Temp-to-Perm Trend Still Strong

By Irwin Speizer

Aug. 23, 2007

Pinched by a tight labor market and demands for more effective talent recruitment, companies are increasingly turning to temporary agencies as a source of permanent hires.

Richard Wahlquist, president and CEO of the American Staffing Association, says the number of temporary workers retained as full-time employees in a process known as temp-to-hire is expected to grow by 15 percent this year, equaling the healthy rate of expansion seen last year.

“Temp-to-hire, according to our members, has been one of the fastest-growing segments of the business over the last two years,” Wahlquist says. “It is hot.”

Some staffing firms report that temp workers are now regularly being screened like potential permanent hires by human resources departments, with full job and education backgrounds requested. As the demand for temp-to-hire increases, staffing agencies are raising fees for temp-to-hire arrangements.

Express Personnel Services, an Oklahoma City-based staffing firm, has seen its temporary staffing business shift into an operation that serves primarily the temp-to-hire sector. Twenty years ago, temp-to-hire accounted for about 20 percent of the company’s temporary staffing business. Today, nearly three-fourths of its temporary recruiting is temp-to-hire, much of it in skilled fields like accounting. That experience mirrors the changes reported by the ASA; Wahlquist says 65 percent to 75 percent of temporary staffing today is temp-to-hire.

“Ten years ago, all we did was drug screening,” says Bill Stoller, co-founder of Express Personnel. “Today we do background checks, credit checks. We are doing so much more because of the eventual decision that the company wants somebody to be full time.”

Requests for more background information come from HR departments, which are turning to temp firms as a source of permanent hires in part because shrinking labor pools make it harder to find qualified candidates, particularly for critical skills like information technology. HR departments are also feeling pressure to fine-tune hiring to avoid mistakes that may require dismissal and new recruiting. By using temp-to-hire, companies can test-drive potential permanent hires without the costs associated with an immediate full-time hire.

Elissa Tucker, a senior consultant with Hewitt Associates, a human resources consulting firm, says temp-to-hire has become a fixture in hiring solutions. “Companies that are starting to feel the talent shortage are coming to us and saying, ‘We are having a crisis; help us come up with a solution,’ ” Tucker says. “Temp-to-hire is one option we might recommend.”

But she cautions that projections of an increasingly tight labor market could result in friction between temp agencies and their clients. “If the labor market gets really tight, there could be an issue between companies and staffing agencies, because they need to compete for the same talent,” Tucker says. “Staffing agencies want to hold on to employees for their own needs.”

Tucker says HR departments that use the temp-to-hire option need to carefully monitor contracts with staffing agencies to ensure that the terms of the transition are acceptable and that the fee for hiring a temp as a full-time worker is reasonable.

On the other side, Wahlquist says temp agencies need to prepare for more temp-to-hire requests with more focused recruitment efforts, particularly for sought-after jobs in tight labor markets. A temp agency that can’t supply talent on demand will quickly lose its usefulness to clients.

“There is a tension that exists between fulfilling increasing client demands for temp-to-hire assignments and maintaining a sufficient bench of talent to meet client staffing requests,” Wahlquist says. “If my business model is to make contract talent available, and I end up becoming a source for full-time employees, where do I get the talent to put on my bench?”

Finding qualified workers is among the top challenges faced by staffing agencies today. But according to a recent ASA survey, the No. 1 reason workers sign up with temp agencies is for help in finding permanent employment.

Wahlquist estimates that 30 percent to 40 percent of temp workers get asked to stay on full time after their assignments end. In most cases, the offer is made with the staffing firm’s participation and under the temp-to-hire clause in the staffing contract. But some companies may try to go around those contracts and hire temps without notifying the staffing firm or paying the temp-to-hire fees.

“We have heard reports of stealth hiring over years,” Wahlquist says. “What we advise staffing companies to do, as part of employee orientation, is to let employees know that they have an absolute obligation to inform the staffing firm of any requests made by a client to take a person on as a full-time employee. We also advise that staffing companies try to have the same sorts of conversations with clients—that if they want to hire staffing workers as full-time employees, here are the conditions.”

Tucker says that as temp-to-hire usage increases, companies need to do their homework before engaging staffing agencies. Ideally, she says, companies should look at temp-to-hire as part of a long-term workforce planning strategy. Such a strategy would include estimating talent needs up to five years into the future and determining where shortages might appear and which types of jobs might be best suited for temp-to-hire use, she says. Companies also need to carefully negotiate contracts with staffing agencies for temp-to-hire arrangements.

“Any company looking to use this as a strategy needs to go in upfront and try to have the best possible cost in the contract,” Tucker says. “In order for this to be a successful strategy, you want it to be cost-effective.”

That’s fine with staffing agencies, which are just as keen on protecting their own interests in temp-to-hire arrangements and want the details spelled out in advance.

“We need to get our return for recruiting people,” Stoller says. “We don’t want to come to the end of the process and feel we are not getting what we feel is a justified return out of recruiting these people. We are a little more upfront in discussing what fees are going to be—even more upfront than in the past.”

Stoller says fees for temp-to-hire are generally on the rise as labor supplies tighten and the competition for talent increases. He also notes that one reason for higher overall fees is that the skills in demand are also rising. That increases the level of screening and pay rates, as well as the temp-to-hire fees.

Wahlquist says that temp-to-hire clients now routinely request résumés from temp workers. Once those temps start working, their performance and progress is more closely monitored today by clients who want to see how well the temp workers fit and adapt during the term of the contract. If the temp passes the test, the company might then exercise the temp-to-hire clause and make an offer.

“The big thing that companies take into consideration in temp-to-hire is that they can eliminate the cost associated with bad hires or bad matches,” Wahlquist says. “If I guess wrong based on a good interview, now I have lost all the cost of recruiting, screening and employing a full-time employee, and I will face the separation costs of letting that bad employee go.”

By test-driving the worker in a temp-to-hire arrangement, the company gets a firsthand look at how a prospective employee performs in an arrangement where the temp agency is the employer of record.

But while the general trend in staffing is for increased temp-to-hire business, not all staffing firms are embracing the shift. Philadelphia-based Yoh Services, which specializes in higher-level temporary workers like engineers, computer programmers and health sciences researchers, has kept temp-to-hire at less than 5 percent of its overall business.

Jim Lanzalotto, vice president of strategy and marketing at Yoh, says his company has carved out a niche that focuses on providing highly skilled consultants for short-term projects. If a company wants to hire one of those consultants full time, Yoh would certainly oblige, he says. But the workers Yoh recruits tend to prefer roving, short-term assignments to permanent placements and might not adapt well to full-time employment.

“It is almost like a round peg in a square hole,” Lanzalotto says. “Some people want to work full time, but if someone is a consultant, let them continue to be a consultant. The biggest message here is that you want to be sure you have the right people doing the right things.”

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