Barriers to entry can exist as a result of government regulations, industry regulations, network and relationships, economies of scale, sophistication of service products and high start-up costs.
These barriers often occur naturally as markets mature. Recruitment has historically been an industry perceived to have low barriers to entry due to the small start-up costs and limited official regulation or governance.
But things have changed in recent years. As this is written the Federal Government has proposed IR laws with a major impact on the recruitment industry. Owners and managers can only look back and reminisce about the way things were.
However, is the lack of industry governance and regulations a deterrent to its long-term success? This debate continues today. To understand this, let’s look at how the recruitment market operates and what positives and negatives we can derive from this.
The bad news is the industry has many thousands of companies essentially doing the same job. To stand out from the crowd and succeed on a long-term basis you must be an overachiever. 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. For instance, consider how estate agents, insurance agents, and recruitment advisors can be grouped together due to these shared perceptions.
There is a positive aspect to this situation. Thanks to the low barriers to entry in the recruitment industry, companies are not bound by strict requirements for formal training or qualifications. This sets the industry apart from sectors such as Financial Advisors, which are subjected to rigorous regulations. The flexibility allowed by the low barriers enables recruitment firms to operate with a certain level of autonomy and freedom in terms of structuring their teams and services. Is this why there are fewer companies going the extra mile to improve the quality of their service and genuinely taking action to hire and train the best teams?
With the right investment and strategy, you can create a proposition that is stronger than your competition and stand out from the crowd.
Consider the debate in the context of Porter’s Five Forces, a framework to determine the attractiveness of an industry. The five forces are competitive rivalry, the power of suppliers, the power of buyers, the threat of substitutes, and the 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 well-defined business strategy, effective marketing, comprehensive training, and a dedication to maintaining elevated internal standards, many companies have demonstrated the feasibility of running and expanding highly prosperous recruitment businesses.
It is important to anticipate a likely increase in barriers to entry in the near future. As the industry advances, client expectations for more sophisticated services grow, and agencies respond by offering more refined solutions. New entrants may struggle to match this heightened level of sophistication in terms of both sales and service delivery.
Regulators continuously add complexity to the recruitment industry through regulations related to hiring and payment, requiring new companies to establish robust systems and processes to meet audit standards.
The recruitment industry historically offered low barriers to entry due to minimal regulation and start-up costs, but recent changes have altered this landscape. The market's saturation and some negative perceptions hinder differentiation and premium pricing, while low barriers may contribute to some companies not prioritising quality improvement. Despite these challenges, successful recruitment firms thrive by combining high-quality work, strategic planning, effective marketing, and training. Anticipating increased barriers in the future due to evolving regulations, companies must establish robust systems to meet expectation.
From HHMC’s perspective the rising barriers to entry will eventually lead to an increase in recruitment agency valuations, as organisations will be prepared to buy their way into the industry as the “build from scratch” option becomes more expensive.
HHMC Global operates within the staffing and recruitment industry on equity transactions, market valuations and business growth advisory. Contact us to discuss further.