SI Review: January 2011

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My Take, SI Review

Understanding the Competitive Forces Impacting IT Staffing

In speaking with staffing companies across the country one thing is clear. Job order numbers are increasing, and placements are starting to follow. This is welcome news; however, many executives see a rapidly evolving industry fueling concerns about the long-term prospects for growth independent of the state of the economy. This article will discuss three of Michael Porter's five competitive forces that are having the biggest impact on the future of our industry: bargaining power of buyers, the threat of substitutes and rivalry among competitors. Understanding these forces will provide insight on how your company should respond strategically to a rapidly changing marketplace.

The increasing bargaining power of buyers has been a challenge for staffing firms ever since the beginning of the millennium. The pressure on IT to produce greater ROI to justify its existence has led many buyers to transform their staff augmentation model away from differentiation based on relationships and customer service and towards a focus on program compliance and performance. Many firms blame the advent of the VMS for this transformation, when in reality VMS is only a symptom of the natural evolution between buyer and vendor as an industry matures. It is only natural for a buyer to drive cost lower, gain visibility into spend and manage their vendors on objective performance measures. This is not something unique to the staffing industry, and most buyers will leverage whatever advantages they have to increase the value they get from vendors.

IT staffing buyers leverage a couple of significant advantages when negotiating with vendors. First, switching vendors is relatively painless. Yes, when a company switches vendors they are losing institutional knowledge that could impact service level, but it's very difficult for a staffing vendor to become an indispensible partner. It's unfortunate, but in many cases we are too easily replaced.
 
Second, many staffing firms become highly dependent on a few large clients. This weakens staffing companies in two ways. The obvious impact is the more dependent a staffing company is on a client, the more it is willing to reduce rates. Anyone who has experienced a reverse auction understands how desperate staffing firms can become when a large client negotiates for price concessions.
 
The other impact is more insidious. As staffing companies realize more and more business from fewer and fewer clients they can lose the ability to land and grow new business. In effect they turn into a delivery-driven organization versus a sales-driven organization. A weakened sales organization increases the dependency on current accounts thereby weakening a staffing company's negotiating position. This transformation is often not understood by management until a company sees the need to replace an existing book of business, further undermining the staffing company's negotiating position.
 
What can weaken the bargaining power of buyers and shift more power to staffing companies? An increase in demand. The commoditization of our industry is predicated on the ready availability of talent. Several years ago I wrote an article on how the war for talent may undermine transactional VMS programs since recruiting methods would have to change as the talent becomes less available. To speak of a war for talent today certainly seems out of place. However, the long-term trends in IT graduation and retirement rates are pointing to talent supply issues in the future. But will that decrease in talent supply lead to more opportunity for staffing firms? Much of that depends on the evolution of another competitive force: The Threat of Substitutes.

The threat of substitutes is a threat that alternative services may have on the demand on a particular industry. A good example of the impact a substitute product can have on an industry is MP3 technology on the CD industry. The demand for CDs went down dramatically because a substitute product was more cost effective and convenient for the customer. The MP3 caused a fundamental shift in the industry. Whether there is a substitute service for staffing that could have the same impact as the MP3 to the CD industry is uncertain; however, options for buyers are increasing and could impact the demand for traditional IT staffing providers.

Most IT staffing threats of substitution reside in the continued evolution of the IT outsourcing model. While the outsourcing segment seems to always be in some sort of flux, the advent and adoption of cloud computing could be exceptionally disruptive to the IT services market. While Cloud, as a disruptive change agent, may increase demand in the short term, it can provide a significant long-term threat to the staffing industry.
 
Depending on the scope of adoption and how cloud services evolve over the next few years Cloud computing could hit at the heart of demand for IT staff augmentation providers. Susan Tan, from Gartner, suggests that, “Cloud computing represents a fundamental shift in how companies pay for and access IT services,” predicting that by 2012 20% of companies will not own virtually any IT assets. Cloud could be especially attractive to emerging small and mid-market companies where the adoption rate of SaaS and Cloud exceeds large businesses by a factor of two, according to a study done by K2 advisory. This could be of great concern for IT staffing providers that focus on the SMBs to drive higher margin business and lessen the reliance on large VMS programs.

The adoption rate of Cloud computing could accelerate as the large system integrators and niche consulting companies figure out ways to use it to their competitive advantage. IBM, for example, is touting labor savings of 50% as the leading value proposition of Cloud computing, representing a direct challenge to the staffing model.

While Cloud presents some interesting challenges to traditional IT services models it's important to understand that Cloud is enjoying a honeymoon period where all the possibilities are being imagined and few of the real-world obstacles have yet to be understood. Soon, we will experience some of the limitations of Cloud, and a realistic picture of its potential will emerge. However, many staffing firms believe the industry will change and are creating strategies to remain competitive contributing to the third competitive force: Rivalry.

Anyone who has more than five years experience in the IT staffing industry is familiar with pricing pressures. While VMSs play a significant role in driving pricing down, it is the competitive landscape that allows it to happen. As long as there are competitors that are willing to do the work for less, and there is a low barrier to entry, pricing pressures will continue. Some firms have embraced this dynamic by increasing operational bandwidth through processes and automation built for speed and volume while at the same time limiting fixed sales and recruiting costs. In short, their ability to respond quickly and cheaply is their competitive advantage.

When firms decide to compete through service offerings then firms are attempting to bring greater value to the marketplace. As staffing companies have sensed a changing marketplace, many of them have developed offerings around workforce management, specific technologies or industry vertical. These approaches are becoming more and more prevalent regardless of the size of the firm. Other offerings from staffing organizations are positioned more as a substitute for staffing. An example of this is staffing firms that have developed offerings combining payrolling with services that enable customers to directly source their own contract talent. A client who successfully adopts this model will decrease its dependency on 
traditional agencies substantially.

Discussing competitive forces should not discourage staffing providers but instead instill a sense of urgency to develop a well-defined plan to succeed continually to improve their operational effectiveness. Staffing companies that choose not to plan and evolve threaten their short-term success and their long-term survival.

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