Why are Recruitment Company Growth Rates so Poor?
There are a number of recruiters that will instantly say that this statement does not apply to them, they are achieving excellent growth rates. I understand that and I see a number of these company’s in the course of my work.
However, my overriding feeling is that for an industry dominated by agile SMEs, achieving stellar growth rates is becoming more challenging. The definition of stellar growth varies depending upon type of business, size of business and many other factors aside. That said, 20% compound growth in net fee income (NFI) for companies in the £2m to £10m NFI bracket used to be the “accepted” benchmark.
I appreciate that investors and Finance Directors would prefer that measure to be on earnings rather than NFI, a point that I would generally agree with, but the area I want to explore is a market share issue hence I am using NFI. Furthermore, earnings can be inflated by re-engineering and cost reduction programmes all of which are important, but should not be seen as a substitute for an effective strategy.
A quick look at the March Markit Report (sponsored by the REC) on Jobs graphically illustrates the issue – the rate of growth in recruitment firm placements has been falling over the past three years from around 65 basis points to around 55 basis points; this is a crude average across temp and perm and it does disguise short-term lifts in growth, but any analyst would draw a downward line through the growth curve. Couple to this continued margin pressure from clients and the continuous change in procurement strategy, particularly by bigger employers and it is not difficult to understand the challenge. We should also consider that at 30million the number of people in employment in the U.K. is at an all-time high leaving recruiters with limited gearing in the available workforce to manage. The current changes to IR35 must also be taken into account particularly for public sector focused firms but let’s leave this for another post.
There are companies achieving exciting and continuous rates of growth and I believe that the lesson for all of us is that the secret to unlocking high growth rates is in our own hands.
Across all the firms that I chair and the 20 or so that I have regular contact with I see a fundamental area of differentiation between the moderate growth and stellar growth businesses. This lies in the firm’s fundamental business model.
This falls in to two crude categories; those that are committed to being the leading suppliers to major employers through framework or RPO structures and those that are marketing based on subject matter expertise and value add.
Many years ago I attended a lecture by the leading strategy consultant Michael Porter. He categorised firms in to 4 different boxes, they were either supplying general or premium services into either general or niche markets. He illustrated his theory using car manufacturers, placing the likes of Ford, BMW, Ferrari etc. in to the relevant box. His theory was that it is difficult to be successful by trying to operate in more than one box at the same time.
The point I am making is in a way a reflection of Michael Porter’s theory. For a business model that is structured to be the fastest, high volume, low cost supplier, this probably excludes it from being able to drive up fees in certain niche areas. The labour cost, technology application and facilities costs are probably radically different. So when I observe the top class delivery models into large framework and RPO arrangements they have re-structured costs, put in place technology, changed their management approach, put in place relevant KPIs.
Compare this approach to two businesses that I have been a director of; Alexander Mann and FDM. Alexander Mann was sold over two years ago to a US Private Equity firm for in excess of £250m and FDM was floated on the LSE around the same time for approximately £300m and is now knocking on the door of the FTSE250
Keen observers might say that actually both of these have a low cost delivery model similar to my previous point. Maybe they do, but the important component of their strategy is the value add they have presented to clients. Their business models have been radically transformed from their origins as conventional recruiters, their business case to clients change the whole landscape of how to source talent, yet their ultimate deliverable is putting people into jobs.
Now I am not saying we should all follow Alexander Mann or FDM, but I do think CEOs and their boards should start to think more radically!
“You should give me all of your business Mr. Client because we are experts in your market blah, blah” really doesn’t wash anymore.
The current shortage of available labour in the UK, which according to Markit has declined quarter on quarter for over three years, and is commented on by Kevin Green (CEO of the REC) has not done anything to arrest the pressure on recruiters’ margins or help drive up productivity.
Time to wake up and smell the coffee; your business model needs something of a re-think.
Happy to discuss, drop me an email firstname.lastname@example.org