If yours is like most Consumer Reporting Agencies (CRAs), you’ve probably spent time reviewing your organization and trying to tweak it to be responsive and profitable in your target market. This is something business executives do whether starting a new CRA, rebuilding or right-sizing an existing business. The market changes and successful CRAs change with it. The challenge is that tweaks often involve people, process and technology and which or which combination do you change to greatest effect? In this business brief, we’ll consider the impact of change you may be considering to a service at the center of your CRA, employment and resume verifications.
One of the larger labor commitments most CRAs make is to the service of employment verifications. You have to offer them but that’s precisely why they are the target of industry-wide commoditization. The question that keeps most executives up into the wee hours of the night is whether to continue adding verification staff with all the hiring, training, and management required or whether to outsource this vital but expensive and potentially unprofitable part of the business? Many CRA executives are rethinking the role this service plays today and going forward. Let’s take an objective look at the business of providing employment verifications in the modern CRA.
When answering the question of whether to outsource your employment verification services to a third party processor or staff up an in-house team, these are the important considerations:
There are a number of great reasons to outsource your verifications. These include a lower cost and preservation of your current labor force – as the need for verifications drop, rather than laying people off, you can train them to do other jobs or clear up that backlog.
Then there are those times when there’s a hiring frenzy. Verification specialists must be trained, and training takes time. It can sometimes take months before a brand new researcher is ready to handle a full workload. This means you are unable to scale quickly to keep up with demand and may even have to turn down work.
When employment verification requires manual research, it can stall for three, four, or even five days. In the meantime, you have irritated clients, and other work backs up; this is one of the things that makes employment verifications so frustrating.
So, while you might think keeping verification services in-house is best, let’s talk about the reasons why it may not be.
Cost per verification ultimately impacts profitability. If you’re outsourcing verifications, cost per verification is typically a line item cost in the service agreement from your provider. You pay for what you use. In that sense outsourcing makes verification a completely variable cost in your business, which is very attractive. Fixed costs like minimums may come into play if you’re trying to buy down verification cost to increase profits. For example, you may have a minimum commitment of $10,000 per month but agreeing to that lowers the cost per verification by 23%. As long as you have commitments from your clients to meet the minimums, that can be a smart way to increase profits. An in-house verification team is a completely different model.
When you perform this work in-house you assume the fixed cost of staff, infrastructure and training. It’s sort of like buying that minimum commitment in the outsourced verification service model. You pay for these things whether you use them or not. If you have “busy periods” you may end up paying overtime so that your staff can meet your service level agreements. That eats into profits, not to mention the toll it takes on your employees. But even in non-peak times, it’s important to understand where your in-house team’s hours are best invested.
At SJV, we’ve observed that when you break down a typical CRA’s employment verification workload, about 35% of the orders can be completed using automated tools, which takes about 2% of labor resources. The other 65% requires manual verification, consuming the bulk of a researcher’s time.
So, let’s say your blended cost of performing a verification using your in-house team is $4. That really isn’t the whole story. Let’s say your automated verification cost, fully burdened with your software, training etc. is $0.55 per verification.
$4 = (35% x $0.55) + (65% x manual verification cost)
Manual verification cost = $5.86 per verification
Let’s say your fully burdened profit on that $4 blended rate is 20% or $0.80. So if your cost rises 80 cents, your profit drops to zero. That happens if your manual verifications rise by just 15 percent…. Something you may not have much control over. This simple equation demonstrates the real risk that your CRA business may be exposed to by conducting verifications in-house.
Above and beyond any issues of cost per employment verification, most of your clients have precise requirements for manual research. For example: “I want you to call twice the first day, wait two days, call another time, wait another day, then call twice again.”
This is, by far, the most cumbersome aspect of completing verifications and can impact both the CRA’s ability to scale business (up or down) and also the profitability of the business.
Keeping client's’ dramatically different demands in mind as you conduct your research is a complicated task. At SJV we’ve seen researchers with desks covered in sticky notes, or whiteboards that look like they belong on the set of CSI. Why is this important to the CRA? If you’re setting up or maintaining your own in-house verification service, how you handle manual verifications impacts your business in two ways, besides the cost issue mentioned above:
As you look at growth plans for your CRA, carefully consider how you’ll provide essential verification services. The stage of your operation and markets you serve will impact the best choice for your CRA in terms of how you provide employment verification services.
If you’re just starting up, think about how you will build out the infrastructure, hiring and training staff and projecting business to keep the verification team busy and profitable (don’t forget to use the equation to look at the balance between automation and manual verifications based on the type of customer you’re servicing). If your CRA is rebounding from a market downturn and where you had to furlough or lay off in-house researchers, consider that experience and what you’ve learned about how to hedge against the need for painful reductions in staff and the time and money required to re-hire, retrain etc.
If you’re thinking about outsourcing employment verifications, you don’t have to think about maintaining a large staff of researchers. If you’re pondering whether to rebuild a research team that was furloughed or laid off due to a downturn in the economy, this may be the right time to look at the overall model of your business and determine if perhaps switching employment verifications from a fixed to a variable cost in your CRA makes sense. In order to keep verification costs a truly variable expense in your business model, here are things your CRA should consider when setting up the relationship with your service provider:
You may generally prefer an in-house model. Depending on the type of clients your CRA is servicing, the size of your CRA and whether you’re rebuilding after downsizing or building for the first time, either in-house or outsourced verification can be appropriate. But the most important point is that your verification model matches your business growth plans so that you can scale profitably, up or down in response to market trends. In the experience of the CRAs we work with, a hybrid insource/outsourcing model provides the right combination of scale, flexibility, and profitability.
CRAs who have been in the business for any length of time know that demands placed on employment verifications are both changing and increasing. The cost of “keeping up” is increasing, which makes it increasingly difficult for small and medium sized CRAs to staff an effective, profitable verification team in-house.
The typical individual CRA only has access to a relatively limited body of verification data, encompassing their group of clients and nothing more. On the other hand, an outsourced provider may work with dozens or even hundreds of CRAs, each with their own clients. The result is a continually growing mountain of diverse experience; and experience breeds expertise. Just one example of how this experience impacts both effectiveness and profitability of an employment verification team is employer response to verification calls:
For example, how long would it take an in-house team to know how call completion rate will change if you switch from three calls over three days to four calls over four days? How about if you make four calls in three days? This is one area where an outsourced employment verification team has a distinct advantage over an in-house team, and that advantage is typically passed along in more competitive pricing. Another advantage outsourced providers often have, is technology.
Employment verification technology is expensive. The cost to implement, maintain and train on the latest technology usually puts it out of reach of the small to medium sized CRA. Outsourced employment verification providers have the scale and resources to build and staff cutting-edge call centers powered by the same state-of-the-art tools used by the world’s most effective customer service organizations. In a word, the outsource providers have made it their business to be the most efficient and effective at one thing, employment verifications. If that’s not your CRA’s core value proposition because of the speciality of the niche market you serve, outsourcing may be a better option.
We’ve already established that verifying employment history can be time-consuming and difficult, but it can also be error-prone. Organizations contacted to confirm employment history might be unresponsive. Applicants often provide inaccurate or incomplete information, such as different employment dates or roles, which makes confirming employment history difficult and can delay the completion of the investigation.
The U.S. Department of Labor says the cost of a bad hire can reach up to 30% of the employee’s first-year earnings. Another report says bad hires can cost $240,000 in expenses, related to hiring, pay and retention - or termination.
Those are sobering statistics. A CRA’s clients won’t appreciate it if an error due to the verification services you provide causes them to hire someone they shouldn’t have. If you’re staffing your own employment verifications team, you’ll want to be sure to carry the correct insurance to cover you in the event of a legal claim. If you’re outsourcing employment verifications to a service provider, you will want to understand what protections that firm may extend to you in such circumstances.
Many legal standards apply to the employment verification process-both those ensuring that an employee is eligible for work, if they are eligible for promotion or they are able to rent an apartment as well as those relating to the details of current or past employment. If you’re considering adding an in-house employment verifications team, you’ll want to be sure that you maintain knowledge of these laws and apply them consistently in your research. Laws vary by state, and knowing the ins-and-outs can be time consuming and require copious research time. For example, some states prohibit you from asking for an individual’s salary.
If you’re considering outsourcing your employment verification services, be sure to check with your service provider that they are well versed in applicable laws and regulations that apply to the markets and jurisdictions you serve.
Running a successful CRA is a complex and challenging task. The market for talent is always changing under our feet whether it’s new legal requirements, new sources of information, automation or just the business of training, maintaining and scaling your own talent. One thing is certain however. Employment verification isn’t going away. So your choice whether to outsource or provide employment verification services organically is a critical business decision every CRA must make or perhaps re-make.
Increasingly the complexity, legal requirements and expensive automation technologies involved in performing thorough, rapid employment verification services favors the selection of a quality outsourced provider, especially if your CRA is just getting started or rebuilding from a market downturn. However, there are situations where a CRA focused on niche or very new markets, that have unique requirements, may find that an in-house team is more cost effective and efficient. Regardless of which situation you find your CRA in, in-house or outsourcing, there are critical cost, scale and service level metrics to be aware of and monitor as you grow a profitable, successful background screening company and it’s important to revisit your choice of how your CRA provides employment verification services at least annually, to be sure you’re current with emerging trends and changing legal requirements.
If you are ready to explore outsourcing your employment verifications, click here to connect with one of our experts or give us a call at 800-203-0582.