Recruitment Process Outsourcing

How do you solve a problem like.....................

The issue of Recruitment Process Outsourcing (RPO) is not a new one but over the last year has provided Asset Based Lenders with some real challenges both in terms of risk and client relationship.

The working capital needs of UK recruitment businesses are ideally suited to the use of invoice finance. Accordingly for a large proportion of ABL providers funding to staffing agencies will represent a significant part of the lending book. In the main the invoice raised by the recruiter to an end user company is a sound receivable. The agency worker or contractor has to provide evidence of the hours worked to the end user who is then required to authorise a time sheet for validation. So there is usually a strong audit trail and collateral test available to the funder prior to or after paying against the invoice assigned.

With over 10,500 staffing agencies in the UK and over one million temporary workers there is a very good chance that a large end user, in the private or public sector will due to the requirement for flexible work patterns, use one or more agency. In some cases it will be many agencies. A hiring manager is faced with different agencies margins, processes and documentation. The recruitment industry recognised that as the procurement departments of the larger end users became more involved that they needed to change to enable a more cost effective and efficient solution.

Tendering for contracts with the private and public sector began over a decade ago but in the last ten years the number of recruitment process outsourcers has grown significantly to meet the needs of end users. The RPO effectively manages the whole process becoming the conduit between the hiring company and the staffing agencies. This makes sense for the end user who now knows what its costs are and that the process of hiring, authorising and billing are on a common platform.

The principle of RPO is therefore sound and embedded. I estimate that ABL providers are conservatively lending in excess of £100 million to recruitment businesses who are supplying agency workers and contractors to end user companies via an RPO. Some of the end users will be well rated and a good risk from both the supplier and funders perspective. However, now the RPO controls the contract and stands in place of the end user requiring the agency to invoice the RPO for the supply of temporary workers to the hiring company. They may not be well rated and represent a concentration. Accordingly the risk is greater for the lender and exacerbated by the likely involvement on more than one ledger.

But that’s not the real issue that has been vexing providers over the last year it is the contract between the RPO and the recruitment business which contains onerous clauses effectively negating the security of the receivable. Principally it is a clause that sets out that if the hiring company does not pay the RPO then the RPO does not have to pay the recruiter. The ‘Pay when Paid’ clause. The best example and I will avoid names was a case last year where a lender declined to advance funds to its recruitment client where the hiring company was the lender or at least part of the same organisation! You know there is a problem that needs some intervention when a situation like that arises.

The genie is now out of the bottle and so the various parties need to find solutions to avoid restricting the recovery of the sector as it comes out of downturn. I know that ABFA has set up a team to work on this as has The Association of Professional Staffing Companies (APSCo) but although it could be argued that solutions are available (remove the contentious contractual clauses or alternatively change the relationship between the RPO and the end user where the RPO acts as an agent for the end user) it needs all parties to work toward a solution. To date there have been contractual variations made in specific cases or a change in the way of supply to avoid the lending restrictions seriously damaging the viability of the recruiter.

The recruitment industry saw turnover drop in 2008/2009 by £5 billion (REC Annual Survey 2009). It will be the first to show and has already begun to reflect an increasing demand for agency workers as hirers begin to increase their workforces again. However the scale of the role now played by RPOs has the potential to slow the recovery of the recruitment sector if lenders understandably restrict the funding to their clients until such time as a solution is found.