SI Review: December 2011

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Above the Crowd

Common traits of some high-performing staffing firms

By Sona Sharma

The Great Recession has brought whole countries to their knees. Many industries have shared the same fate. The staffing industry was no exception, with revenue falling 5 percent and 27 percent in 2008 and 2009, respectively.

However, there are those that not just defied the great recession, but stood tall. Indeed, 42 not only managed to continue to grow, but did so enough to land on Staffing Industry Analysts’ 2011 list of Fastest-Growing U.S. Staffing Firms. They are the new breed. To qualify for the list, staffing firms had to post at least $1 million in revenue in 2006 and have a compound annual revenue organic growth of at least 15 percent between 2006 and 2010.

How were these firms able to achieve extraordinary results in the face of a downturn? What differentiates them from the rest?

We took a close look at the firms on our list to understand how they did it. In the process, we noticed some common characteristics shared by these firms. Additionally, we identified a few business models that are likely propelling growth for some of the staffing firms. Of course, there is no guarantee that emulating these business models would yield similar results for other firms; the secret lies in the execution of the business strategy. Still, some key concepts implemented by these firms may be applied to a business to enhance performance and value.

Leading the Pack

The top 10 fastest-growing U.S. staffing firms had a median compound annual growth rate of 39.8 percent. Eight of them focused on information technology staffing. The other two provided industrial staffing. Overall, 27 of these 42 firms on the 2011 Fastest-Growing U.S. Staffing Firms list reported IT staffing to be their top segment.

Ten companies missed making our list in 2011 — either because they did not have revenue of $1 million in 2006 or they fell just short of the required 15 percent compound annual growth rate. Mirroring the top 10 fastest-growing firms, eight of these runners-up reported IT staffing to be their top segment.

It is quite evident from these companies’ results that the IT staffing market has been outperforming other segments of staffing. At the same time, the IT staffing industry also declined 4 percent in 2008 and 20 percent in 2009. Obviously, being on the list is no easy feat for those that made it.

IC Compliance & Payrolling Firms

We also saw the emergence of payrolling and compliance providers in the 2011 list. Independent contractor compliance has become a favorite issue with the Internal Revenue Service these days. No doubt, this is worrisome for buyers that employ large numbers of independent contractors as part of their contingent workforce. In fact, research from Staffing Industry Analysts shows that fewer than one in five buyers are confident that all their 1099/independent contractors are properly classified. Roughly half of the buyers reported they were not 100 percent compliant with required 1099/independent contractor classification, and another third had no idea whether they were compliant. Clearly, helping clients achieve peace of mind with IC compliance can be a big value-add that staffing firms can offer and some have started to provide these services with reasonable success. There are a few staffing firms that are also taking over the payrolling aspect of the business for their customers who are utilizing independent contractors. This model appears to be gaining steam.

Diversity Status

Another criterion that helps staffing firms attract attention is having diversity status. This appeals to buyers of staffing services that want to achieve their diversity goals by having these suppliers as part of their supply chain. Additionally, about half of the companies on this list have diversity status. While having diversity status definitely helps in generating and winning business, the jury is still out on the extent to which it helps. There are those in favor who believe that diversity status helps staffing firms gain value and get acquired.

Emerging Patterns

Another impressive statistic that jumps out when reviewing the Fastest-Growing U.S. Staffing Firms list is that 11 of the firms had revenue of more than $100 million in 2010.

It’s easy for small companies to post impressive growth rates and make the list, observes Jim Childs, managing partner at Childs Advisory Partners. “But to make this list and still have 2010 revenue of over $100 million shows that you grew a lot in that timeframe on absolute dollar basis,” he says.

According to Childs, who has been an avid follower and observer of the list over the years, two successful business models have emerged in the latter half of the decade among staffing firms that have made it to the list — the high-growth, local-branch model and the high-volume, centralized delivery model.

High-Growth, Local-Branch

This model relies on selling through the local branch network and in putting as many feet on the street as possible to work the clients. Many of these branch offices are like a business unit in themselves with a sales person and more than a couple of recruiters. This enables a more decentralized decision-making process that spurs quick growth. Of course, everything depends on the management’s team’s vision of how they want to grow their company. Insight Global and Apex Systems are following this model, Childs notes.

“The growth culture has to support the leaders’ vision,” says Kevin Knaul, director of strategy and corporate development at Indecon Solutions, an IT staffing and services firm that is No. 42 on the list. “This model attracts certain types of people who are career minded and it certainly is not for the nine-to-fivers who are looking merely to just collect a paycheck and get out.

“The second element is hiring, promotion and retention. It’s about hiring inexperienced people into a vigorous system. So this type of a model does not typically look for five to 10 years of experience in staff. They’re looking for younger folks who want to get behind a program, follow the leadership, and create a career. Often times it is athletes or people of a competitive nature that fit well into this environment.”

As with anything else, the key to success is deciding on the growth strategy and sticking to it — determining the focus of the service offering, establishing processes and metrics and having the discipline to apply them to branches across the board.

High-Volume, Centralized Delivery

This model is the byproduct of the advent of workforce management tools, such as vendor management systems (VMS) and managed service providers (MSP), Childs says. These solutions have been adopted

 by many large buyers of staffing services and have changed the process of how companies engage with their contingent workforce. In short, these solutions have made the process more centralized with considerable help from procurement. It works well for heavy users of contingent workforce as it enables the companies to have better control of their contingent worker spend.

Research shows that over the past five years or so, workforce solutions have become quite deeply entrenched among large buyers. According to Staffing Industry Analysts’ survey of corporations that buy staffing services, about 72 percent of large companies already had a VMS in place in 2010. This usage is projected to grow to 74 percent in 2012. Similarly, usage of MSPs was pretty high for large companies. In 2010, about 66 percent of buyers said they’re using MSPs, and in 2012 we expect this number to go up to 68 percent.

While many staffing firms have resisted working with these workforce solutions, there are some that have accepted the writing on the wall and formulated a strategy to work with large suppliers that use VMS and MSPs. Although the margins are lower, the volume is high and their costs are lower.

Artech Information Systems is one such firm that has embraced this model. With about $272 million in revenue in 2010, Artech was ranked No. 23 on the Fastest-Growing U.S. Staffing Firms list with 25 percent compound annual growth rate from 2006-2010.

Artech’s business model is completely different from what Knaul described. It focuses on delivery rather than sales, says Ranjini Poddar, co-founder and president of Artech. Companies such as Artech are not only selling to the end customer, but also working with MSP sales channels.

“First of all, the target market is different. When our rep goes out and looks at all the prospects out there, our top prospects are those companies that have centralized procurement, that have high volume or relatively high volume staffing needs,” Poddar said.

“Geography is not a factor in our decision,” she says. While companies divvy up the geography among your sales force in the local model, Artech is looking for large volume users across the country. “We know that even if the prospect is in a geography where we don’t have a significant presence, we can either service that customer through our centralized delivery model, or build enough local presence to service them. So our prospect list is not limited by geography,” she adds.

Takeaways

While the gross profit percentage for the two models is quite different, with the local branch business model capturing higher gross margins, the centralized delivery model helps reduce the cost structure of a staffing firm. As the sales process to a high-volume customer using a vendor management systems is not that complex, the compensation structure offered to the customer can be lowered.

And while a combination of the two models is an option, such an approach would be more appropriate for larger staffing firms that have the ability to scale. For a relatively smaller firm, a focused strategy might yield better results.

“I think the takeaway for me is that no matter what model you employ, and there are certainly variations on these two, it really does come down to execution,” Childs says. “So I think copying a model doesn’t really help you be successful. It’s really the day-in and day-out execution of it that makes a difference between the most successful firms and the rest. Clearly, simpler and focused appears to be a big common theme among the high performers.”

Sona Sharma is senior research analyst at Staffing Industry Analysts. She can be reached at ssharma@staffingindustry.com.   

[SIDEBAR]

2011 Fastest-Growing U.S. Staffing Firms                                             

Ranked by compound average growth rate from 2006 to 2010                                   

  1. WorkSource Inc.; Headquarters: West Des Moines, Iowa; Top staffing segment served: Industrial
  2. Rose International; Headquarters: St. Louis; Top staffing segment served: Information Technology
  3. Pinnacle Technical Resources; Headquarters: Dallas; Top staffing segment served: Information Technology         
  4. TekPartners/MedPartners HIM; Headquarters: Fort Lauderdale, Fla.; Top staffing segment served: Information Technology
  5. Insight Global; Headquarters: Atlanta; Top staffing segment served: Information Technology
  6. Industrial Labor Management Group Inc.; Headquarters: Huntington Park, Calif.; Top staffing segment served: Industrial            
  7. Digital Intelligence Systems; Headquarters: McLean, VA.; Top staffing segment served: Information Technology
  8. The Select Group; Headquarters: Raleigh, N.C.; Top staffing segment served: Information Technology
  9. Q Analysts; Headquarters: Santa Clara, Calif.; Top staffing segment served: Information Technology
  10. TalentBurst Inc.; Headquarters: Framingham, Mass.; Top staffing segment served: Information Technology
  11. Arrow Strategies LLC; Headquarters: Bingham Farms, Mich.; Top staffing segment served: Information Technology
  12. HealthCare Partners Inc.; Headquarters: Lawrenceville, Ga.; Top staffing segment served: Healthcare/Locum Tenens
  13. Amerit Family of Companies; Headquarters: Walnut Creek, Calif.; Top staffing segment served: Payrolling/Independent Contractor Compliance
  14. Employment Plus; Headquarters: Bloomington, Ind.; Top staffing segment served: Industrial
  15. Mindlance Inc.; Headquarters: Hoboken, N.J.; Top staffing segment served: Information Technology
  16. Portfolio Creative; Headquarters: Columbus, Ohio; Top staffing segment served: Marketing/Creative
  17. InfoGroup Northwest; Headquarters: Lake Oswego, Ore.; Top staffing segment served: Information Technology
  18. EdgeRock Technologies LLC; Headquarters: Boston; Top staffing segment served: Information Technology
  19. Populus Group LLC; Headquarters: Troy, Mich.; Top staffing segment served: Payrolling/Independent Contractor Compliance
  20. Akraya; Headquarters: Sunnyvale, Calif.; Top staffing segment served: Information Technology

For the full list of 42 firms along with precise growth rates, contact membersservices@staffingindustry.com.

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