Building an ROI Business Case for a Temp-to-Perm Staffing Strategy

In last week’s blog post, I mentioned how a temp-to-perm strategy might be the best solution for some organizations’ staffing needs. Unfortunately, both staffing firms and their clients often overlook this option. Don’t make that mistake yourself! Showing your clients the potential ROI for outsourcing a portion of their hiring in a temp-to-perm model can be a powerful technique to help you win new business.

When I was in the staffing industry, I focused my efforts on high-volume temporary and temp-to-hire call-center staffing. Each time I entered a new market, I immediately targeted the clients who already believed in outsourcing. Although this method provided quick and easy wins, it also made me a commodity: as a regional firm competing against national firms, I would rarely win a deal when price alone was the deciding factor.

To combat this disadvantage, I decided to focus on cracking the tougher nuts—the large call centers that felt they could staff their operations better and cheaper than we could. One key tactic I used to win their business was show them an ROI exercise that demonstrated the financial sense of outsourcing. I’ll work through an example here to show you how it’s done.

The first step is to make sure your clients understand the fully loaded cost of an employee (which often adds 30-40% to the base salary!). Jo Landers has a handy online calculator to help you get started. For this example, let’s use an employee pay rate of $10.00/hr and the following assumptions:

Mandatory Costs
FICA  7.65% up to wage limit of $110,100 (2012)
FUTA 0.60% up to wage limit of $7,000 (2012)
State UI 3.00% up to wage limit of $14,000 (2012)
Workers comp 1.00% up to wage limit of $20,800 (2012)

Hiring Costs
Recruiting, hiring, 6.90%
training, payroll
Severance pay 0.10%

Optional Benefits
Vacation (5 days/yr) 1.92%
Paid holidays (7 days/yr) 2.69%
Sick pay (2 days/yr) 0.77%
Paid break (2.5 hrs/wk) 5.91%
Health benefits 5.77%
(employer covering

Total 36.31%

With these assumptions, the fully loaded hourly cost of the employee is $13.63/hr. If your bill rate on a $10.00/hr employee is $15.00/hr, the gap between the client’s cost and your rate is only $1.37/hr.

But we still haven’t factored in the hidden financial benefits of outsourcing. If a company outsources some of its high-volume positions with a 90-day temp-to-perm arrangement, it has an opportunity to achieve the following goals and realize an ROI in two years or less:

Increase Employee Retention

Most employee turnover for unskilled positions occurs in the first 30 to 90 days after hire. For a temp-to-perm employee, day 1 on the company payroll will actually be day 91 with the company—which means he or she is already past the critical turnover point. The net result is improved employee retention. Calculate their cost of turnover and assume a 10% savings. J & D Consultants developed a calculator that seems to work pretty well. Click here to download the Excel version.

Improved Retention = Lower UI Rate

Most states calculate the employer’s UI tax as an experience rating. Improved employee retention yields a lower rate for the entire employee population. For the purposes of going through this ROI exercise with a client or prospect, assume a UI rate reduction of 0.5 to 1.0% over two years and apply this reduction to their company wide UI costs. (Laws vary from state to state, though, so be sure to review the relevant state’s numbers.)

Reduced Workers Comp Claims

The frequency of injury claims also determines how much a company pays for their workers comp premium. Work with your client to figure out the average number of incidents that occur during an employee’s first 90 days of employment for the positions you’re proposing to staff, then assume that your client will reduce its claims by that number. The experience rate is reviewed annually and adjusted as needed. Calculations vary from state to state, but in general a company starts out with a modifier rate of 1.0%. A reduction to 0.9% thus represents a 10% savings on the workers comp premiums.

Once you understand all of the numbers specific to your clients and prospects, you’ll be able to help them focus on the bigger picture (instead of your rate) and deliver a presentation that shows a two-year ROI based on the above assumptions.

When I was in the staffing industry, I used this exercise with several prospects, typically starting my conversations with the highest-ranking person in HR and eventually including the CFO. Each and every one of those prospects signed up as clients, and my company became the primary or master vendor for each of them.

Temporary staffing is not a commodity but an outsourced service essential to a company’s business strategy. Believe it or not, you’re adding value well beyond warm bodies. You’re helping the companies you serve improve their bottom line, employee retention, and quality of hire.

Digging into the details with your prospect to determine the ROI for using your services in a temp-to-hire model takes commitment from the client and some serious number crunching on your end. If you dedicate yourself to the process, you’ll open new doors—and win more and bigger deals.