CWS 3.0: December 17, 2014

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Stay Alert: M&A staffing deals have good, bad implications for you

Mergers and acquisitions among staffing suppliers can affect their clients, and there have been quite a few such deals as of late. One example: Hays plc, the world’s sixth-largest staffing firm, recently expanded its US presence with a $44.0 million acquisition of an 80 percent stake in IT staffing firm Veredus Corp.

There are financial incentives for mergers and acquisitions among staffing suppliers. A deal can have positive results for staffing buyers — it can make staffing companies larger and better. However, M&A activity can also bring uncertainty, a change in relationship or even disruption of activity.

Mergers and acquisitions among staffing suppliers can put buyers on edge, says Greg Muccio, manager, People Department, at Southwest Airlines.

“You’ve worked for a while building a relationship with that supplier, so when you see some sort of acquisition, as a customer, the first questions is what does it mean to me?” Muccio says.

Does the acquirer value the company it is buying, does it plan to add resources or could there be negative changes? Muccio says staffing buyers may already have formed an opinion of the acquirer based on knowledge of the market.

It is important for buyers to be proactive and communicate — find out whether things will be status quo or changing, Muccio says. They should also stay in contact with leaders at their own company. Buyers should not make the mistake of thinking no news is good news.

And a main thing is for staffing buyers to keep a healthy vantage on what their alternatives are.

“From the buyer side, my advice would be to become knowledgeable and … have a contingency plan,” he said.

M&A and consolidation among staffing suppliers can be a positive, says Clay Lewis, vendor executive for global staffing at Bank of America. Staffing is a fragmented industry with relatively low barriers to entry; consolidation can make larger, better staffing suppliers, Lewis notes.

“Some leaders may become anxious as a large deal is announced, but in my experience these are generally positive for us,” Lewis says. “The acquiring firm has taken the right steps … We have seen the right things said and, more importantly, the right things done.”

However, staffing buyers should be kept in the loop.

“Make the buyer part of the process,” Lewis says. “Classic change management; include us and allow us a forum to provide our point of view and take that into account.”

For some, M&A deals represent a concern.

“When I hear M&A, all I hear is ‘disruption,’” says Jason Ezratty, president of Brightfield Strategies, a consulting firm in the contingent workforce space.

Mergers & acquisitions can bring uncertainty to all parties, Ezratty says. “If you’re a recruiter working for a staffing firm and you’re acquired, your future is uncertain,” he said. And that can affect morale — and morale issues can be felt throughout the supply chain.

There could also be cultural shifts. For example, a staffing supplier could be very high-touch while the acquirer may take a more transactional approach. In addition, a staffing buyer may be a key customer for a staffing supplier, but the buyer may not be as important a customer if a supplier is bought by a much larger staffing firm.

Ezratty also says infrastructure can be different at the acquiring firm, such as a change in the applicant tracking system, loss of access to candidates and historical records may become harder to find. Service level agreements could also change.

“All of those things are disruptions that buyers prefer not see,” he says.

Some staffing buyers see acquisition targets as a lesser fit and could decide not to do business with them during the RFP process, Ezratty says. However, M&A deals aren’t typically announced until they are done, and it requires a savvy procurement professional to read the telltale signs of a possible staffing acquisition.

There are things buyers of staffing services can do to make sure things run smoothly for their companies, he says.

“If they have the right kinds of contracts that keep them in the driver’s seat, the better they can make termination terms be in their favor, the more strength they have to make sure those types of transitions go their way,” Ezratty says. “It all comes back down to leverage and how to apply that leverage.”

Fiona Coombe, director of legal and regulatory research at Staffing Industry Analysts, says a main issue for staffing buyers in these situations is ensuring contractual liabilities are taken over by the merged entity.

“A well-drafted supply contract should provide for such eventualities, but a prudent buyer would always take advice on the effect of any merger or acquisition of a supplier,” Coombe says. “Ensuring that the new supplier entity takes over the liability for matters such as misclassification, workplace injury due to the supplier’s negligence and other matters within the supplier’s control is vitally important. Also checking that the indemnities provided by a supplier hold good and are backed by the necessary insurances is crucial.”

It would also be a good time to review key performance indicators in a service-level agreement to make sure that the new entity is fully aligned with the performance metrics and capable of delivering optimum levels of service for the lifetime of the contract, Coombe says.