CWS 3.0: May 23, 2012

Print

What Your Supplier’s Gross Margin Can Tell You

If you had to choose your top three metrics for evaluating a potential staffing supplier, what would they be? You might choose fill rate, time-to-fill, turnover or any of a host of cost and quality metrics. But what about the gross margin of your supplier? Gross margin may not be the most important statistic for procurement managers, but it can yield insight into your supplier’s overall business strategy, your supplier’s financial health, as well as be a predictor of future bill rates.

What Is Gross Margin?
Gross margin is simply the amount of money the staffing firm gets to keep after paying the temporary worker’s salary, benefits, and any payroll taxes — expressed as a percentage of revenue (or the bill rate for that contingent worker.) Staffing firms then use gross margin dollars to pay for the cost of their internal staff, facilities, marketing and management costs, as well as to return a profit to their owners.

In economic terms, the size of a staffing firm’s gross margin should roughly correspond to the cost of their recruiting and sales activities, as well as correspond to the economic value added by their staffing services. As we would expect, gross margins are lower at firms specializing in industrial staffing (for example, TrueBlue reported a 25.5 percent gross margin in the first quarter of 2012) due to the lower cost of recruiting as well as thick competition. Similarly, gross margins are higher in professional staffing due to the higher cost of recruiting (for example, Kforce reported a 31.2 percent gross margin in the first quarter).

What Gross Margins Indicate
In addition to serving as a relative gauge of the cost of recruiting, your supplier’s gross margin is an indication of the financial health of your supplier. A rapidly falling gross margin could indicate distress, as your supplier cuts prices to win business. On the other hand, a stable and healthy gross margin (compared with peer suppliers) means that your supplier has the cash flow to make the investments in technology and training that will allow it to perform well into the future.

Another way to appropriately interpret a staffing firm’s gross margin is to distinguish temporary staffing gross margin with the firm’s overall gross margin. Overall firm gross margin will be biased upward at staffing firms that generate significant permanent placement revenue, outplacement revenue or HR consulting revenue — all businesses with higher gross margins than in temporary staffing. For example, Robert Half International reported first-quarter gross margin of 39.6 percent overall and gross margin of 35.6 percent for its temporary staffing business. The four percentage-point difference is due mainly to its large permanent placement business, which has a 100 percent gross margin.

Gross margin data is reported each quarter by more than 30 publicly held staffing firms. If we look at the trend among the eight largest firms, we see that median gross margin has declined for four years in a row to 22.3 percent in 2011 from 24.1 percent in 2007 (see accompanying graph). The declining trend is likely the result of both cyclical and secular forces. One secular trend is the increasing use of managed service providers/vendor management systems that have made the staffing market more efficient by connecting additional suppliers to buyers. A related trend is the cost reduction in recruiting brought about by new technology and centralized recruiting models. As the economy recovers, we might expect to see gross margins go up (and bill rates with them.) Indeed, the median gross margin of 22.3 percent in 2011 is below the average of 23.2 percent since 2000 for these same eight large staffing firms.

Conclusion
Knowing your supplier’s gross margin percentage can provide insight into your supplier’s business strategy (whether low cost or high quality), the financial health of your supplier relative to its peers and serve as a predictor of future bill rates as gross margin reacts to the business cycle.

Staffing Industry Analysts recently published a report analyzing gross margin and bill rate trends of 19 publicly traded staffing firms. CWS Council members can access the report here.

Click image to enlarge.

Comments

Add New Comment

Post comment

NOTE: Links will not be clickable.
Security text:*