In March, Financial Analysts at Morgan Stanley’s European Business Services Research team issued a report titled ‘Staffing Survey – Temporary Attractions are Peaking’. The report made quite a few waves as it challenged the orthodoxy of secular growth trends within the staffing industry. Over the days following the report’s publication, major staffing stocks experienced quite a sharp decline and most have not yet recovered to post-report prices.
The basis for Morgan Stanley’s assumptions was a survey conducted among 200 HR Managers in the US, UK, Germany, and France by Alphawise, a proprietary research company. The survey sample included a mix of small, medium and large companies across a broad array of industries and was conducted in January 2011. The report made the following observations:
- Only 15% of employers plan to add temporary agency workers during the course of next year.
- Longer-term, there is no evidence of a significant shift towards a greater reliance on temporary workers – employers do not expect to increase overall temp usage in the coming cycle
- Dropping from 6% pre-recession to 5% in 2012 and beyond
- Only Germany expected to increase
- Skilled workers expected to decline from 4.2% to 2.8%
- Demand for RPO and MSP will be muted
- None of the survey respondents expect the HR function to be completely outsourced to a staffing agency
- Only 6% indicated that consolidating to one vendor was “very likely” within three years – although 20% indicated it was “somewhat likely”
- Little change expected in number of vendors used over the next 2 years
So, are Morgan Stanley’s assumptions valid?
The Alphawise survey provides a useful insight into the attitudes and perceptions of staffing company clients. What it fails to resolve is how relevant those perceptions might actually be in terms of what happens in the market. There’s a certain element of wishful thing in the responses and it will be interesting to see how the market has developed a year from now to calculate exactly what the Wishful Thinking Factor (or ‘WTF’) is.
No survey is perfect, but this one is flawed in a number of key areas.
To start with, you would have to question the appropriateness of the respondents as informed experts on this particular issue. Within many companies, HR managers are not necessarily the people in charge of contingent workforce hiring - increasingly, the procurement department are taking the lead in managing these programs. In smaller companies, contingent hire is normally quite a decentralized process so the centre will have a relatively slim grasp of what’s actually happening at the periphery. In larger companies, the senior HR executive may be quite remote from the day-to-day details of temporary hire even if they had some involvement in negotiating the initial contract. As for larger international employers - even those deploying VMS globally (and there aren’t too many of them!) will still be subject to hidden rogue spend in remote corners of their network. So Morgan Stanley’s 6% penetration rate reducing to 5% should not be taken as a particularly accurate reading of the current status, nor of the future trend. In reality, few HR Managers have a solid grasp of how many temporary workers they actually employ from one moment to the next so there will be quite a significant margin of error to factor into these results.
The hidden assumption made in the report is that staffing market development is only buyer-led. This overlooks the demand for more flexible staffing alternatives from workers themselves, the impact of skills shortages and the evolving legislative environment. Staffing market growth is subject to a number of complex, interrelated factors of which employer aspirations is only one. Depending on where we are in the cycle, supply-side factors can have a significant impact especially in the higher-skilled areas such as information technology. While the HR Manager may want to reduce temporary staffing numbers, the demand to find rare skills for special projects may leave them with no choice but to rely on the services of a staffing firm whether they want to or not. Ironically, it is this group of professional workers that Morgan Stanley identifies as having the weakest secular growth trajectory. Long-term demographic trends are expected to create significant skills shortages and point to the supply-side having an increasing say in staffing market growth compared to the buy-side.
The implementation of the EU Agency Workers Directive should lead to further liberalisation of temporary staffing markets in continental Europe from the end of 2011. New sectors will be opened up for staffing companies to target while restrictions on assignment length and limits placed on the percentage of agency workers employed should fall away leading to increased usage and profitability for staffing companies. In addition, ongoing government wariness over the status of independent contractors may ultimately drive up temporary staffing usage in some countries, including the US. All of which points to quite healthy structural growth for staffing companies into 2012 and beyond.
The Morgan Stanley research is also biased towards well-established mature staffing markets (the exception being Germany). While these are certainly the largest national staffing markets and cannot be overlooked, most markets are much less mature than the US, UK and France and are, therefore, anticipated to be growing structurally at much faster rates. For the larger staffing companies, emerging markets in AsiaPac and Latin America offer considerable potential over the next few years and will be key engines for growth.
Turning to the judgement that demand for RPO and MSP will be more modest – and certainly more modest than suggested by the staffing companies themselves, this is also based on a series of flawed questions.
Firstly, asking HR Managers if they will be outsourced is rather like asking turkeys to vote for Christmas (or Thanksgiving for US readers). Not surprisingly, the answer came back that almost none expected the HR function to be outsourced to a staffing company! No doubt, if CFO’s had been asked we might have been given an alternative point of view. And the question itself is misleading. The overriding majority of RPO contracts do not entail the wholesale outsourcing of the HR department anyway – they will outsource a particular function (namely, recruitment) or even a specific component of that function (such as online advertising). The response received in this research should really be interpreted in light of the prospects for HRO (Human Resource Outsourcing) than for the likely demand for RPO.
Another ‘wrong’ question was asking HR Managers if they planned to consolidate to one vendor and using this as the basis to determine likely demand for MSP. Consolidating to one supplier might be a relevant question to ask if you are measuring the demand for sole supplier solutions but even the most ambitious HR Manager would not expect to whittle his supply chain down to one via a managed service contract. Admittedly, the survey did come up with the fact that little change is expected in the number of vendors used over the next two years. This at least has the merit of being a relevant question, however, again we must question the knowledge and expertise of the respondents. How many really know how many staffing companies their organisation uses in the first place?
Staffing Industry Analysts’ own research suggests that MSP use among large US buyers has roughly doubled, from 34% of such buyers using MSP in 2007 to 66% in 2010.
Still a Growth Industry?
The interpretation placed on the survey results by Morgan Stanley effectively undermines the investment position of staffing companies as growth stocks. It positioned the staffing industry as one that will continue to ebb and flow with the vicissitudes of the economy but that will not structurally grow beyond previous peak penetration levels.
Growth stocks exhibit a number of common characteristics, not least of which is a strong growth rate – both historic and projected forward. Historically, you would expect to see smaller companies with a 10%+ revenue growth rate for the past five years and larger companies with growth rates of between 5% and 7%.Looking at trends and opportunities in their broadest sense, there is nothing to suggest that staffing companies cannot enjoy these levels of growth over the next five years. Before you rush out to buy shares, Staffing Industry Analysts recommends that investors independently evaluate particular investments and strategies, and encourages investors to seek the advice of a qualified financial adviser!
So, in summary - an interesting study in perceptions across a relatively small sample of HR Managers. But asking the wrong questions to the wrong people has little to tell us about how the staffing market will actually develop. Nevertheless, Morgan Stanley saw fit to downgrade Randstad and Robert Half as a result of the insights gleaned from their survey and millions were subsequently wiped off the value of staffing stocks around the world.