IR35 6 months on: Stories from the front line

We have just had our busiest month ever at Melber Flinn for role flow. One of the key metrics for any recruitment business is how many requirements you register on an ongoing basis, it’s a test of market demand, and reflects how well you are developing your client side relationships. For most recruitment businesses it is the main challenge, because at any given time you’ll be grappling with variable market conditions, working hard to develop relationships with candidates and clients, and also competing against the competition. But role flow in itself means nothing without a conversion rate. You can secure all the requirements in the market but if you don’t convert and place them you’re not doing any business. And conversion rate has been our problem of late, not because we can’t source good candidate options, and not because we can’t price competitively, its mainly because of client indecision and ignorance around IR35.

In a blog at the end of this year I plan to present a more detailed summary of Melber Flinn’s performance, which will further illustrate how the contractual landscape has changed in 2017, but in the meantime I wanted to recount two recent examples of roles we have handled, where IR35 and to a partial extent NHSI pressure on organisations to reduce temporary staffing has thwarted what might otherwise have been fairly quick and straightforward placements.

The first was an interim Deputy Director role with large multisite trust. The trust in question had lost its previous post holder and a potential secondee lined up from NHSI had fallen through at the last minute. We took the brief and asked the important questions up front – what was their IR35 determination and on what contractual basis could they proceed. The hiring manager by her own admission had a reasonable but not detailed knowledge of IR35, I presented 5 contractual routes and advised her that the role was likely to fall in scope of IR35 if assessed against the online tool because it was cover for a vacant substantive post. She tentatively agreed and we committed to starting the search offering the role to candidates on an in scope day rate basis, or on a day rate basis but to join their bank. Two candidates were sourced, presented and one was shortlisted for an initial phone interview. That went well, but a face to face meeting was required which didn’t take place til 12 days later. That too went well, and an offer was made. Success! Not nearly. Thereafter we entered into lengthy negotiations, the trust wasn’t responding when I was chasing them on which contractual options they wanted to choose – day rate, through a PSC and in scope, or day rate direct on their bank. The candidate in the meantime suggested after interviews that an improvement remit could be created, off structure, and out of scope of IR35. I suggested that as a third contractual route to the client, which if anything might have been unhelpful because it gave them more choice. 12 days after the face to face interview the client came back and confirmed they could engage the candidate on their bank, but her rate would need to come down as we would have to shoe horn the total cost under 750 / day to avoid submission of a business case to NHSI. Luckily we weren’t far off this figure anyway but we worked backwards from 749, factoring in employer’s NI, charges from their bank (which was managed by a third party) our margin (which I reduced) and candidate’s rate (which had reduced). 36 days after taking the brief, we finalised the offer, but the delay had eaten into the assignment duration. NHSI had lined up another secondee for the trust who was due to start on a fixed date 3 months later, therefore shortening the duration of the interim assignment. Something else had come up for the candidate, ironically from NHSi and at a better rate, where agency margin wouldn’t have been a factor and could have been passed onto the candidate to improve her rate. Crucially it was a longer duration and as she explained to me, security and longevity are all the more important in an uncertain market.

The second was an interim role supporting a trust with 17/18 business planning for 4-5 months. The hiring manager was substantive but had previously worked as an interim. This is helpful as she immediately had an understanding of IR35, the interim required would need to be a self starter and work autonomously, and to an extent they could choose the location from which to perform the services as the writing elements of the remit could be done from home. We immediately found a strong option who had just been doing a similar role at another trust and was due to come available at the right time. An interview was quickly arranged and they hit it off. All looking good, this is going to happen. But the trust was coming under increasing scrutiny about its locum doctor and agency nursing expenditure. Yes this business planning role on a standalone basis could be out of scope, but the hiring manager did not want inflate the scrutiny of temporary staffing spend by appointing an expensive interim on an out of scope of IR35 basis. “How much would it cost on the bank?” they asked. The candidate requested a 20% increase in her rate to compensate for the extra taxation / loss of tax relief on expenses, and when that cost was combined with the 13.8% employer’s NI, plus margin, the total cost to the client shot up by 30% compared to the out of scope price. Unaffordable they said, understandably. After consultation with HR the client decided to advertise on a fixed term contract basis for 12 months, given they had another vacancy in the same team which could be amalgamated into the business planning role. Against all odds, the candidate remained interested. The content of the role and her enthusiasm to work for the specific hiring manager ultimately outweighed the comparative financial loss of the fixed term contract. She needed additional terms such as parking, but the client recognised they were getting a bargain securing an interim on a fixed term contract basis. 32 days after taking the brief, the candidate accepted, and the client was delighted.

Ive always worked on the principle that if the candidate and client like each other at interview, you’re 90% there. 9 out of 10 processes reaching that stage will result in a placement, the harder parts of the process, the journey from 0% to 90% is in securing the brief, and then crucially running the search and finding the right options at the right price. But in our new post IR35 2017 market reaching that stage of mutual interest post interview now only feels like 60%. And in 2017, 60% is mile 16 in a marathon instead of mile 12 in a half marathon. The journey nowadays is longer and the final stages considerably more painful. In that last 40%, any number of reasons can kill a placement, be it internal approvals, external approval of a business case, deciding on contractual routes, making the IR35 determination, agreeing terms and also – maintaining candidate interest when processes become protracted. As in our first example, candidates are liable to disappear because goalposts move or because other things come up and they need to take the bird in the hand.

A few years ago I took for granted how easy it was in a contractual sense to do business, the default contractual model was PSC and day rate, IR35 was the candidate’s responsibility (although we would always be looking to support legitimate out of scope arrangements through robust contract templates). Contracts were never quibbled and approvals rarely needed. I once remember placing a role in 4 hours, I sent one CV of a plum candidate to a client at lunchtime on a Friday for a Deputy COO requirement, they had a phone interview at 3pm, and client offered candidate on the phone to start on the Monday. That is an extreme example, but consider that underlying cost of sale against the cost of sale of a process that takes 32 days to conclude and many many more man hours. And as a recruitment business if each role takes on average a lot longer to conclude, then your capacity is reduced, you cannot competently handle as many roles concurrently. And if you place less of them (conversion rate) you are making less sales, and if we are making less per placement (more of which in a future blog) then your profitability is being eroded from a number of angles.

Good businesses will have to innovate to survive and prosper, and thankfully Melber Flinn has kept it costs low and its head comfortably above a profitability line. All agents and interims alike need to work hard to better educate and inform clients about IR35, in an honest and objective way. This will be one of our key objectives in our client dealings as we go into 2018. We expect market conditions to remain challenging for the foreseeable, but over time the market will better understand IR35 and how to manage the challenges it presents to how business is done.