Healthy growth awaits you in this region
By Timothy J. Landhuis
This is the third in a series of snapshots of staffing climates in various countries around the globe. Here, we profile the market in Canada, a country with abundant space and rich natural resources. While its market typically mirrors that of its neighbor to the south, Canada has fared better than the United States post-recession, leading to increased demand for staffing services. However, this market also has its challenges.
Canada has a lot going for it. It’s the world’s second largest country by area — and much of that area is stunning in its natural beauty. It’s one of few developed countries that is a net energy exporter. And the country enjoys a gross domestic product per capita that is in line with that of the U.S. In fact, it has demonstrated a more resilient economy than the United States in recent years. In this setting we take a look at Canada’s staffing industry, a dynamic sector that bears many similarities to the U.S. industry, yet features some unique differences.
Canada weathered the recent recession better than the U.S. Indeed, Canada’s real GDP has grown at a faster pace than the U.S. GDP each year from 2006 to 2010. Canada’s GDP growth has outpaced the U.S. growth rate by an average of 0.4 percent each year, according to data from the World Bank. Canada has performed better with regard to employment as well. While the U.S. lost 6.1 million jobs from the peak of January 2008 through December 2011, Canada gained 0.2 million jobs from its 2008 peak to its 2011 peak, according to seasonally-adjusted figures from the U.S. Bureau of Labor Statistics and Statistics Canada. Similarly, the unemployment rate was 7.4 percent in Canada versus 8.6 percent in the U.S. in November 2011.
“We did not have as severe a drop [as the U.S.] and we came out of the recession at a quicker pace,” says Bryan Toffey, vice president for Canadian operations at Aerotek and president of the Association of Canadian Search, Employment and Staffing Services (ACSESS). “Some reasons for this include [the fact] that we did not face a mortgage crisis as in the U.S. and that the Canadian banking system is now being held up globally as a model of a successful banking system.” As a result, there was less uncertainty among Canadian firms and increased confidence to grow their businesses.
All this economic activity has fueled demand for staffing services, an industry that totaled C$8.7 billion in 2009 (US$8.3 billion), according to Statistics Canada. And healthy growth is expected ahead. “We saw low double-digit growth in 2010 and 2011 and we expect the trend to continue at a more moderate pace in 2012,” says Toffey. “2007 was the high water mark for the IT staffing industry. While firms are still dealing with the impact of the last recession, the industry as a whole is healthy and on track to surpass that in the next few years,” says Terry Power, president of the National Association of Computer Consulting Businesses (NACCB) Canada, which represents approximately 80 Canadian IT staffing companies.
The Canadian staffing landscape is dominated by Randstad Holding NV and Adecco with 2010 revenue of C$450 million and C$400 million, respectively, according to the 2010 Book of Lists produced by Staffing Industry Analysts. The other three leading providers are Procom, Design Staffing Group, and Allegis Group, all privately held fi rms.
Canadian staffing falls into the same categories as in the United States: general temporary staffing, professional staffing, and direct hire staffing. General temporary staffing includes clerical and light industrial workers, while professional staffing includes IT, engineering, and finance workers. In terms of total revenue, general staffing accounts for about 60 percent of overall temporary and contract staffing in the country, while professional staffing accounts for the remaining 40 percent, Power explains; in the U.S., the split is closer to 50/50. “Many firms in the industry are now seeing something closer to a 50/50 split between general staffing and professionals. We expect this trend to continue.”
Professional staffing is dominated by the IT function, which comprises slightly more than half of the segment, says Power. After IT, the functions of engineering, finance, and accounting are equally sized components that make up another 25 percent of professional staffing. All other professional occupations constitute the remainder of the segment.
Staffing provided to the private sector accounted for an average of 87 percent of Canadian staffing revenue from 2007 to 2009, based on data from Statistics Canada. Government and public institution purchasers of staffing totaled 12 percent of industry revenue.
The billing structure also mirrors that of U.S. companies, with staffing firms in Canada earning markups as a percentage of worker pay. For professional staffing, markups range from 15 percent to 35 percent, with an average of 22 percent, says Derek Bullen, president of S.i. Systems Ltd., a large, independent staffing firm with offices across Canada. For direct hire, fees range from 10 percent to 15 percent for clerical positions to 30 percent for executive search, with 20 percent being a typical average, says Bullen.
The Canadian staffing industry grew an impressive 52 percent from 2004 to 2007, increasing from C$6.0 billion to C$9.1 billion, according to Statistics Canada. Bullen explains that during this period “the boom in global demand for commodities made many Canadian firms flush with cash.” Firms used the cash for capital budget projects such as implementing ERP software across the company. Firms turned to contingent IT workers to execute these projects. A factor driving the use of contingent workers is that “Canada does not have ‘at will’ employment as in the U.S.,” explains Bullen. “Firms must give notice three or six months prior to terminating an employee.”
Evidence suggests that the usage of contingents has returned to pre-recession levels in Canada. The Canadian Staffing Index reached 98 percent of its July 2008 value in September 2011, according to ACSESS and Staffing Industry Analysts, who produce the index. Indeed, the index, which estimates the total hours worked by temporary and contract staffing, has reported positive or flat year-over-year increases every month since January 2010.
Industry-wide, operating profit remained in the range of 3.5 percent to 4.5 percent of revenue from 2003 to 2008, according to Statistics Canada, before falling to 1.7 percent in 2009. However, Power says operating profit margin is expected to return to its historical range.
Four provinces host the vast majority of Canadian staffing activity, accounting for 96 percent of total revenue, according to the latest figures from Statistics Canada. From 2007 to 2009, staffing revenue collected in the provinces of Ontario, Alberta, Quebec and British Columbia accounted for on average 57 percent, 19 percent, 13 percent and 7 percent of total industry revenue, respectively.
“Toronto, Ontario, and Calgary, Alberta, have been the hottest markets now and for some time,” says Kevin Dee, CEO of Eagle Professional Resources Inc., a large independent staffing firm with offices across Canada. “Toronto has the most head offices in Canada, and corporate headquarters are where you tend to get the largest market for staffing. Calgary has the second most number of head offices. Toronto is home to firms in the banking, insurance, and telecommunications sector, and has always been the largest market. Calgary is home to firms in the oil and gas sector, which is hot right now.”
While overall operating profit in Canadian staffing averaged 3.3 percent of revenue from 2007 to 2009, staffing firms in Ontario and Alberta posted figures of 2.4 percent and 3.4 percent, respectively. However, operating profit was higher in British Columbia and Quebec, at 5.6 percent and 5.4 percent, respectively. The higher profits in these regions may be explained by the fact that Quebec and British Columbia have more government support programs, while Ontario and Alberta react more directly to the economy, says Bullen. In addition, Quebec uniquely utilizes the French language which makes their economy a more local economy. The Quebec market was the only major province to report positive revenue growth in 2009, growing 2.5 percent year over year.
Prefer to be Contractors
While much of the Canadian staffing landscape mirrors that of the U.S., Canada does differ in the role of independent contractors: Companies hire independent contractors using staffing firms as intermediaries, but the workers remain independent. The majority of contingent workers in professional functions — such as IT, engineers and accountants — are operating as independent contractors, says Power. The same computer programmer who might be working as an employee of a temp agency in the U.S. would likely be working as an independent contractor through a staffing firm in Canada. These independent contractors are often “incorporated contractors” who are a business of one person.
“In the U.S., staffing agencies avoid taking on independent contractors because of the fear of misclassification and resulting penalties brought by the IRS,” says Martin Glick, senior associate of global compliance at Brightfield Strategies. “Other countries are not as concerned about this.”
In many other respects, the work culture experienced by contingent workers is similar to that in the U.S. “In Canada, as in most places in the world, there is concern that contingent workers are treated as second class citizens, and they also face opposition from unions,” says Dee. This has led to recent legislation in several provinces that aims to balance protections for contingent workers with the need for businesses to have cost-effective help for temporary projects.
A larger staffing industry brings increased regulation. Ontario, home of more than half of Canada’s staffing revenue, passed Bill 139, which resulted in new regulations on the industry that took effect in 2009. One rule involves a prohibition against conversion fees after a contingent worker is hired after working six months for a client, which for professional functions in particular can result in a significant loss of revenue for the staffing firm that has placed that worker.
“Other than the economy, I think the biggest challenge facing staffing firms in Canada today is the potential of regulatory reform,” says Dee. If independent contractors were no longer allowed to be supplied by staffing firms, it would really hurt the industry, Dee explains.
Brisk demand in the IT segment has some firms expecting a shortage of available workers. “We are seeing definite skills shortages in areas like senior leadership, project management and business analysis,” Power explains. “The recent Labour Market Report by the Information and Communications Technology Council (ICTC) projected approximately 106,000 new jobs will be created in IT over the next five years in Canada. Post-secondary graduates and immigration will likely only fill half of those.”
Another current challenge for staffing firms is the increased sophistication and expectations of clients. For example, more clients expect staffing firms to engage in a managed service provider (MSP) framework. “Three years ago, MSP was barely on the radar in Canada,” says Toffey. “Now, it is very prevalent.”
Challenges notwithstanding, “2012 is looking very good,” says Bullen. He expects that renewed global growth will drive the price of oil to $120 a barrel this year, a boon that would ripple across the Canadian economy. “Every dollar of oil company profit in Canada brings 40 cents to Ontario in terms of the banks and tax revenue.”
Timothy J. Landhuis is a research associate at Staffing Industry Analysts. He can be reached at email@example.com.