Staffing Agency vs. Direct Hires: The Opportunity Cost for Startup Founders

Quick Summary - As a tech startup founder, should you hire directly or work with an IT staffing agency? As we’re about to show, hiring people takes a significant amount of time and effort.

Staffing Agency vs. Direct Hires: The Opportunity Cost for Startup Founders | PerceptionBox

Moreover, beyond simply hiring, many tech startups report turnover rates of 25% or higher. Should the hiring effort be on you as your startup’s visionary and strategic driving force? One thing to consider is the opportunity cost of managing your hiring process or vetting an IT staffing agency.

5 mins read

Human Resources in startups

Most startups don’t have a Human Resources Team. Early on, it’s not uncommon for startups to have one or two people handling all administrative, payroll, legal, and HR program activity on a part-time or shared-duty basis. Sometimes that’s the founder, or perhaps the founder’s spouse. Though it’s advisable to set up an HR program as early as possible, a dedicated HR manager (or team) probably isn’t necessary until you have more than 50 employees.

To save you time getting started, business-in-a-box offers HR Handbook Template. Not having an HR policy of any sort can exacerbate turnover. It’s basic, but you can develop it to better suit your needs as time permits… without having to start from scratch.

Sourcing through an IT staffing agency

The entire role of an IT staffing agency is to find, vet, and provide HR support for companies who need IT specialists. In all cases, we recommend for founders and other hiring managers to do their due diligence before signing any contract. The vetting process makes sure that the agency you select has the experience and staff with the right skills, and terms, for your project.

You advise the agency about your situation, project requirements, funding restraints, and calendar goals. The agency matches your project requirements to the skills of candidates in their existing pool and determines if they need to find additional specialists. You’re provided an interview opportunity before they start.

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Your newly outsourced IT specialists work for you, even though they are employed by the agency. If one needs to leave your project for any reason, they are obliged to give advance notice so a suitable replacement can be brought on. Further, the wages of an outsourced developer in Ukraine run around $50k per year compared to a $108k US-based average which can tack on up to another $20-50k for taxes, insurance, office space, and other overhead. Developers in Ukraine and most of Eastern Europe actually rank higher in technical skills than their US counterparts.

Evaluating several staffing agencies is likely to take around 6-8 hours. Your project review and agreement is then likely to take about 2-3 hours. Figure it will be an investment of 8-12 hours after which your hands are free to focus on developing your startup. From first contact with a staffing agency to having your outsourced team ready to start can take as little as two weeks. Large and complex staffing requirements will take longer, between four and six weeks.

The process of directly hiring employees

Directly hiring employees is a more involved, time-consuming process. Many startups begin with one or a few co-founders dividing up duties according to their strengths – i.e. CEO, CTO, CMO.
Most often it is the CEO or CTO conducting the hiring as an “added duty” – but not usually borne of experience as a hiring manager. You’ll be looking at four stages in the hiring process.

Stage One. You need to hire someone!

  1. Define the skill sets you need.
  2. Write the job description.
  3. Decide where to post it.

Each stage takes time. If you’re proactive, you can get the job description written and posted on the same day. Preparing detailed job descriptions tends to attract better candidates. So, it’s more likely this process will take a few days to a week to make sure you get everything right.

Stage Two. Make sure you’re hiring qualified people.

  1. Receive applications.
  2. Review applications to trim the obviously unqualified (Keep the top 20%).
  3. Conduct first Interviews (Typically 1 interview per 5 applicants, but variable).

It’s a good time management practice to do “like tasks” together, so you’ll want to wait until you have a decent number of applications. That can vary for many reasons. There are the emails or phone calls back and forth to arrange an interview. Interviews average up to an hour each.

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Stage Three. Now to make and vet your shortlist.

  1. Background and referral checks.
  2. Follow-up interviews, discuss benefits, and negotiation.
  3. Hire, sign the contract, NDA’s, etc.

Once you have the candidates lined-up that you’re thinking about hiring – you’ll need to decide on the standards for your background check. Did they graduate from MIT? Do they have a criminal record? Do the references they provided recommend them as skilled developers? You may weed out some during the process of vetting your shortlist.

Stage Four. The New Hire Transition.

  1. A transition period (2 weeks notice to the former employer, etc.)
  2. Tax filing and benefits enrollment.
  3. Project onboarding, review coding standards, work processes, etc.

After you’ve signed an agreement with your new employee/s, it’s standard practice for each to give their current employer two weeks of notice. Even then, throughout 2019 and despite COVID-19, ghosting has been a major headache for recruiters at all stages of the hiring process. This includes candidates who have been hired, but who no-show on the day they’re supposed to start.

Hiring takes at least a month, often much more

Everything considered, if everything runs smoothly, you’re looking at a minimum of one month to bring on an employee. Even the best startup founders can be overly optimistic about their time when posting, reviewing, and scheduling interviews. The process can be drawn out to 2-3 months. The number of hours you spend in the hiring process will vary by how many interviews you conduct per position, and whether you’re hiring all at once or in stages.

Finding qualified and experienced candidates can be more difficult in two additional cases.

  • Hiring Locally: Qualified developers can go pretty much wherever they want and find a job fairly easily. It can be very difficult to attract the talent you need if you insist on having in-house developers as employees outside of a tech hub. An extreme example of this is the entire state of Iowa.
  • Premium Positions: From Multimedia Designers, Software Developers, and Engineers to Security Management Specialists, the full range of software development roles can be hard to fill. It’s not so much a lack of applications that’s at issue, as the lack of qualifications by those applying for the jobs.

Add issues of retention – up to 25% of your first your tech start-up hires won’t last a full year.

Cost Opportunity - outsourcing vs. hiring

Working with an IT staffing agency to manage your personnel and skill requirements is an Agile “vet once – hire many” process. Hiring employees directly is a labor-intensive process for a founder – and appropriate on a strategic basis as relates to your core team. Every hour spent reviewing applications and conducting interviews is an hour that you aren’t finding new clients, talking with investors, developing connections, and trying to cut deals.

And that’s what makes the time spent vetting an IT staffing agency so valuable – you’re investing in finding a long-term partner. If successful, you can count on having the right team composition on your project every step along the way of your startup’s evolution. We’ve covered the cost advantages of outsourcing vs. hiring before, but the Founder and CEO’s time – and that of their fellow partners has a strategic value. Later, when you’re established, profitable, and still growing, you can hire an HR team of your own.

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