recruiting. They think of themselves as recruiters. They don't think of themselves as tech companies. They're not structuring their data in a really nice way and exposing it via API. It's just not what they do. In fact, it's too much data. And I don't think any API of any Hrs really is capable of exposing the level of data you need to truly have cell source control. And I think that what the industry wants is this kind of ability. They want an Hrs, they want the ability to see their contract workforce control, the policies of their contract workforce to some degree. And they want automation around all their workflows that go into the management contract for scheduling interviews, proving expenses, improving PTO, but they don't have that. And the DMs provide a little bit of that, but there's just a lot still missing. 1s

No, that makes so much sense. Again, 1s not being from the snapping industry, I could totally see I mean, I just love how you guys use technology, kind of the whole 1.1s compound methodology you were telling me about to kind of have an end to end solution where you have software companies that may provide the software piece, but they don't do the staffing, so they're missing data. And then you have staffing agency who does the hiring, but they don't have the platform. They just want to sell you people. So you guys got to combine those two and everything else to give them a full solution. And again, that's why we're so excited to partner with you guys to help these companies save a lot of money and time on the staffing spend. So one question I always like to kind of pick founders brain on is, look, the last two years with COVID right, everything has accelerated as far as digital transformation. And that's a broad term. Digital transformation just means a lot of things are going to the cloud, a lot of things are going to software. So you guys, again are a staffing company, but you have a platform, so you're a software company as well. What have you seen the last two years as far as change with maybe customer behavior or even just your business or the staffing industry in general? What has changed the last two years? You know, from COVID? 1.8s

Yeah, well, Cobin has definitely hit this industry in a big way. 1s The first major thing is processes having to be digitized and moved online. 1.2s So you have to 1.8s if you're going to have a remote workforce, then you have to manage that remote workforce. And that means that process can happen through pushing papers in person. So we saw a lot of staffing agencies and continued workforce programs scrambling to figure that out. Just administering to a remote workforce is 1.1s very different, very complicated. You have people moving because of kova to different states, which affects taxes and the employment regulations that apply. And it means you have to track where they're living. We've got 2.1s with remote work, just like all of the onboarding and paperwork has to be done remotely. So that's a big difference. And lately, just talking to someone earlier today was saying their number one problem is actually fraud, where candidates who are applying to jobs remotely will have someone else sitting on the interview 1.1s for them. 1.1s I've heard headlines about that, but 2.1s now I heard it confirmed from a couple of folks that 1.3s

how would you guys solve that or do you guys solve that? 1.9s Yeah, I mean, there's different ways to solve it. I think that 1.8s the main thing is that 1s the most basic thing is that the person who's taking the interview is the same person that actually shows up to work. And I think it's pretty easy with some basic processes to make sure that's the same person. And when you have big bureaucratic processes at companies that are large contract workforces, it's very easy 1.1s for that to be missed because 2s the person doing the interviewing is not necessarily the person doing the day to day management. Some companies, what they'll do is during an online interview, lock down the computer and make sure that the person is not opening up any browser tab or someone feeding them instructions and so forth. I'm not sure or that that's. 1.6s That sounds back at high school 3.2s

for interviews. I don't know. We tend to address a pretty 2.9s just segment of the workforce where that feels a little heavy handed to me. So it hasn't really been necessary for us. 2.2s

A couple of things I would love for you to kind of share with the market and the audience and educate them. Right? Because, look, first of all, 1.3s when I hear margins, like 60%, 90%, I mean, sometimes even crazier from these companies, how can that happen to these customers? Because they're literally paying more to the staffing agency than the great people that they're hiring. So the people are not benefiting. And of course, there's a lot of management and costs, don't get me wrong, right? I know there's a lot of cost to provide them benefits and all of these things to these people. But also the margins and overcharges are just crazy, right? When I've been used to being a telecom industry, you overcharged customers by 1020 percent already. A lot you turn over 90%. So how does that happen? 1.2s How does kind of these companies, I would say to some degree, maybe get away with it or just that these customers are not able to better maybe protect themselves from it or any tips on how again? And then I want to talk about second part of that, how you guys approach it differently, which is completely with transparency and that is very different. Alright, but the first part, why do you think that happens?

Yeah, it's a really great question. So, first of all, the mark up seems a little more egregious. It might actually be in practice because a markup is different than 1s gross. 1.9s Gross cost 1.3s of gross profit because it's quoted potential of the payroll. And then out of that mark up, 1.3s staffing firms have to pay for payroll taxes and benefits and workers comp and other things. So they do. It's not all gravy for them. But that said, 60% certainly seems like a lot, you know, is typically those costs are going to be 20% of payroll or maybe 25%. So you're still left with 35, 40 points of gross profit. But then you hear about some staffing agencies that charge 90% markups, 100% markups. It's not uncommon at all. 2.4s I think that there's a couple of reasons why it happens. One reason is opacity of pricing. A lot of staffing agencies, what they'll do is they're not actually charging a markup. They're charging a bill rate. They're saying, here's a person, they cost $100 an hour. And then what they're doing is then trying to pay the individual as little as they can get away with. It might be $50 an hour so that they can pocket that 100% mark up. So that's the biggest reason. So clients aren't actually contractually agreeing to pay 100% mark up. They're just agreeing to pay $100 an hour. 1s And once they find out, 1.9s they can be a little upset, as we've discovered. But I think the challenge thing is they don't find out, and that is not good for the employer and the employee break for the staffing agency. But I guess walk me through, how are you guys doing it differently and why, right. I'm sure everybody is tempted by this secret margins that people don't even know, right. And it's very tempting. But then you kind of went a totally different way and decided to show transparency. And I believe,

correct me if I'm wrong, your markets are even in your platform. That showing people, customers. That is like a breath of fresh air, I would say in the staffing agency, probably. But what made you kind of go down that path?

Yeah, well, transparency is one of our values. We just think that promotes trust. We are trying to create a system that people can understand where the pricing comes from, what we pay to whom. We're trying to build, like, long term partnerships with people we work with. 2.5s So I think that 1.8s let's see, I think it's important to understand, like one thing that happens is these are kind of like inadvertent sales. You know, hiring manager can make 1.5s decide to work with a staffing vendor who's offering them somebody and they have a role to fill. They desperately need someone to fill that role. They'll pay the price of the staff vendor quotes it. Maybe they won't even think about it too much. And then it kind of is a beta complaint at that point. And maybe the staffing vendor is able to get them to hire five more people, ten more people at the same price. And they're like, Well, I'm already paying this price. One person. I want to do that for five people. But no centralized decisionmaking has happened that says, we intend to pay this much, we intend to pay this markup. So part of what we do and the role of transparency we see is in educating our clients, giving them, 1.6s empowering them to understand where their pricing comes from. We'll tell them we think this is the right amount. Bigger programs are sophisticated. Like Facebook has a standard rate card and. 2.3s They're going to tell all the staffing firms this is the market that you have to pay. But smaller companies don't necessarily have that have that knowledge and maybe they're hiring contractors for the first time. They don't necessarily know where the market is. So providing that transparency is quite, quite helpful. But 1.1s it's equally important though, to 2.6s make sure folks understand that recruiting is expensive. 3.1s A lot of folks do balk at recruiting 1s prices. Whether it's contingent fee or markup like pay the staffing firms, it is expensive because it's very labor intensive. To get that one higher, some recruiters might have had to engage with hundreds of candidates over many weeks. And if you were to hire someone internally to do it, you would be spending tens of thousands of dollars to get that higher as well. So there is a reason to pay it and I think that it's important to make sure that 1s you're just selling goods. Good expectations about what's the reasonable amount. 1.2s Yeah. No, I think it's just about being fair. Right. Doesn't mean you have it's not about buying cheaper or cheaper is better, but I think it's about paying a fair price. It's about what the market truly should be. And when you lack that transparency or that knowledge as a customer, I think you're just going to get taken advantage of. And that's what we as a buyer of anything, we don't want to get taken advantage of. Right. When you buy a car, house, you don't want to get taken advantage of just like anything else. Right. 3.6s I

had a couple of last questions for you because I think our golden nuggets about you guys, another one is the fact that a lot of these customers and companies that we together are working on have staffing agencies that they work with. Maybe they have a good relationship with existing suppliers and they're doing a good job and they want to retain those staffing agencies for whatever reason. And a lot of times they may look at you as competition. Right. Oh, you're here to replace this supplier that I'm working with. But I do like them, so I don't see a need. But in fact, you guys have a very interesting approach that kind of helps those staffing agencies become your partner versus your competition. Can you kind of talk a few seconds about that? Because I think that is fascinating.

Yeah. So our approach is we want staffing agencies to see us as an industry utility, as software plumbing that can help make this whole industry function better. That's how we think of ourselves. We see ourselves as taking this software approach to this industry, trying to simplify it, trying to make consolidate data, make it self serve, make it easy for clients, give them a magical experience in managing their workforce in one place. And we see that in this setup, there's still an incredibly important, critical role for staffing firms in recruiting candidates 2.3s for many roles. You need to go do outbound recruiting the markets, the job effectively to individuals, whether it's. 1s Messaging folks on LinkedIn or calling up people, you know. And so you can automate some recruiting, that's what job boards do, that's what job board integrations do. But you can't do that and at all, not even close. So what we do is we actually work with clients and take their job racks, expose them to staffing firms and then they can source for all of our jobs. And then 1.3s if somebody gets hired, the crucial difference with us is versus what the industry says, we will become the employer of record as opposed to the staffing firm. And then we're charging the client markup and remitting a portion of that markup back to the staffing firm that supplied them. So we're able to replicate the unit economics that the staffing firm would get if they sourced and hired the person themselves. But we are able to be the employee record and therefore be that single source of truth, that single employer, standard employer for the entire contract workforce, for the client, giving them a good experience. And what we found is that it's great for staffing firms because 3.4s the vast majority of staffing firms are going to say not ours. The vast majority see themselves as 2s providers of sourcing screening, placement services, recruiting services, and they focus on what they do best in this arrangement and then we can focus on what we do best, which is providing great software 1.8s and they're able to not have to front the working capital to fund payroll. They don't have to worry about all the HR and Admin stuff we can do in a much more automated, more cost effective way. They focus on finding really great candidates and then we handle the rest. 1.8s

So as we kind of wrap up, I mean, like I said, I can talk to you for hours. I just love picking your brain. And again, staffing and people are such critical components to every company success, right? And it's one of the highest spend. And so if together we can help companies 1.2s optimize, still get the great people that they need, but get that at a fair market rate or even know what that fair market rate is and have a platform to manage it all. Yes. Very excited about this partnership. As we wrap up, one of the last questions I love asking founders is if there was one advice you would give to other founders or business owners, sea level executives, 1.3s anything would be maybe it's personal advice. Maybe it's business advice. In this crazy world and this crazy economy, 2.5s what would it be? What would be that one advice that you really think you care about? 3.3s

It's a great question 6.4s

for me. One thing that Y Combinator always said to us, and something I really took to heart, is 1.8s the idea of listening to users and potential users a lot and then being nimble and constantly trying new things until what you do catches fire. 1.3s Because we spent a long time trying to find the right 1.6s approach in this very big industry, and we did eventually, and it worked, but 1.8s we had to kind of feel our way along. And I don't think we would have ever come up with this idea if we hadn't experienced it firsthand by getting out there and trying something and learning and hearing about this kind of pain points in this industry that's, like,

largely hidden from view. Even though it's so big, at least if you're not in the industry, it's quite hidden from view. And so 1.3s that's probably been the most valuable thing. I heard that when we started the company, but I never really quite internalized it, but it was always kind of there as a little voice in the back of my head.

Yeah, YC would be proud, man. YC would be proud, persistent, and you have a great team. We love working with you guys, and I really appreciate you joining and dropping some knowledge, man. We're excited to continue the conversation in a webinar we're going to plan with you guys soon so you can demo your platform, because I think seeing is believing, right? Again, a lot of people associate staffing, but they don't associate that with technology per se. And so I can't wait for you to share. Nick, I really appreciate it. Great to have you.

Well, thanks. 2.2s

That was an amazing episode of the did you know podcast with Varisource. Hope you enjoyed it and got some great insights from it. Make sure you follow us on social media for the next episode. And if you want to get the best deals from the guests today, make sure to send us a message at sales@varisource.com.

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