SI Review: January/February 2013

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Reading the Numbers

Staffing Industry Analysts’ experts discuss 2013 trends

By Subadhra R. Sriram

It’s been an interesting pattern over the last decade for the staffing industry. If one looked back to 2000 it would seem then that staffing industry growth would go on forever. It didn’t. But what stands out is the shift in the way labor is procured.

What we have been witnessing over the last decade is a general disaggregation of the labor force. The traditional employee role has evolved to different worker classifications: freelancers, temporary workers, independent contractors, statement of work consultants, etc. There has been a gradual loosening of people’s attachment to individual employers. Contingent workers have become the norm with little stigma attached to utilizing them. In fact, those businesses that don’t are frowned upon as these workers bring in an unparalleled flexibility. As a result, staffing agencies gained, though not as much as some experts believed they would. In addition, technology has played a bigger role in the procurement of people, giving rise to new business models around the acquisition of labor. Companies offering leading-edge vendor management systems attracted big investments.

Editorial Director Subadhra R. Sriram sat down with Staffing Industry Analysts’ research analysts to discuss what 2013 and beyond will bring. Here are some trends in information technology, healthcare, M&A, what the buyer expects and much more.

Jon Osborne, VP, Research and Editorial

More Than Just Middlemen

What is one big change that you have seen since entering the staffing industry?

One of the biggest changes over the last decade has been that the rate of growth has definitively slowed in temporary staffing. At the same time, however, the broader contingent workforce has expanded, and the staffing industry has evolved, has broadened its mission, to enter that space with management services of various kinds, like independent contractor compliance, VMS and MSP. The industry has evolved in many ways, and continues to do so — the new online staffing phenomenon being one of the latest examples.

What are your thoughts on the general disaggregation of the labor force?

I see people’s attachment to individual employers to be loosening — you know, whether it’s through one mechanism or another, there seems to be a general disaggregation, which is good for the staffing industry. You see it not just in the expansion of contingents, but even in greater employee turnover, shorter job tenure, among traditional workers.

So it doesn’t matter that the workers may not come through the staffing agencies?

There has been a deceleration in temporary staffing growth over the last decade, as I mentioned, but I will add that I think that could change. For one thing, there is already a little shift back in that direction simply because the government doesn’t really like the whole independent contractor thing. They are making it difficult for companies, risky. And we’ve seen lately among the contingent buyers a change in attitudes where they are a bit more negative about using independent contractors and more positive about temporary staffing. So I think that that’s going to move some things back in staffing’s direction. The other thing that could spur greater use of temporary workers is healthcare reform. Yes, healthcare reform is a headache for staffing firms but it’s also a headache for buyers. And there are economies of scale in expertise in navigating any kind of regulatory situation. So for buyers using contingent labor, it may be a relative advantage to use staffing firms if they are experts in healthcare reform. Buyers don’t want to spend time learning about the law as it applies to contingents and reform. As a buyer, I’d just want to outsource it to the staffing firm; I’d know that they are taking care of it and it’s all legal if I go through them.

So maybe the idea of staffing agencies as middlemen is becoming necessary because you need someone to moderate the space?

Staffing firms are more than just middlemen. I would say they are real business partners, but yes, they help customers navigate the space.

Any trends that the supplier should be aware of as we move forward?

I think that there will be long-term growth, but more than that, with respect to the short-term, many areas of temporary staffing haven’t even rebounded to pre-recession levels. There are many areas with plenty of snapback left to go without even getting to the new levels that haven’t been seen yet. That’s going to make for some growth on its own for the next couple of years.

A lot of things are evolving, and then of course there’s online staffing. It’s relatively small right now compared to the industry as a whole, but it’s growing extremely rapidly and it has a very strong economic logic to it.

And it’s not a threat to the industry?

It’s an evolution. Temporary staffing firms will participate in it because the technology that makes online staffing possible is becoming cheaper and the providers are going to make it cheap enough for staffing firms to participate.

What’s your reaction when people say: we don’t really need the industry; we can attract and recruit ourselves?

Well, I would say you can make your own sandwich too but often it makes more sense to eat out. There is such a thing as specialization. Specialists can do things better and cheaper, there are economies of scale. It may be an area where you don’t really want to become an expert in how to recruit somebody and you rather outsource that to somebody else who spends all day recruiting. So there’s definitely logic to outsource recruiting functions.

Paying those margins is the right thing to do, then.

Yes. When you look fully at the cost of internal recruiting, it isn’t cheap. I mean, the people who think that outsourced staffing services are expensive aren’t comparing these costs on an apples-to-apples basis with their internal recruiting costs. I would add as well, as someone who has worked in large companies with professional recruiting departments, that the hiring managers in those situations are basically dealing with an internal monopoly that may or may not be particularly interested in their recruiting needs. When a hiring manager is dealing with a staffing firm, the hiring manager has real power because there are thousands of staffing firms available. If one isn’t doing the job, the next one will.

So if you had to give advice to the staffing industry, what would it be?

My advice would be to be flexible, both in your cost structure and in your service offerings, in how you help your customer. You’re in a business where business comes and goes, that’s your function, as you are absorbing shocks in the economy and fluctuating seasonal needs. It’s very important for you to be flexible internally so that you can lower your costs when business is down and scale back up when business comes back. I would say also to take seriously any kind of efficiency changes that you see out there, especially in terms of technology. I’ve mentioned online staffing but there are all kinds of trends going on, social media and so forth, that you don’t want to be asleep on. If you’re not taking advantage of these economies that technology brings about, you’re letting other companies get a competitive advantage.

Timothy Landhuis, Research Analyst

Healthcare, marketing/creative, direct hire growth outpace economy

Where do you think you’re going to see growth in the industry?

I’ll start off by talking about temporary staffing, which makes up about eighty percent of the industry as we define it. And for 2013 we’re looking at six percent growth. Compare that to 2012 which had 9 percent growth.

The industry is growing but not as much as last year?

Yes, so there is a deceleration in the growth rate, but I would consider six percent a solid year, given a slow economy.

What are the reasons for this slowdown?

We’re assuming we’ll see a slow economy this year — about the same economic growth as 2012, about two percent U.S. GDP growth, which is lower than one would like to see. So we are looking at another year of slow growth but there is still some growth, and that is going to contribute to the growth of temp staffing. Also, business has become increasingly volatile and businesses are turning toward a more flexible workforce.

What staffing segments are seeing the most growth?

We expect IT and healthcare staffing to show strong demand in 2013. We’re forecasting about 8 percent growth in IT staffing. That’s down from the double-digit growth the segment posted in the past but still pretty solid. IT as you would expect is a star just because of technological change and every business has to keep upgrading their technology, leading to a lot of demand for IT project work. The other notable segment would be healthcare, which we’re also expecting to grow 8 percent overall.

We divide healthcare into the four sub segments: travel nurse, per diem nurse, locum tenens (physician staffing) and allied/other (physical therapists, occupational therapists and other health-type occupations). For travel nursing, we’re looking at 8 percent growth in 2013.

So travel nursing has made a comeback.

Yes, in fact, travel nurse was one of the fastest-growing segments in 2012, with 15 percent growth, and that is a bounce-back from the steep declines that it had during the recession. In addition, government regulations regarding electronic medical records as well as healthcare providers moving to ICD-10 coding is driving demand for travel nurse staffing — as staff nurses are getting trained, replacement (travel) nurses come in to care for the patients.

The growth in healthcare is also in part due to the reform?

Yes, President Obama’s re-election makes healthcare reform more likely. That just means millions of uninsured people will now be needing hospital and out-patient procedures, and this in turn means needing more staff to service them. With locum tenens, we project 9 percent growth in 2013. This is due to a physicians shortage combined with the upcoming healthcare reform. In the allied segment, too, we project a 10 percent growth.

And to finish up the growth topic, marketing/creative also has an 8 percent forecast growth in 2013. Marketing/ creative is only about a billion dollar market — less than one percent of temp staffing — but there’s a kind of a technology story here as well, with projects related to websites, user interfaces, and social media marketing driving work in this segment.

Then there’s the direct hire segment or permanent placement, which also has an 8 percent growth rate forecast.

This is good news for people looking for jobs.

Direct hire tends to be very cyclical, even more cyclical than temp staffing, so as the economy continues to recover, direct hire is coming back from steep declines. It’s only at about 70 percent of what its peak revenue levels were.

Any surprising trends that you would like to comment on?

I am sometimes surprised to see solutions businesses popping up here and there. Solutions business — or outsourcing — is project-based. If I am a company, I can either hire temporary workers or I can just contract with another company to do all the work. So I’m not supervising the employees day to day, I just expect the project to be completed. We see quite a bit of this in IT where they use statement-of-work consultants, but also in the engineering and legal segments. This could be something that’s competing with staffing firms or it could be an opportunity if staffing firms want to get into the solutions business.

Aren’t some staffing firms already doing this?

Yes there are, and it’s an interesting choice for staffing firm executives to make because on the one hand, solutions business can offer higher gross margins, but you also hear stories about the challenges. Sometimes when your competency is staffing, it can be hard to execute a completely different business model. Suddenly you really have to have deep technical knowledge in managing those particular project areas.

If you had to make an acquisition where would you look?

We have some useful research from our annual staffing companies survey on this topic. More than 600 firms took the survey this fall, and when we asked them about where they would acquire, IT and healthcare (segments) were the top targets.

We do an interesting calculation and come up with the ratio of companies interested in acquiring versus the pool of potential target firms. And engineering and marketing had the highest ratio —1.9 buyers for every 1 seller. So if you’re looking to acquire an engineering or creative marketing staffing firm, the prices might be a bit higher at the current time. On the flip side, the ratio was lowest for industrial and legal staffing firms.

Give me one word with regard to what the next couple of years are going to bring for the industry?

I’ll give you three words: constrained macro economy. We’re seeing some sort of structural challenges that we’re not used to seeing in the U.S. I think a lot of us who experienced the 1990s got used to four percent GDP growth per year and a booming job market. But many economists are concerned about the so-called structural problems in the U.S., those being high budget deficits, high government debt and high unemployment which may not go away if there are mismatches between the skills that companies are looking for and the skills that people have. And as long as we’re having high levels of unemployment, it’s going to be hard for the economy to show high growth. So that’s not to say that the staffing industry can’t grow or that individual companies can’t see success, but as a whole, I don’t see a boom in the U. S. economy.

In this environment, my advice to staffing firm executives is to really focus on your niche, and on your competitive advantage, in order to grow and succeed. Because the economy is barely growing, firms cannot simply rely on a rising tide to lift all boats.

Sona Sharma, Senior Research Analyst

Healthcare IT Is on a Tear

What is driving the IT segment’s growth?

IT has become a pretty sizable staffing segment. It wasn’t this way about a decade ago. Some of it is because the composition of staffing is changing from commercial, industrial to more professional staffing. This is not to say that commercial is not a very big segment. It’s just that revenue-wise, professional, including IT staffing, is much bigger, due to higher bill rates. Volume-wise, though, commercial staffing is still big.

It also points to the evolution of the industry from commercial to professional.

Professional staffing is becoming more acceptable; these IT professionals want to be contingent, it’s their choice. What’s driving IT’s growth is its all-pervasive nature — it cuts across the board in any vertical, in any industry. In the dot-com days everybody would say, “Oh if I don’t have a website, somebody will eat my lunch.” Well by now, if you don’t have a good website you are way too late in the game. Computers are used for myriad purposes, hardware, software and websites both on the business and consumer side. In fact, the sale of computers has been going up for the past 30 years. In no year on record have computers sales actually declined, plateaued maybe, but not declined.

What is the size of the IT staffing segment?

We estimate that the U.S. IT staffing industry was $20.6 billion in 2011. There were about 33 staffing firms that had $100 million or more in IT staffing revenue in the U.S. in 2011. Together, these 33 firms had about $13 billion in IT staffing revenue, or 63 percent of the total IT staffing market. There are many momand-pop outfits. Despite the larger firms, there is enough business for everybody to play with.

What do you forecast?

We estimate that U.S. IT staffing revenue grew 12 percent in 2012 to reach about $23 billion and we project it to grow to about $25 billion in 2013, which is growth of about 8 percent. So we are quite bullish about the IT staffing market.

Do you see anything stopping this growth?

IT staffing is heavily related to the health of the economy. During this last recession, IT did slow down, but it’s relative. If you look at the overall staffing industry, IT was not affected as much as the other sectors were. Compare that with the previous 2001 recession, which was led by IT, where the segment suffered big time. Companies made deep cuts, in fact many cut to the bone. This time there was none of that.

So a slowdown is relative in the IT segment?

The employment growth in IT overall is outperforming overall employment growth. For the past 12 years if you look at the numbers, IT employment rose 30 percent versus a meager 0.8 percent increase of total employment.

Any trends you would like to draw attention to?

The number of undergraduates with a computer science degree in the United States is still not going up. An annual survey from the Computer Research Association, the Taulbee Survey, measures the number of undergraduates enrolling in computer science or computer engineering programs. Those numbers are not growing. The survey indicates there were 14, 458 undergraduates in the class of 2012 in the United States that declared computer science or computer engineering as their major. This number is up just 0.2 percent from 2010.

What’s surprising though is that IT jobs are available, employment is increasing, the bill rates are very high, the salaries are very good yet there are not enough people to fill these jobs.

So what should staffing firms do when they scout for IT talent?

You know it’s a dual-edged sword. It’s great that you don’t have a huge labor market; that means there’s a shortage, which in turn means margins are higher, so staffing companies are more in demand. The trick is of course being able to procure smart talent with the right IT skills.

What is the right IT talent?

Cloud computing, mobile technology, big data, these things are being used more and more. People who can deliver in these areas will be in great demand. These are areas that are kind of driving the IT market. Another one is Healthcare IT with government mandated electronic medical records and ICD-9 to ICD-10 conversions. That requires software programmers.

Healthcare and IT are merging together. It is no surprise that both segments are projected to grow. The thing is that you need IT expertise but you also need clinical expertise. People who are well versed with the administration of a hospital or of a medical facility do understand how to use that IT.

What should IT staffing firms be doing in preparation for this continued growth?

Be smart about it. I think the growth will continue but it will stabilize. Depending on how the economy does and with the healthcare reform, healthcare IT is in a boom right now. Small staffing firms should specialize in either a skill set or technology. They need to carve out a niche.

Andrew Karpie, Research Analyst

Online Staffing Is Not Ringing the Death Knell

You have been intensely focused on online staffing. What are you seeing?

What we are seeing is a change in how work can be intermediated and these models are basically associated with technology-enabled platforms.

So when you say intermediated you mean a way by which work can be done better or it’s just a way by which work can be handled?

Both. I often speak of work arrangements, and these platforms provide another way of arranging work or establishing work arrangements between workers and those who need to have their work performed. It could be brief freelancing relationships or it could be more complex crowdsourcing types of relationships. So work arrangements are one part of it; the other is how work is supported. There has been a trend toward more use of remote workers and some of these platforms actually provide support for remote workers performing their actual tasks.

Give me an example of a remote workers platform?

Companies like Elance or oDesk may provide a way — or a workspace — in which files, certain documents that are worked on, can be maintained and transferred. That’s a very simple example. And you know a more extreme example might be platforms that support software development. GitHub is a very good example of such a platform where developers can join into projects and check their development work into and out of this whole environment.

Why is this model growing?

Why it is growing and why it’s important is, first of all, it reduces the transaction costs and cycle times related to work arrangements, establishing work arrangements. It also increases the supply of labor to geographically remote areas, potentially opens it up to skilled populations across the world, so that’s very important. The models are very scalable. Those are probably the major reasons.

So in the long run, how do you see online staffing play out in the traditional staffing industry?

I do not think that online staffing is ringing the death knell for the traditional staffing industry by any means; it’s just a new growing segment. And I think what is most important about it is that it’s setting another bar for what staffing firms can get done using technology to make that process happen more efficiently and to make more happen in that process, such as expanding labor pools and reducing the transaction costs to make certain types of work viable where they might not have been otherwise.

I see online staffing developing side by side with traditional staffing, and at the same time I think that traditional staffing is going to look at how online staffing is doing business and begin to adopt more of the models and technology and practices that have been deployed. So I think we’ll see an evolution of both models.

Are some jobs better for online staffing than others?

There’s a clear indication of that already: Most of the online staffing jobs today are knowledge or information worker types of jobs — writing, developing software, creative, artistic marketing types of activities but other forms of knowledge works. So certainly these are the leaders. But at the same time I think we are going to see that there isn’t really any reason why some of these models cannot be applied in different ways to other roles and even roles that are performed physically onsite.

Give me an example.

There are some of these platforms that already do support onsite types of roles and rather than having your workforce remote and geographically dispersed, you are actually establishing work arrangements for onsite positions using the same type of platform. So the work arrangement and the contractor freelance arrangement is established through the platform, without a lot of human intervention, but the worker goes to the job and performs the work onsite.

Do you have any advice for our readers?

My advice is to try to keep track of what is going on and do not dismiss these new models, these online staffing models, as something that doesn’t concern you or is not relevant to you. Try to look at what they are doing and see if there are parts of what they are doing that you can expropriate and take advantage of in your own business. After all, imitation is not only the highest form of flattery; it’s also a way to learn new ways of doing things.

Tony Gregoire, Senior Research Analyst

CW Management Is a Primary Role

In terms of buyer behavior, what are you seeing?

We are seeing a trend of incorporating statement-of-work consultants (SOW) into contingent workforce programs. In Staffing Industry Analysts’ Buyers Survey, a substantial number of the respondents noted that they are doing this or planning to over the next couple of years. And the VMS/MSP Competitive Landscape report shows a substantial amount of increase in SOW spend, going through both the VMS and MSP.

So buyers have accepted SOW as a contingent worker classification and are incorporating it in the program?

Correct. And while it’s much smaller than temporary staffing, it is growing at a faster rate. Another trend is that CW programs are expanding their geographical footprint — it is one of the buyers’ priorities as seen from the buyer survey. We also see substantial VMS/MSP spend growth outside the U.S. It’s getting larger in Europe and Asia. This ties in with the growth of SOWs. In some countries, like Japan or India, because of legal requirements, most of the MSP spend is in SOW rather than temporary staffing.

Are buyer attitudes getting more positive about using contingents?

Yes. The buyer survey net bias scores have increased over the past several years. We are also seeing them use more of these workers. We see a continued increase since 2009, an increase in the share of workers that are contingent and probably the biggest driver there is the lessons learned from the recession where companies had to lay off workers, which resulted in a greater appreciation for a more flexible workforce.

Do you have any tips on how staffing firms can win the buyer over?

Staffing Industry Analysts’ surveys, such as the Staffing Firm Survey, reveal that staffing firms are really interested in expanding their client base and getting new clients. But when we look at the buyer survey results, the buyers are consolidating their suppliers more than they are expanding.

What buyers are doing is using fewer staffing firms to get all of their temporary workers. And I would recommend that staffing suppliers focus on retention of their clients because you could gain a lot by just retaining a client that’s consolidating and pick up extra business from that client.

Do you have any trends that you want to draw attention to?

Most CW managers now spend a majority of their time on contingent workforce-related responsibilities — this has increased from the past. Right now it’s more of a primary role, rather than an add-on. This helps draw more attention to contingent work and helps increase the level of business — as contingent workforce management becomes more of a craft, it becomes more of something to be managed whether by an MSP or internally.

Another trend we have our eyes on is payrolling. As contingent workforce managers get more power from social media, and there are more tools they can use on their own to source workers, I think payrolling will become more prevalent. CW managers might be able to use an IT contractor LinkedIn group, for example, to source an IT worker for an assignment. The company can then pay a lower margin than they would to a staffing supplier by just having a payrolling firm as the employer of record for that worker.

Subadhra R. Sriram is editorial director at Staffing Industry Analysts. She can be reached at ssriram@staffingindustry.com

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