Preparing for the squeeze on agency margins

We recently looked at how changes to the Travelling & Subsistence expenses (T&S) rules, due to come into force next April (2016), are likely to affect contractors. In this article, we gaze into our slightly murky crystal ball and try to predict what impact these amendments will have on recruitment agencies in the temporary worker sector.

By now, most medium to large agencies will be operating a Preferred Supplier List (PSL) or, in the absence of a PSL, an Approved Supplier List (ASL).
With Onshore Intermediary Legislation reporting well and truly upon us and with it, the need to have only compliant suppliers, it would be foolish not to have either of these in place by now. Many will have also negotiated a ‘processing’ fee or ‘management’ charge back to those Umbrella companies, who also benefit from such an arrangement, by receiving consolidated and clean time/invoicing data from the agency. (Incidentally, there is nothing wrong with this mutually beneficial arrangement).

However, in the face of the loss of Umbrella workers’ tax benefits when claiming T&S expenses at source, it is unlikely that most Umbrella companies will be able to justify their fees (at least, at historic levels). In addition, the new rules affecting Salary Sacrifice and Dispensations also call into question exactly how Umbrellas will operate after April 2016.

Although we do not yet know the exact wording of the new regulations, the one thing we can be sure of is that Umbrella companies will no longer have sufficient margin to maintain agency processing/management fees at today’s level.

In addition, agencies will come under increasing margin pressure from contractors, whose take-home pay will be reduced by the loss of tax-free T&S. The compound effect of all these changes is bound to have a profound impact on agency margins. Indeed, with contracting no longer as appealing to contractors who, in their eyes at least, will be receiving a raw tax deal in return for remaining part of a flexible workforce, the ready supply of contractors is also likely to become scarce.

While there is no doubt that contracting will continue after April 2016 and with it, the need for agencies to remain in business to supply temporary workers; the most successful agencies must plan ahead and think about how to remain profitable. If gross margin is squeezed, then overheads must
reduce to compensate. Now is the right time to think about outsourcing noncore functions to specialist partners, who can process tasks faster, more efficiently and at lower cost than an agency. A good business process outsourcing (BPO) firm will soon become an integral part of any successful agency’s operations and enable it to focus on fee earning activities instead. Typical processes that suit outsourcing include CV verification, wake-up calls, time sheet data collection, sales and supplier ledger, monthly accounting and reporting, for example.

Some agencies may be reluctant to consider outsourcing as part of their future strategy but it is far better to investigate the options now, rather than being forced to do so in a panic sometime next year.

 

 

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