FY19 was a record breaking year for sales, but only 1 in 5 Australian recruitment agencies capitalised on strong market conditions.

When it comes to sales, Australian recruitment agencies had an outstanding year in FY19. The first two quarters delivered record breaking sales across both the temp/contract and permanent revenue streams. This growth continued throughout the year despite some major challenges, including the federal election.

Considering sales were sky high, you'd expect profits to also peak. However, when we analysed the results of 104 Australian recruitment agencies, this wasn't the case. Despite market conditions being the best in recorded history, only 1 in 5 recruitment agencies increased their profit in FY19. That means around 80% recorded a decrease in profit.

The reason for the surprising results can be attributed to two main factors a decrease in productivity and an increase in operational costs.

The productivity slump

Productivity is a huge determinant of profitability for recruitment agencies. Productivity can be measured by calculating how much gross profit (or net fee income) is produced by each staff member. Sadly, for many recruitment firms, the increase in work in FY19 didn't equate to increased productivity. On average, productivity declined by 4% over the course of year, falling from $216,894 per staff member in FY18 to $207,814 in FY19.

While the top 10% of performers increased productivity, the growth was a negligible 0.1% at $296,842 per person.

Unsurprisingly, staff turnover was largely to blame for poor productivity. With team dynamics constantly changing, many recruitment agencies struggled to keep on top of growing sales. Low fill rates on perm orders were also a factor, with a lot of work falling into the 'unbillable' basket.

The budget blowout

Recruitment agencies have a range of operational costs, but human resources accounts for the largest portion of expenditure. In FY19, these costs reached a record high, increasing 5% from FY18 to an average of $162,491 per staff member.
The final two quarters were especially expensive with staff and management costs blowing out to an alarming 60% of gross profit.

Remuneration, training and recruitment will always be costly and money spent on keeping a high-performing team together is usually money well spent. However, these costs should be proportionate to profit, and 60% is an unacceptable amount for any recruitment agency.

Fortunately, some firms managed to contain their costs and boost their bottom line as a result. The top 10% of most profitable firms recording an average decrease in operational costs of 7% per staff member.

The great divide

The results from FY19 show a great divide between the top performing recruitment agencies and the majority. For most, the surge in sales led to more hard work and pressure, but not to an increase in profit. On average, profit per staff member in FY19 fell 27% from the year prior.

However, for the star performers, productivity gains and smart spending led to above average results. The top 10% of recruitment agencies increased their profit per staff member by a 14% to a record $114,711. An exceptional result.

How to avoid the profit pitfall in FY20

In FY19, many recruitment agencies fell into the trap of prioritising growth, without having strong processes in place. This meant they lacked the resources and systems to capitalise on the increase in sales. To ensure your recruitment agency achieves better results in FY20, here are 4 ways to boost your bottom line.

1. Focus on staff retention (and address the staff turnover issue)
2. Look at ways to improve productivity per person
3. Control operational costs by setting a firm budget
4. Get better before you get bigger

With the right foundations in place, the sky's the limit for growth but set your agency up for success by working smarter with the resources you have before attempting to scale.