Staffing agencies: know your workers
New research by Isabel Fernandez-Mateo, Assistant Professor of Strategic and International Management at London Business School and Matthew Bidwell, Assistant Professor of Management at the Wharton School in Pennsylvania offers fresh insights into the workings of staffing agencies.
As the world of work has changed to one in which companies aim at being lean, maintaining large full-time workforces is no longer desirable for many firms. Moreover, especially in the rapidly growing IT field, companies in need of skilled specialist workers do not necessarily have the staff in place to search for, vet and hire people for short-term projects. Thus, staffing firms that can provide companies with temporary workers have emerged as important players.
These staffing agencies are, in effect, brokers that supply companies with the right workers for specific projects. They work in a similar way to other types of specialised market brokers (such as estate agents, headhunters and dating agencies), which bring together buyers and sellers to facilitate the exchange of goods and services. For staffing agencies, which are the official employers of the workers (sellers), the surest way to increase their profits and maintain their relationships with client firms (buyers) is by establishing long-term relationships with the workers they place. That way, the staffing agency is much more likely to make solid placements that will gain them a reputation for providing their clients with the best possible workers.
The research done by Matthew Bidwell, Assistant Professor of Management at the Wharton School in Pennsylvania, and Isabel Fernandez-Mateo, Assistant Professor of Strategic and International Management at London Business School, was based on a careful analysis of data from a subsidiary of a single, large global staffing firm headquartered in the US. The agency specialises in placing highly skilled creative information technology professionals, such as graphic and Web designers, in a variety of companies. The researchers chose the agency because it was prepared to share in-depth information with them and because its practices were similar to those of other staffing firms in the field.
The professors’ analysis revealed that staffing firms can charge higher prices and obtain higher margins when they place workers with whom they have longer relationships. And the authors made certain that, in their analysis, the only difference between workers was the length of their relationship with the agency.
The authors found that long-term relationships allowed the staffing firm to acquire a great deal of information about the workers it was placing (much as companies do about full-time workers). Having such abundant information was invaluable in determining how well each worker would suit a given company’s needs. As a result, the staffing firm made placements that were so satisfactory that they could charge higher initial rates for placements, which is important because it is extremely difficult to increase prices for workers over time. This ability to charge high rates translates into higher pay for the workers, encouraging them to stay with the agency. Interestingly, it also translated into higher profit margins for the staffing firm.
The findings of Bidwell and Fernandez-Mateo provide important insights about the ways in which brokers can increase their profits through the accumulation of private information about workers. They note that this approach is very different from the current concentration by some staffing firms on solely cultivating relationships with the clients, for whom they find workers, instead of the workers themselves. The authors also draw conclusions on how brokers’ relationships with buyers and sellers may affect their ability create and capture value in other settings, such as the financial market, real estate, or executive placement services.
Isabel Fernandez-Mateo (ifernandezmateo@london.edu) is Assistant Professor of Strategic and International Management at the London Business School. Her paper (co-authored with Matthew Bidwell), “Relationship duration and returns to brokerage in the staffing sector”, is published online in advance of publication by Organization Science.