Recruitment Businesses: Long-term growth threatened by skills shortages and legislation costs

The Saffery Champness Recruitment Business Survey - Financial Review 2006, launched today, reveals that most UK recruitment businesses are optimistic about their long-term growth, but have deep concerns over the skills shortages faced by the industry and the rising costs of legislation.

The research by top 20 firm of chartered accountants Saffery Champness, details the financial position of recruitment businesses and identifies the challenges faced by the industry. In-depth interviews were conducted among 50 senior decision-makers in recruitment businesses, and the views of others were sought through an email survey.

The research revealed that growth predictions are positive for the industry: 92% of respondents expect to grow their businesses over the next 12 months. Over a third of respondents expect to grow organically whilst just 14% expect to expand through a merger or acquisition.

This optimism is counteracted in the short-term by the issue of skills shortages. Whilst the influx of migrant workers has filled some workforce deficits, most respondents cited skills shortages as the main problem across the industry, and one affecting both their clients and their own operations.

The report also revealed concerns regarding rising recruitment costs due to the growing raft of legislation affecting the sector. 58% of the smaller companies interviewed saw legislation such as the Agency Worker Directive and Flexible Working as a hindrance, due to their accompanying administration and compliance resourcing costs.

Comments Martin Holden, Head of the Professional and Consultancy Group at Saffery Champness: ìA picture has emerged of a ëcandidates marketí due to a shortage of skilled individuals. This is of particular relevance to specialist recruiters such as those in the IT or healthcare sectors.î

ìWhilst the sector is facing short-term pain from skills shortages and legislation, business owners remain confident that these issues will be overcome and long-term gains will still be achieved.î

ìHowever, the key to maintaining this growth is through the long-term retention of employees within these firms, and we would advise owners to think keenly about putting put measures in place to help encourage this.î

Exit planning
The research revealed that ëexití or ësuccessioní planning is not uppermost in the minds of those interviewed. Of those who had considered the future ownership of their business, just 4% wanted a family member to succeed them.

Joanna Hellen, Partner in the Professional and Consultancy Group at Saffery Champness, comments: ìDue to low barriers of entry into the recruitment industry, companies often grow very rapidly and as a result, exit planning can be neglected. Those who bring in management early to strengthen their business could be in a position to consider consolidation with larger companies. Others that choose to remain independent should put succession planning on their agenda at an early stage to ensure a smooth handover at the appropriate time.î

Martin Holden adds: ìMany commentators have pointed out that the sector is ripe for consolidation and perhaps this lack of focus on exit planning and capital value explains why it has not yet widely occurred. Owners of recruitment businesses that are hoping to sell their firm would be well advised to focus on initiatives that maximise capital value rather than simply cashflow.

ìThis lack of focus would also help to explain the relatively low uptake of tools such as employee share schemes. As well as helping encourage loyalty and enhancing performance, such schemes can encourage the kind of long-term equity participation that helps ëlockí key personnel into a growing business and, again, assist with the transition of management.

Other Findings:

Financial performance
- 32% of respondents reported increased turnover in the past year

- The highest turnover per consultant ratio is in the IT contracting market

- Average administration costs were quoted at 25.5%

- Average gross profit margin was 29.5%, whilst the highest margin, 85%, was reported by a sector specific agency with a high proportion of permanent placements

- Around 40% of respondents use invoice discounting to finance their working capital

- The internet and Eastern Europe were identified as the biggest opportunities for the sector by the most respondents

Remuneration
- Average commission was reported as 27.7% of salary
- Consultants were paid higher basic pay and less commission, which challenges the traditional remuneration model for the sector