Storm batters the minnows

17-Sep-2008

The current recruitment market is fraught with difficulties. Smaller agencies are being battered by the economic storm, exposing weaknesses and allowing those who do succeed to grab a bigger marketshare.

The number of recruiters going into insolvency so far this year has trebled from last year, increasing from 18 to 52, according to the Business Sale Report. In August alone, 12 recruitment businesses went into administration, four times as many as the same month last year.

The agencies particularly threatened by the economic climate are those with low turnovers. An analysis of the company reports available for those going into administration in August shows only one with a turnover bigger than £1m — legal and finance recruiter Greatfleet.

This follows reports from industry analysis company Plimsoll that sales growth for smaller agencies has dropped. As reported in Recruiter, 3 September, the average annual sales growth of agencies with a turnover of less than £3.5m has dropped dramatically, from 8.1% to 1% over the last three years.

Smaller agencies are more susceptible to the pressures of an aggressive marketplace because their overheads are greater and they rely on high margins to ensure profitability.

"In the last recession there were two reasons why recruiters went out of business: either they were profitable but they ran out of money or they weren't top of their game and lost business," Denise Walker, owner of management consultancy to the recruitment industry Absolutely Business, told Recruiter.

The fall in sales growth can be explained in part by the increased use of preferred supplier lists (PSLs) and managed service providers. Liam Doyle, senior consultant and top biller at Hays Information Technology, told Recruiter he has seen margins on PSL business drop from between 15% and 10%, to between 10% and 5%.

The cost of financing is increasing pressure on business with low cash flows. Alan Nolan, director at accountancy firm KPMG, which works with the Recruitment and Employment Confederation to monitor the recruitment industry, told Recruiter: "The invoice discounting companies are being careful as to who they do business with and banks are squeezing the smaller players. The margins that recruitment companies work under are so small, it can be enough to make them go out of business."

The number of smaller agencies up for sale has also increased. Mike Higgins, a partner and specialist in the recruitment market for sales, acquisition and management specialist Fusion Corporate Finance, told Recruiter: "There has been an increase in the number of small agencies going up for sale. At the moment it's a buyers' market; there are more opportunities and prices are coming down very quickly."

The price of agencies which are for sale has dropped, according to Higgins, as companies try to get out of the market. "If somebody has a business that's providing general staff or a high ratio of permanent placements, they're already seeing their businesses crumble and are thinking they better get out — prices are coming down quickly."

However, among the headline-grabbing doom and gloom some ambitious small agencies continue to do well. In a more competitive market those who can offer a higher level of service have the opportunity to increase their marketshare.

Mark Barnicoat, director of niche talent attraction recruiter Oasis Search, has targeted a specific market: "We have very few competitors. Where there is an urgency to hire you can justify charging higher margins and retain business." Oasis Search had a turnover of £300k last year and expects to grow by 166% to £500k this year.

Recruiters are also using the current market to their advantage by targeting other agencies for purchase which have good order books but are struggling with cash flow problems.

Newly launched construction recruiter Turner Lovell is assessing faltering agencies to see if they can acquire established order books and experienced consultants. "The current market is a great opportunity," Antony Lovell, founding director, told Recruiter.

Industry experts advise recruiters to react to the current market to ensure they retain business. "It's all about getting the basics right. Those who do really well understand the market and their clients, understand candidates and understand the job roles," said Walker.

Maxine Waring, managing consultant at Basingstoke-based industrial and office recruiter Wote St. Employment Bureau, told Recruiter the company looks for a range of business to spread risk. "If a company rings up and says 'I want 20 temps tomorrow' we'll do it, but then we'll actively go after one-temp roles to offset it."

Neil Bennett, director at restructuring, recovery and insolvency specialist Leonard Curtis, told Recruiter agencies that are facing difficulties need to act quickly, especially in terms of building up large Crown arrears.

So a more competitive marketplace is set to encourage the growth of proactive agencies and punish those who have weak credit procedures, client relationships and a reluctance to diversify.