Computer systems for recruitment companies are the source of much angst. You feel that one of the biggest decisions you can make is committing to a system that will lock you into one type of walled garden, having long-lasting and serious consequences for other systems in your business, but it appears there is no way to avoid it.
This issue comes up, time and time again, when we talk to people about their business, and how they worry these systems will integrate with the back office, and how to know if their numbers are right. And the setup costs are often huge.
We believe that there are three fundamental principles you can apply to take away a lot of the risk and complexity. They are:
One: your back office systems only add up
Back office systems, the ledgers, should be the place that holds the sum of the results for the business. They don’t perform calculations. They are designed to be robust and secure. Like the paper ledgers of old, locked in the chief accountant’s safe.
Two: your front office systems run the business of your business
They help you find roles and candidates and, hopefully, join them together. They are complex, flexible, dynamic, and varied.
These two system types are so different in nature that trying to join them together can often bring a world of pain. So…
Three: middle office is where the control happens
The name Middle office comes from the separate departments in hedge funds and investment banks that manage risk and calculate the profit and loss on every trade. They are usually in charge of IT. But the principle applies to other industries as well. For example, lawyers have practice management systems. We believe that using this concept in recruiting firms is the secret to avoiding the pain.
For recruitment companies, onboarding contractors, timesheets, invoicing and the control of margins is critical to the success of your business, and this cannot be done effectively in either the front or back office systems.
We have seen front office systems designed to send invoices, and track debtors, fail. Xero is great for staff payroll but not great for temps. We have seen some people try to get sales information from the back office into their ATS, so the front office could see their progress, and fail.
Calculation of temp margin is such an important part of your business that it needs to have it’s own systems, and they need to intelligently interface with both front and back office systems.
Luckily there are some natural interface points in recruitment company processes.They are:
One: importing sales invoices into the back office system (GL & debtors)
This is actually a piece of cake. Invoices can be batched and then easily imported. All back office systems allow you to import invoices via a CSV file. What the GL can’t allow you to do is accurately calculate the margin on each temp, client and consultant. You only have the aggregate of the invoices. General ledgers can’t calculate, just add.
Two: importing payroll information into the back office system (GL)
Payroll data is easy to import into the GL. Again you do it by batch. That’s what Xero does with its payroll. It might be a menu item in the software but it’s essentially a different system with linked navigation.
Three: showing sales and margin numbers in your ATS
To be able to show these numbers you have to calculate them. If you calculate your temp invoices in a spreadsheet, good luck loading it up. If you use a dedicated middle office system your ATS can simply make calls on the system for numbers. For example, the temp sales for a particular consultant for a month are the sum of all hours on timesheets for that month. Databases are so fast these days you get it real time.
But what about on costs?
This is where most people come unstuck. Take workers compensation for example. Most recruiters have distributed a spreadsheet to each consultant to work out how much to allow for payroll tax and workers compensation when they set the rate. At the other end of the business, once a year, back office staff fill in the workers compensation forms, then pay the invoice, after posting it to the general ledger. It sometimes gets posted all in one month but usually by monthly instalments. Still, this top down never meets bottom up approach is downright dangerous. Imagine if a manufacturer didn’t bother to count the cost of a critical component for every unit they sold. Same goes for payroll tax and any other cost you occur per temp.
Adopting a middle office approach can help you avoid the risks.Think of your middle office system being the source of truth (if it’s set up correctly) for all margin related questions, it provides you with the real answers to real business questions for any, I repeat, any period of time: not just accounting periods. You should be able to use it to reconcile your monthly management accounts. The sum of your margin in your middle office system should be equal to your management accounts. If it’s not you need to find out why, and probably find problems that would have otherwise slipped straight past you.
There is another reason you want to know the margins
You want to know them by consultant, by team, by office, by manager, by client, by industry segment. Anyone that has tried to do this using spreadsheet knows it’s pretty much impossible to get right all the time, let alone keep up with a changing business. A good system should be able to tell you whatever you want to know about margin. And you should be able to rely on it.
Consultant commission is another on-cost
How do people calculate commission? Let me count the ways. The one thing they all have in common is the starting point is margin. The spreadsheets we have seen to do this are almost always incredibly complex, labour intensive and fragile. Often only one person knows how they work.
Ok, so which middle office system should I get?
Truth is, it doesn’t matter that much as long as it does the job. What does matter is that it’s configured properly and joined up efficiently to the front and back systems. These days, most tools are up to the job, it’s the setup and execution that’s critical. Any good tradesman will tell you that.
That’s why we started this business called Middle Office
We’ve all been around the traps for years now and this is the position we have come to from all that experience. Experience actually running and advising businesses like yours, and smaller, and bigger than yours too. Using the Middle Office concept, we believe, is the way for you to stop the pain.
You use us to calculate your payroll and invoices, and your oncosts, and we load the data in your back office system as CSVs for you, so all you have to do is approve and send the invoices and pay the bank BSB file.
But you also get margin reporting. We think it’s the best in the business.
We are technology agnostic, we use what we think is best for you, we take care of the setup, the licencing costs, the upgrades, the compliance changes to payroll, the onboarding, the payslips, the invoices and the interfaces. You don’t have to worry about your payroll person getting sick, or married.
We do all that for about half the price of you doing it in house, especially when you take into account your potential software costs. We can do it for that price because these tasks lend themselves to scale and specialisation. And they are getting more complex with every change handed down by Fair Work.
Let us do it. That lets you be a specialist, unique, recruiter.
Thomas is a CPA qualified accountant, business advisor and on-demand CFO with over 20 years of experience running businesses. He has worked in senior finance roles with some of Australia’s biggest companies and best business leaders.
Thomas been an independent CFO for 20 years, working with B2B businesses from start-up to 30M turnover. Twenty years ago not many people knew what an Outsourced CFO was but they are becoming more widespread these days. Which Thomas thinks is a great thing.