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Outsourcing Risk comes in Black and White – Not Grey

measure ROI for Outsourcing

The use of 3rd party vendors that offer back-office services for recruiters seems to be on the rise. All seems well and good; however recruitment business owners need to tread carefully.

Here’s why.

Most outsourcing arrangements entered into by small recruitment firms will usually fall into one of three groups.

The first group is more transactional. The recruitment agent outsources employment compliance payments and the job of pay-rolling contractors (with debtor financing attached). In this case zero employment risk is mitigated as the recruitment agent remains the engagement vehicle and remains as the labour supplier to the end user. Whilst no employment or business risk is mitigated, the recruitment agent still off loads the work-load to a payroll specialist and gets debtor financing relief. Straight forward.

The second group is where it gets grey. I am going to call this group the “Cross Hire” group. This is actually a mining industry term and it’s used when a mobile equipment management company (who owns the plant equipment) hires out to another company who in turn then on-hires again (usually to a mining company who is the end user). If nothing goes wrong with the machines then all is good however if the machine breaks down on the working site and losses are incurred then watch this space get messy. Claims and counter claims with multiple parties involved. Ouch.

Interestingly, “Cross Hiring” seems to be a growing trend in recruitment. The recruitment company uses a third party contractor engagement company to hire and payroll the worker. The engagement company pays the worker through their ABN. Add some finance and the recruitment agent now has a full worker engagement vehicle in place. The recruitment agent can now on-hire the worker to their end user client for each hour worked, collect the money, pay the contractor engagement company and keep the difference.

Sounds straight forward enough? ....... well not really. For instance, if the recruitment agent has the supply agreement with its client, complications exist. A bit like wanting to “have (keep) your cake and eat it (too)”. ‘Outsourcing’ engagement of the worker through a third party really doesn't mitigate the recruitment agent from any business or employment risk at all if the agent is still going to be the one supplying the worker to the end user client.

If something went wrong, then the end user would look to be compensated from the supplier. If the end user didn’t pay the invoice for hours worked (for whatever reason) then the recruitment agent (supplier) would still owe the contractor engagement company for the hours worked. If there was a work-cover claim (or a harassment claim) then the agent would still be in the line of fire as they on-hired and supplied the worker to another work-site.

Related: How to measure ROI for Outsourcing?

“Cross Hiring” for recruitment (white and blue) has the potential to be as messy as it is with mining. It’s never an issue until something goes wrong and it’s all tested.

If the recruitment agent wants to remove themselves of business risk and employment risk, then maybe a rethink is in order.

This brings us to the 3rd group which presents recruitment owners with a solution which is, in essence, joint venturing, not outsourcing.

This model, established by Red Wind, is for recruitment agents that are looking to mitigate 100% of the business and employment risk, yet still wanting to provide a temp/contracting service to their client base.

With good joint venturing, both parties enter into a Memorandum of Understanding style agreement. The recruitment agent hands over the entire contractor engagement and client invoicing process. It’s a higher level of relationship as the agent allows the joint venture organisation to supply to its client directly, agreeing to risk its wages cash-flow with no guarantees.

What this type of relationship does achieve is very clear black and white relationship so if something went wrong then the joint venture organisation would be the entity under fire, not the recruitment agent. There is no “Cross Hire” as the recruitment agent entrusts its partner to not only engage and pay the contractor, pay tax, compliances, but also then supply the contractor to the end user, collect the money and risk the cash spent on wages.

Yes, the recruitment agent lets go of some control, however the recruitment agent gets to concentrate on providing customer service, recruitment quality and good candidates to its clients – whilst having the benefits of a trusted partner that takes on the 100% of the risk. No grey areas.

Article written by Tully Young, managing director and founder of Red Wind. For more information visit

Categories: Consulting

Tags: Staffing, Technology, Recruitment industry, Tully Young, Offshore Recruitment

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