A glance at any of the recruitment industry media looks depressing, with company after company reporting declining results. While some agencies are thriving, some are in real trouble. We contend the structural changes that are underway are good for the industry and can be embraced.
Talking with agency owners usually brings up some common negative themes around recruitment being taken in-house, procurement led contracts, and the rise of RPO’s. All of these are making it more difficult for agencies to conduct business at the same level and for the same fees that they could previously.
There is no doubt business trends come and go, and the use of RPO’s and internal recruiters will probably be less prevalent in the future. But one aspect will not return – corporates will not return to paying full fees in the future for tasks they are currently receiving for a smaller fee.
This makes a lot of sense in a rational world. The recruitment industry exists to provide a value added service that organisations believe is better sourced externally rather than internally. Organisations outsource their talent acquisition to recruitment agencies. But the service from the industry needs to be economically viable compared to other alternatives.
Over the past decade the growth of job boards and online facilities like LinkedIn have commoditised activities that used to be the domain of the recruitment industry. In response, the recruitment industry has done a good job in developing new cost models and new quality services to ensure they maintain relevance and expand available opportunities.
But not all agencies are enjoying the changes that have been building over the past few years. It seems 2012 was the year it all hit home. As someone said to us recently “whatever we were doing before the GFC is not relevant or applicable to us now”.
The reality of living in a global economy also impacts the industry. It’s not just the uncertain global economics that influence us, but the arrival of more global niche recruitment agencies and the opportunity for local organizations to source services from offshore.
From our perspective we see major changes as:
- less access to capital for growth
- fluctuating economic conditions impacting corporate decisions
- reduced job flow, especially for perms due to in-sourcing and RPO’s
- reduced margins for perms and temps
- smaller agencies losing direct access to larger corporations as procurement led organisations deal exclusively with larger agencies
- difficulty in maintaining a business development culture - sales are critical to replenish client lists
- remuneration models inappropriate to the current business – too many consultants earn commission for tasks that can’t justify commission.
- pressure to invest heavily in social media and mobile computing.
It is hard to see the rate of change in these areas slowing.
Build a robust business
So what to do about this? Last year we wrote an article on “building a robust business in any economy”. Some points from that article have been revised and included here.
1. Seek an external view
It is almost impossible for a business owner working within their business to gain an appreciation of strategic, operational and financial risk without review or questioning from an external party. Having access to external opinions is a critical step to understanding the strengths and weaknesses of your business; including how it is viewed, and valued, from those on the outside.
2. Measure your business
Those companies that have the courage and conviction to Measure and Manage their service process and outcomes and empower those entrusted with working it, while challenging them to improve it; sustain a much higher level of engagement and get real performance gains over the long haul. This means you must take the lead in creating a culture that’s always in search of continuous improvement; with strong strategic direction, confident leadership, intense customer focus, equitable rewards for all and honest, effective communications.
Companies that excel in these areas will always enjoy stronger individual and company performance with superior long-term financial results.
3. Listen to what your customers are asking you to provide
While the recruitment industry is known for its good focussed sales activity, just occasionally someone needs to stop and listen to what the customer is actually asking for.
There is rapid change in the way corporate and government clients are developing models for procuring recruitment and HR services. Your business needs to understand what is happening in your client base so that appropriate strategic decisions can be made. If your clients are seeking different services from its suppliers then you can be quickly marginalised – you might need a new service offering or you might need new clients.
4. Prepare for less buoyant times
Many planning activities, revenue budgets and remuneration models assume “on target” outcomes. Not enough attention is focused on the financial “valley of death” when performance is below budget. Owners need to minimise the break-even position for the company. How much revenue do you need to break even (eg what is the minimum average billings per income producer for you to break even)? How can you reduce that figure?
The first task is to reduce fixed expenses as much as is possible either by eliminating them or by turning them into variable expenses (eg by outsourcing). The second task is to ensure that variable costs don’t kick in until the company has been paid back for its investment and risk. The biggest single expense is staff remuneration and too many agencies incent their staff before the company has been rewarded. The financial health of the company must come before the individual staff member and remuneration models need to reward staff after the company is financially safe in any particular period.
5. Keep project costs and ongoing costs in proportion to your business
Unfortunately growing businesses need step increases in expenses such as office accommodation, IT systems, processes and procedures, back office staff, and management structures. A business is particularly at risk at these points of investment as they move from being under-invested to over-invested in a particular area.
The challenge for owners is to choose the timing for the new investment correctly and to choose the size of the investment correctly. You need to consider both the project costs and the ongoing costs. A question to ask is: what if your business shrank by 40% next year? Would the investment you are about to make jeopardise the viability of the company?
6. Business Mix
Business mix is so important for the future; you don’t want to be too dependent upon the highly volatile perm market. At the moment far too many companies are making reasonable profits only when they have had a good perm month and that tends to be 1 in every 3 months if lucky! As soon as possible make the call and have dedicated staff focused on growing and servicing the temp/contractor sector, it’s different to perms and requires a very different person to make it grow. Acquire or quickly develop this capability with an aim to achieve a 70% to 80% contribution to gross profit from this highly valued offering, then the next time the perm market hits a bump you should at least still be able to make profit on a regular basis.
7. Cash Management
Cash is always king and you must be focused on your debtor days and be prepared to act quickly to keep them at a good level. Tougher market conditions often means people taking longer to pay you, you must be able to overcome this obstacle more often than not if you are going to succeed.
In addition, you need to have investigated and have available (at short notice) the access to increased funding for growth, you might just need to tap into it if you hit that big order?
Originally Published in Recruitment Extra March 2013