Pay for performance: How India's staffing model is getting a makeover

Summary

Major staffing firms Quess, TeamLease, and Adecco report that clients are shifting from flat fees to output-based billing. Vendors now manage workforce performance, facing penalties if targets are missed and earning rewards when they deliver

India's staffing industry is moving beyond providing workers to taking responsibility for what they deliver. This helps the client tackle inefficiencies while giving vendors scope to charge higher fees.

Three of India's largest staffing firms - Quess Corp, TeamLease Services and Adecco- which together provide about a million workers to clients on a contract basis, are seeing demand for "output-based billing" instead of a flat-fee structure.

Across e-commerce, logistics, agriculture, IT, and consumer sectors, clients are adopting this model, signing clauses under which the recruitment firm will lose its margin or incur a penalty if its workforce does not meet the targets set by the client.

"Over the last couple of years, we have seen an output-based workforce model begin to take shape alongside the traditional general staffing model," said Nitin Dave, chief executive officer (CEO) at Quess Staffing. "While general staffing has typically operated on a service-fee model linked to workforce deployment, companies across FMCD, logistics, e-commerce and agri-based sectors are increasingly looking at manpower solutions where commercial outcomes are linked to productivity or output." Fast-moving consumer durables (FMCD) include long-lasting appliances like electronic items.

Staff managers

In recruitment parlance, staffing firms provide workers for six months to a couple of years for a flat fee that is typically 9-10% of the employee's cost to company (CTC). The worker remains on the staffing firm's payroll, not the client's.

This is different from gig service providers, who offer manpower for shorter periods, and allow them to toggle between multiple client platforms, as is the case with delivery workers.

In permanent recruitment, the staffing firm sources candidates and the client hires them, after a few rounds of interviews, hires the person, who is put on the company's payroll. The vendor works for a set fee that depends on the candidate's role and hierarchy.

For executive search firms that headhunt top bosses, the fee structure is split into three parts: the cost of hunting the CXO, a second tranche when the candidate accepts the offer, and a final tranche paid after the CXO has stayed in the firm for six months. In between, if the candidate drops out or the CXO quits within the first six months, the search firm must restart the process at no additional cost.

Now, the staffing firm is more accountable for workforce performance. "We are seeing contracts with penalty and reward clauses. If the worker is not following protocols which may impact the business and safety of the workplace, the vendor's fees may get slashed," said Sunil Chemmankotil, country manager for Adecco India.

Competitor Quess has also seen both penalties and rewards tied to workforce performance. "Today, around 10-15% of our clients are seeking some form of output-driven service, and we see this emerging as a new line of business for workforce solutions companies such as Quess," said Dave.

The model is still in its early stages in India, staffing firms said, but managed services, which include penalty clauses, are common practice in developed countries where supply chain demand is at a premium.

In India, rising labour costs and tier-1 and tier-2 cities competing for workforce demand mean these penalty clauses help rein in absenteeism.

"The margins are higher, and the recruitment vendor can manage the operations for the client and take a call on the workforce needed and where to station them, manage their expenses, take care of payroll, etc. The fees in this case can range from 10-20% per candidate versus single digital in regular staffing," said Adecco's country manager.

TeamLease Services said that with artificial intelligence (AI) driving 20-25% productivity gains in areas like development and testing, the expectation is shifting from paying for activity to paying for outcomes. In hiring, this means clients want partners to be accountable for closures, quality and time-to-hire, rather than just providing profiles.

"Contracts are increasingly linking commercials to outcomes. This can include replacement commitments, SLA-based clauses, early-attrition provisions and credits linked to delivery," said Neeti Sharma, CEO, TeamLease Digital. "Fee models are also becoming more flexible, with success-linked or milestone-based payments." Service level agreement (SLA) is signed between the service provider and the client/customer.

For staffing firms, however, the new model has yet to completely overturn the earlier business model.

"The adoption is still evolving, so we would not put a single number to it. But we are seeing these conversations much more frequently, especially in high-volume and repeat hiring," said Sharma.