Should we let them fail?

The latest report into the UK Recruitment Agencies market from industry analysts Plimsoll rates 155 of the UKís leading 1000 Recruitment Agencies companies as being in financial Danger. Amid calls for bail-outs and emergency measures, Senior Analyst David Pattison asks:

ìShould we just let them fail?î

Pattison argues: ìThere is no doubt in my mind that recessions catch bad businesses out. Those companies that have entered this period ill-prepared have placed themselves at a distinct disadvantage. Many have grown used to running their businesses on high risk business models, propped up largely on finance.

Of the 155 firms rated as Danger, the report shows:

- 82 increased their debts last year; they are now carrying almost twice the level of debt we recommend. Using debt has become a means of propping up their businesses, for many this started to become an issue up to 3 years ago.

- 122 saw profits fall last year and 101 are losing money. Their costs are clearly ahead of sales and they have failed to respond to changes in their business structure.

- 85 managed to increase sales last year, some would argue an enviable task. However it only proves that despite their rising debts and mounting losses they have been desperate to maintain sales at any cost.

■ 63 are firms are what I would call ìwell establishedî having been set up over 10 years go. Arguably these are failing to adapt to the modern recruitment agencies market and are now falling behind the rest of the market as a result.

In summary, it is clear that many of these 155 ìdangerî businesses are fundamentally poor, aggressive or disruptive and are unhelpful to the market. With newly prudent banking systems in place, raising quick finance will not paper over the cracks as it once did.

Recent examples of failed businesses in the news bear this out. Zavvi, Woolworths, Whittard and Wedgewood, were all rated Danger by Plimsoll prior to their demise.

Latest research shows that the UK recruitment agencies industry is not immune to the current crisis. The sector has overcapacity, 27% of businesses suffered a fall sales last year, with competitive pressure forcing many to see sales fall by 11%.

The reality is, for many of these 155 danger businesses, their problems go back years, certainly long before the current UK slow down, yet they have failed to fix their problems. Darwin, in his work, The Origin of Species, recognised that extinction was an integral part of evolution, survival going to those most responsive to change.

Our analysis is clear, not all of these 155 businesses will survive. Of those who do, very few will be in their current shape and many will be in the hands of new owners. This further supports the argument that despite the obvious tragedy of job losses, livelihoods lost and the pain of a business in decline this period is inevitable and can only be good news for the market in the long run.

If we examine the airline industry, which to some extent is 12 to 18 months ahead of the recruitment agencies market in the evolutionary cycle, the failure of XL Leisure is has turned out to be the best thing that could have happened to the industry as it has freed up capacity. The recruitment agencies market too will see winners emerging out of the crisis. There are 573 terrific companies who can compete fiercely on price, and are largely debt free while holding their margins. Most are operating at the height of productivity. These will be the oneís to watch in the next period.î

The 2009 Edition of the Plimsoll Analysis- Recruitment Agencies includes an individual analysis of each of the industryís largest 1000 companies. The report values each company as well as rating each company on its attractiveness as an acquisition. Each of the 1000 companies analysed receives a unique Plimsoll rating showing the companyís strengths and weaknesses.

Copies of this timely analysis are available for 350, by calling Clair Sherwood on 01642 626400.