About Modern Job Trade — Recruiters

We’ve all been there (if not, lucky ducky) — on your way home from work, Linkedin notifies you that someone has sent you a direct message. You literally check your inbox: From the UK? Check. Named Sam? Check. Recruiter? Check. Golden opportunity? Check.

If this is your first interaction with a recruiter, you might be flattered — ‘I knew my profile was in-demand’. Else, the message does nothing but annoy you. Unless you’re frustrated with your current employer. Your tasks do not match your role description. Your pay raise was below your expectations (actually, your friend has the same role at a competitor and makes $5k more than you). Perhaps you’re a bit hungry. Perhaps you answer Sam and suddenly find yourself in front of an interviewer, and another one, and another one, and then, magically, a job offer in the form of a contract shines before your eyes. Perhaps you sign it, why wouldn’t you? That signature ensures you a pay raise above your expectations (now you make $5k more than your friend).

Perhaps you enjoy working for your new employer, perhaps you don’t. This post is not here to judge your decisions, but there are some things we want to explain:

• Why do these recruiters exist?
• Why do they always speak with a British accent? (even when they write)

Recruiters (headhunters, whatever) exist mainly for two reasons:

1. The trust barrier (described in the previous post)
2. Scarcity of high-skilled labor

These two combined makes it difficult, time consuming, and expensive for a company — those who produce goods and services society desires — to recruit the talent they need to operate and develop their business. Roughly speaking, such a process involves:

1. Writing a posting describing the role and required skill set
2. Marketing the posting
3. Filtering applicants
4. Interviewing applicants
5. Negotiating terms

Recruiters are basically outsourcing the first three steps. Their value prop is that they save time (which is of the essence, especially when you have to replace someone in management who left unexpectedly because the job is absolutely toxic) and they reach a larger audience (by also targeting talent not actively looking for a new job). The latter is really valuable when resources are scarce.

What’s the price of this service? At least 15% of your salary. That’s not too bad, is it? It depends. Not if the headhunter lands you Elon Musk for your ‘Colonize Mars’ project in the matter of days. But that’s not realistic. He’s more likely to spend three months sniffing out 6 relevant candidates, one who is mistaking Mars for the chocolate bar. No, but seriously — using headhunters may have some serious consequences for your company. Why? Because they’re not economically incentivized to find you the best candidates, rather, they love to pick low hanging fruits — any talent willing to show up to an interview will fill a seat in the headhunter’s get-paid-train.

Headhunters are aware of this agent problem and claim to ‘fix’ it with a business model they call ‘no cure, no pay’. They only get paid if their client ends up hiring one of the candidates they put forward. Does ‘no cure, no pay’ solve the agent problem? Absolutely not. The agent still doesn’t need to provide the best candidates available, they just have to be good enough to get the job. That’s not the employee you want, the good enough (the one who didn’t want to switch jobs in the first place) — you want the best. At least when you’re paying top dollar.

What’s the implications of these middlemen? A lot of money is wasted finding the ‘good enough’ candidate. Even worse, perhaps your ‘good enough’ candidate was the ‘best’ employee for his previous employer. Both companies lose. And when companies weep, society cries with them. Remember, companies produce the goods and services society desires.

By this definition, are recruitment agencies companies? Well, the global market for recruitment is about $450 Billion.

Can blockchain reduce this bill? Absolutely! How? By helping freelancers in organize in a decentralized peer-to-peer network that incorporates recruitment in the government process. Then, freelancers can both replace recruiters directly and reduce the need for them indirectly.

Let’s address the direct solution first: Buddy recruitment with skin in the game.

Buddy recruitment has been popular for decades now — recommend someone from your private network to your employer and get a bonus if he signs. The agent problem is obvious — help a brother out (and get to work with a brother). Recently, platforms where you can do buddy recruitment across companies have emerged — recommend someone from your private network to any employer and get a bonus if he signs. Still an agent problem — you don’t care if he’s the best candidate, only that he’s good enough.

Now, imagine a group of freelancers collaborating in a decentralized peer-to-peer network where every member owns and controls the network according to his contribution. Let’s suppose that this network is built as an economic game incentivizing every member to push in the same direction — increase the value of the network. The members have skin in the game and are exposed to the downside of bad decisions — for instance adding an incompetent member to the network. If you pay this network to recommend a candidate, what candidate would they recommend? All members are already vouched for through the skin-in-the-game recruitment — could they be tempted to recommend a ‘bad’ member to get rid of him? No, no one is employed to the network, it’s all voluntary — the economic game takes care of ‘bad’ members. Also, the network depends on its reputation to remove the trust barrier — the network would lose more by recommending a ‘bad’ candidate than they would earn from your payment.

Hello skin in the game, goodbye Sam? It’s not that easy. In addition to the trust issue, scarcity of resources also affects recruitment. It’s a volume game that a decentralized network couldn’t play alone. There would still be room for recruiters. Can freelancers reduce the number of transactions (job switcheroos) in the job market? Yes — what if consultants on part-time contracts became cheaper, way cheaper? This is the indirect solution we mentioned earlier.

But you’re probably tired of reading, so we’ll explore consultants in the next post. And for the British accent — these guys just always come off as nice, don’t they?

In the meantime, check out www.nomadlabs.xyz and subscribe.

References
ConsultingPoint, How long do people stay at their firms?
Pulse, Staffing Markups
CSI Markets, Industry Profitability Ratios
Fortune Business Insights, Staffing Agency Software Market
Statista, Staffing Industry Revenue Worldwide