How One Bad Long-Term Contract Can Wipe Out Years of Profits

ThinkstockPhotos-479766186Staffing is red-hot right now. An improving economy and tightening candidate market have created a serious sweet spot for staffing agencies that can quickly – and consistently – find great people to meet clients’ changing workforce needs.

But our customers are becoming savvier by the minute. They realize that:

Minimum and “livable” wages are increasing by the day.

  • Several states, including Connecticut, Vermont and Massachusetts, have multi-year wage increase plans that will raise their minimum wage to $10/hr. or more by January of 2017.
  • Los Angeles has a plan to increase its minimum wage to $15/hr. by July of 2020. Jurisdictions throughout the state have also enacted similar plans for wage hikes.
  • Major employers are jumping on board, too. Earlier this year, Facebook began paying its US contract workers a minimum of $15/hr.

Paid sick leave is on the rise, too.

Throughout the country, cities and states are jumping on the bandwagon and requiring employers to give workers paid sick days. In June, Oregon became the fourth state to pass a paid sick day law; more than two dozen states and cities have considered similar proposals in their legislative sessions this year.

Healthcare reform will substantially increase employer costs in 2016.

  • More small employers will be forced to “pay” or “play” in 2016.
  • According to a recent New York Times article, health insurance companies are seeking rate increases of up to 40 percent to offset the cost of new customers under the Affordable Care Act.

The writing is on the wall: employment costs are skyrocketing. As a result, we’re seeing a huge increase in the number of clients wanting to lock into multi-year staffing contracts. And really, can you blame them? With substantial hikes in wages and benefits costs on the horizon, employers are doing anything they can to guarantee pricing and control overhead.

Including creating one-sided contracts that are entirely in their best interest.

Your clients are protecting their own backsides from rising employment costs and risks. You need to stay one step ahead of them.

PREMIUM CONTENT: Staffing Buyers’ International Presence

So protect your firm!

Before you get lured into signing a three-year staffing contract with a prospect you’ve been dying to land, take a step back. And take a deep breath. Consider whether it’s really a good move for your bottom line, or if it may wind up biting you in the backside – and chaining you to years of unprofitable, risky business.

Here are a few tips for creating long-term contracts that benefit and protect all parties involved, so you don’t wind up smacking yourself in the forehead and saying,

“Oh, no! Did we REALLY want to win that contract?”:

Factor in your own employment cost increases. Before committing to long-term pricing, do your homework. Forecast the impact that higher sourcing costs (due to candidate shortages), minimum wage increases, additional paid sick days and health insurance cost hikes will have on your bill rates.

Amend client-proposed contracts. Protect your staffing firm by including dual-indemnification language in contracts. The American Staffing Association provides member firms with a model contract, including an “Indemnification and Limitation of Liability” section which offers significant protection for staffing firms. Alternately, you can hire an employment law attorney to draft similar verbiage to add to client-supplied staffing contracts.

Run every contract by your counsel. Before you sign anything, have it reviewed by an expert. Paying an attorney who’s licensed in our practice area isn’t cheap. But when you consider the costs of legal fees, penalties, judgments and lost business that could result from your own ignorance or negligence, paying for sound legal advice suddenly becomes a real bargain.

Reign in clients who overstep their boundaries. Recently, I’ve seen a lot of conversation threads on ASA Central about overzealous clients who, as a “common law employee” CYA measure, are asking for staffing suppliers to jump through hoops in terms of reporting. Take the lead to prevent clients from becoming squirrely and demanding:

  • First and foremost, make sure your health coverage is ACA-compliant (including when and how you offer coverage to employees).
  • Create standard client reports (including things like hours worked, eligibility, offer of enrollment date, coverage status) to provide tangible proof that your firm complies with ACA and that you meet its requirements in terms of minimum essential coverage.
  • Include language in your staffing contract that specifies the type of ACA compliance reporting to be provided during the contract period.

Sell value, not bill rate. When negotiating a long-term contract, educate your clients about the pitfalls of forcing staffing vendors into bidding wars. Explain that, while the client may lock in low bill rates, they’ll wind up paying a high price in terms of service, speed and candidate quality.

Know when to walk away. Let’s be frank. Some clients want all the “bells and whistles” – including A-level talent, high-touch service and lightning-fast turnaround – all at rock-bottom pricing, guaranteed for years to come. This is not good business for you. While it may produce short-term gains, a contract that’s heavily skewed in favor of the client isn’t worth the liability or hit to your profitability. In these cases, it’s best to be diplomatic – and walk away from the table.

Be smart about your biggest clients. We all have huge clients that are extremely important to our livelihood. These guys hold the bargaining power, and they know it. When you run your cost/benefit analysis for contracts with these clients, consider the impact losing them would have on your business.

If you find that you can’t afford not to sign a long-term contract with them, create a long-term plan for becoming less dependent on any single revenue source. By diversifying your revenue base, you’ll gain more bargaining power yourself – and become less beholden to big employers.

 MORE: How to attract top talent

Tammi Heaton

Tammi Heaton
Tammi Heaton is COO of PrideStaff. She can be reached at theaton (at) pridestaff (dot) com.

Tammi Heaton

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