Thin Margins, Weekly Cycles: Currency Risk in International Recruitment

Contract recruitment is a spread business.

You bill the client a rate, you pay the contractor a rate, and you keep the difference. On international placements that margin is often somewhere between 10% and 20% — and if the two sides of the transaction are in different currencies, the exchange rate gets a vote on it every single week.

For permanent placements the exposure is a one-off fee. For contract and statement-of-work business, it's a recurring position that compounds across a whole book.

Where the margin goes

A worked example.

You place a contractor in Germany. The client is billed €600 a day. The contractor is paid €510 a day. Your margin is €90 a day — 15%.

Both sides are in euros, so your margin is a euro number. In sterling terms it moves with GBP/EUR, but the percentage holds.

Now change one thing: the client is a UK business that insists on being billed in sterling, so you invoice £520 a day while paying the contractor €510.

Your margin is now the difference between a fixed sterling receipt and a fixed euro payment. If sterling weakens 6% against the euro, the euro payment costs you more sterling, and the margin that was 15% becomes closer to 9%.

Nothing commercial changed. You didn't discount, the contractor didn't get a rise, the client didn't renegotiate. A third of the margin went to the currency market.

Run that across forty contractors over a twelve-month engagement and it stops being an accounting curiosity.

The timing problem makes it worse

Recruitment has an unusually tight cash cycle at the wrong end.

Contractors are typically paid weekly or fortnightly. Clients pay on 30, 45 or 60-day terms. So you're funding the gap — and on international placements, you're funding it across a currency conversion at whatever rate applies on each payroll run.

Fifty-two conversions a year, each at an unmanaged rate, each with a spread attached, on money that's already thin.

What to do about it

Match the currencies wherever you can. The cleanest fix is commercial rather than financial: bill the client in the same currency you pay the contractor. If the placement is in euros, bill in euros. You've eliminated the exposure entirely and transferred nothing to anyone — the client is usually indifferent, and a European client often prefers it.

Where that isn't possible, the rest of these apply.

Hedge the contract term. A twelve-month placement at a known day rate is a forecastable, committed currency requirement. A forward contract — or a strip of them across the payroll dates — fixes the cost of the contractor and therefore fixes your margin for the engagement. This is about as clean a hedging case as exists in any industry, and it's rarely done.

Build a currency clause into client contracts. For longer engagements, a clause allowing a rate review if the exchange rate moves beyond an agreed band shares the risk rather than absorbing it. Easier to negotiate at the outset than to raise in month eight.

Batch the payroll conversion. Converting individually per contractor is priced worse than a single bulk conversion followed by local distribution. Convert once, pay many.

Use local payment rails. SEPA in Europe, ACH in the US. Faster, cheaper, and far less prone to correspondent deductions — which matter more than usual here, because a contractor whose weekly pay arrives short will raise it immediately, and rightly.

Hold currency between cycles. If you receive euro client payments and make euro contractor payments, holding a euro balance removes the conversion in both directions. Many agencies convert client receipts to sterling and then buy euros back for payroll days later, paying twice on the same money.

For permanent placements

Simpler, but worth stating. A placement fee invoiced in euros and paid 45 days later is a receivable exposed for 45 days. Individually small; across a year of international fees, a real number. Worth including in whatever cover you arrange rather than treating as noise.

The point about contractors

One thing worth naming on the human side.

If you fix a contractor's rate in sterling while they live and spend in euros, they personally carry the currency risk on their own income. Their effective pay fluctuates month to month through no fault of their own.

Paying contractors in their local currency and managing the exposure yourself is both better practice and a competitive advantage in a market where good contractors have options. Your finance function can hedge. Your developer in Lisbon cannot.

William Fuller, Co-Founder of Orbis Exchange Group contact on 0203 918 5622

Ben James, Co-Founder of Orbis Exchange Group contact on 0203 918 5621