Specialists on loan: when and why to use outstaffing

In 2022, demand for outstaffing surged. The reason? The ongoing talent shortage, particularly for IT professionals and blue-collar workers. In their search for specialists, businesses are increasingly compelled to turn to outstaffing companies.

However, many still view this phenomenon with apprehension and don't fully grasp its purpose. As a manager involved in outstaffing recruitment, among other things, I want to explain when outstaffing is beneficial and when it's not, how to calculate its economic efficiency for a project, how pricing is structured, and how to choose a vendor.

The primary rationale behind outstaffing today is the scaling of in-house recruitment. It's about hiring a significant number of required specialists in a short timeframe. This operates on a simple quantitative principle: five outstaffing vendors, each with a pool of ready-to-work candidates, will provide them much faster than five in-house recruiters. Primarily, this is because each vendor has an entire team of recruiters working for them. 200 people versus your 5 HRs – the speed difference is evident.

Now, what do I mean by "ready-to-work candidates"? There are two types of vendors: firstly, small companies that search for specialists in the market based on your request, which closely resembles the work of recruitment agencies. Secondly, large companies whose specialists are already on their payroll, and their hours are sold to clients as needed. Such a vendor will, of course, assemble a team in a shorter time, and you'll see the first candidates for interviews much sooner.

Outstaffing, Outsourcing, In-house

Compared to outsourcing, outstaffing specialists generally work faster because, for example, people at a digital agency are usually engaged in several projects simultaneously. With outstaffing, you can acquire 160 man-hours per month, which equates to a full-time 5/2 schedule. Moreover, this allows you to directly control the work of these specialists.

So, when should you resort to outstaffing? Primarily, if you're embarking on a large but temporary project. In other words, you need hands-on help only for a specific period – for instance, six months. In this scenario, it's not cost-effective to expand your recruitment team, overwhelm them with work, hire people, and then wonder what to do with them after the project ends. It's much simpler to bring in a temporary team on outstaff.

In short, it works like this: outstaffing is faster, in-house is slower; outstaffing is a temporary solution, in-house is a permanent one. Replacing an in-house specialist is lengthy and costly, while with outstaffing, it's quick and free. Outstaffing involves a short contract with an easy exit. In-house is a long-term contract with a complicated termination.

Of course, outstaffing must have its downsides – otherwise, no one would hire in-house specialists. We'll discuss this next.

Pricing Specifics

The main drawback of outstaffing is its high cost. To cover their services, vendors add expenses for insurance, taxes, voluntary health insurance (DMS), equipment, sick leave, replacements, and their back office operations to the specialist's salary – and then tack on a profit margin.

The pricing model can be both transparent and non-transparent. Initially, all vendors operated on a rate basis. This means the contractor has a fixed daily cost for a specialist's work: for example, 30,000 rubles for a front-end developer – from which they allocate a portion to salary and additional expenses, and keep the rest as profit. You don't know exactly how much of that 30,000 the vendor takes, which allows them leeway to inflate prices.

The second model, which appeared relatively recently, is called "cost-plus." Essentially, it's the same fixed rate, consisting of the employee's salary and a coefficient that covers costs such as sick leave, vacations, taxes, and so on. To this sum, the contractor's commission is added: usually 20-50 percentage points. The difference is that the client knows what the final amount comprises, how much goes towards additional expenses, and how much to the contractor. This means the model is completely transparent. Of course, the vendor's profit per client is lower, but they gain more clients.

• Traditional · Rate-based · Fixed daily cost per specialist. The vendor decides how to split between salary, expenses, and profit. · + Simple pricing structure · − Opaque — you don't know the markup · − Room for price inflation
• Modern · Cost-plus · Salary + expense coefficient + transparent contractor commission (typically 20–50%). · + Fully transparent · + Client sees the full breakdown · − Lower vendor margin per client

However, under any pricing system, the cost of an outstaffed employee is higher than that of an in-house employee due to the commission. Therefore, engaging vendors only makes sense when it is economically justified.

How to Calculate Efficiency

There's a general rule for calculating the financial efficiency of outstaffing: for projects lasting longer than a year, it's always more cost-effective to hire in-house. For projects under a year – outstaffing. Why is that? If you decide to part ways with an in-house employee, you'll likely need to pay them (ideally) severance equal to 2-3 salaries – and it's best to budget for this in advance. If you part ways with an outstaffed specialist, no payments will be required from your end: that's the vendor's problem. Moreover, the vendor is obliged to provide you with a replacement specialist free of charge. However, for long-term projects, the overpayment for an outstaffed employee can exceed the amount of potential severance, so it's better to hire permanent staff.

By the way, if a project extends or the company wishes to continue working with the team after its completion, businesses sometimes agree with the vendor to buy out specialists into permanent positions. This is often discussed at the start of cooperation, but due to legal specifics, this agreement often remains a gentleman's agreement.

Finally, outstaffing fully pays off if you need to urgently launch a new product: the faster you hire a team, the sooner they'll complete the work, and the sooner the project will start generating profit for you.

Which Positions to Outstaff

Theoretically, any specialist can be outstaffed, but this model works best for high-volume positions. It's difficult to imagine an outstaffed executive: considering they are typically with you for a long time, it would be wasteful. And a serious executive would likely refuse to work with a vendor, viewing them as an unnecessary intermediary. It's most efficient to work with a large number of identical or similar roles: for example, 100 salespeople, 200 chefs, 50 PHP developers.

Outstaffing is essential when you need to hire many non-core specialists. For instance, a manufacturer of aircraft parts has no reason to divert HR efforts to find chefs for their corporate canteen. This is why employees for low-skilled positions are often hired externally: for example, the American company Sodexo has been organizing catering for Russian industrial enterprises for several decades. In the West, call center employees are often outstaffed. And at the factory of one of the largest Western companies where I once worked, out of 20,000 employees, only about 700 were permanent workers.

✓ Good for outstaffing

• Mass roles · 100 salespeople, 200 chefs, 50 developers
• Non-core specialists · Canteen staff, call center, logistics
• Temporary project teams · 6–12 month product launch

✗ Not recommended

• Executives · Long-term, high cost, prefer direct hire
• Sensitive data access · Banking, medical, state secrets

Finally, positions involving access to sensitive personal data, banking, medical, or state secrets should not be outstaffed. This data must remain within your company, and allowing outstaffed personnel access to it is quite risky.

Choosing a Vendor

The criteria for choosing an outstaffing vendor are largely similar to those for an outsourcing company. First, the vendor must have specialists with the required competencies. Second, they should have experience in your industry. Engaging a company that previously dealt with cashiers and manual laborers to staff IT specialists is not a good idea. Third, consider market reviews and recommendations. Fourth, the pricing model and cost of services: it's crucial that the vendor doesn't try to sell you cheap specialists at high prices.

Then, you evaluate the contractor during collaboration: for example, you observe how many candidates reach the interview stage and what percentage successfully pass – that is, the conversion rate to hire. After the candidates start on the project, you can periodically conduct performance reviews and assess their quality. And after about six months or a year, you'll understand whether you want to continue working with this contractor or not.

In an ideal scenario, an outstaffing vendor eventually becomes a partner: you establish transparent, trusting relationships, understand each other's needs well, and can negotiate and resolve any issues effectively. But this requires a complete match.

Prospects of Outstaffing

As I mentioned at the beginning, demand for outstaffing significantly increased in 2022 – and it's likely that its popularity will continue to grow over the next two years, especially in the IT market.

The reason is quite simple: businesses and technology are evolving, and consequently, the demand for IT professionals is rising, with supply struggling to keep up. In a context of IT talent shortage and high competition, anything that helps attract the necessary specialists will be in demand: IT recruiters, IT recruitment agencies, IT outsourcing, and, of course, IT outstaffing. Since there are no signs of the IT market's growth slowing down, outstaffing will increasingly become a focus for businesses.