Barriers to entry can exist as a result of government regulations, industry regulations, high start-up costs or they can occur naturally as markets mature. The recruitment market has historically been an industry perceived to have low barriers to entry due to the small start-up costs and little official regulation or governance.
This has certainly been the situation prior to the financial crisis, but things have changed in recent years.
Given these low barriers to entry and with potential for uncapped profits, historically the recruitment market has been an attractive proposition for the shrewd investor.
However, has the fact that the industry has not adopted stricter governance and regulations been a deterrent to its long-term success? This is a debate that continues today. To understand this we need to look at how the recruitment market operates and what positives and negatives we can derive from this.
The bad news: the industry has many thousands of companies essentially doing the same job, so to stand out from the crowd and succeed on a long-term basis you need to be an over-achiever. This means that charging premium prices for premium services becomes very difficult. Also, negative perceptions can be a problem. You can see the direct correlation between negative perception and low barriers to entry — estate agents, insurance salesmen and recruitment consultants often being herded into the same category.
Read More: 7 Barriers to Profit Growth of Recruitment Businesses
However, there is good news: with low barriers to entry, recruitment companies are not obliged to have formal training or qualifications and don’t need as much regulation as some industries, like Financial Advisors, endure. This may be why there are fewer companies that are going the extra mile to improve the quality of their service and that are genuinely taking action to hire and train the best teams.
With the right investment and strategy you are able to create a proposition that is stronger than your competition.
Consider the debate in the context of Porter’s Five Forces. To review, Porter’s Five Forces is a framework to determine the attractiveness of an industry, developed by Michael E Porter of Harvard Business School in 1979. The five forces are: competitive rivalry, power of suppliers, power of buyers, threat of substitutes and threat of new entrants. Using Porter’s Five Forces to analyse the potential for long-term success in the recruitment market it would be easy to be discouraged by the comparative threats.
However by combining high-quality work with a structured business strategy, excellent marketing strategy and a commitment to keeping internal standards high, many companies prove it is possible to run and grow a very successful recruitment company.
Will barriers to entry rise in the near future? Certainly.
As an industry matures there is an increase in the sophistication of services demanded by clients and offered by agencies – new companies find it difficult to meet this level of sophistication.
The regulators don’t sit still and never work towards reducing regulation. The recruitment industry may not be directly regulated in most locations but regulations relating to hiring and paying staff continues to add complexity to the industry. Again, new companies need to work hard to build the required systems and processes that stand up to an audit process.
Finally there is the continuing debate about direct regulation on the industry. Do we need it? Is it going to be forced on the industry? That’s a topic for others to debate.
From HHMC’s perspective the rising barriers to entry will eventually lead to an increase in valuations, as organisations will prepare to buy their way into the industry as the “build from scratch” option becomes more expensive.
HHMC Global provides advisory services to the recruitment and staffing industry and is best known for its work on M&A transactions. HHMC is based in Australia and works with clients globally. To discuss your business future contact Rod Hore or Richard Hayward.