More for less: a new era emerges as recruitment people step up to deliver
16 November 2011 | By Sue Dodd
It is all change in this year’s Hot 100 list of recruitment firms, Sue Dodd, director of Agile Intelligence, reports
Small and medium-sized enterprises have stolen the march on profitability in the 2011 Hot 100, giving credence to the adage, ’SMEs out-perform in a recovery’ while this year’s league table for the UK’s most profitable recruitment firms has seen old favourites shuffle out of the rankings, replaced by new entrants.
This is the year the goal posts shifted: the biggest impact was seen on ’general’ recruiters’ now accounting for only 8% of the Hot 100.
In the sixth consecutive year of the Hot 100’s publication, the average size of the Hot 100 member dropped from 250 to 178 employees, reflecting a sizeable shift towards smaller constituents. As the recruitment market tentatively recovered in 2010 the industry made another crucial step change: the reduced headcount of 2009 was never fully replenished, leading to significantly increased productivity as the market improved.
’More for less’ is a motto now applied to recruitment firms’ own operations as well as to their clients. Rather than just the flight to low margin seen last year, the benefit of higher productivity is now much more apparent. It may help facilitate those low margins but if in-house processes and people deployment are effective and efficient then all parties benefit on their bottom line.
Nevertheless, the drive towards low-cost delivery with added value services still continues unchecked from last year and economic prospects suggest that such demand will continue to expand. Calendar 2010 saw an overall rise in UK recruitment industry sales perhaps recovering half of the ground lost in 2009 and this has continued into 2011, albeit more slowly in recent months. While this includes an increase in permanent fees, the bulk of sales growth appears fuelled by managed services, frequently onsite.
However, continuing to operate well in their core businesses has served this year’s Hot 100 companies well. In the current economic climate, both experience and knowledge are king. The best port of call in a storm is always home and these high performing companies have striven to maximise profitable marketshare. This has then provided a strong platform for some to expand into new specialities and geographic locations, building advantage based upon the emergence of new skill sets and more global shortages, thus accelerating growth for many companies.
Nevertheless, as the economic storm clouds once again loom large, there could be far more challenges ahead for recruiters. The UK cannot avoid the fall-out from the eurozone and nor will every emerging overseas market remain immune. Economic growth will recover painfully slowly, at best further recession is quite possible and unemployment is now rising again. A good geographical spread, an effective delivery model or a strong niche sector can all ease the pain if industry activity turns negative again.
The year 2009 was the catalyst for a step change in productivity, which should prove invaluable if the breathing space provided by market recovery in 2010 proves to be only temporary. Retaining a well-managed, motivated workforce at optimum size, together with implementing efficient operational processes, will be the key to facing the challenges ahead. The Hot 100 celebrates the best in class.
Agile Intelligence has compiled the Hot 100 Report on behalf of Recruiter to determine which companies are best at leveraging their intellectual assets. By rigorously measuring the gross profit (net fees) per employee this indicates how effectively an organisation uses the skills of all its own people to generate a profitable return for stakeholders. All in-house employees (excludes temporary workers or contractors) are included in the calculation not just fee-earners; this is a standard key performance indicator (KPI) used by most senior management. While wild cards may exist, companies emerging strongly from this analysis, especially if featuring regularly, are primarily those that operate the most efficient organisation, balancing the need for good, well-trained, directed and motivated staff against the need to minimise costs.
In challenging times the best companies stand apart. Which companies derive most ’value add’ from their own employees (before allocating overheads) yet still engender the right atmosphere over the long term to encourage a profitable and sustainable sales approach? To answer these questions, here is the 2011 Hot 10
The 2011 Hot 100 group sales turnover rose 10.7%, in line with the whole recruitment industry turnover growth of 11.0% reported in calendar 2010 by the Office of National Statistics. The Hot 100, with its changing membership each year, typically accounts for between a quarter and one-third of industry sales turnover.
Profitability saw a strong recovery as an overall headcount gain of just 2.1% translated into a 14.8% rise in gross profit. Both gross margin and gross profit (GP) per head made good progress. Like for like:
- The 2011 Hot 100 companies collectively reported an increase from their previous year in latest available sales of 10.7% to around £8.3bn.
- Hot 100 combined gross profit reached £1.9bn, a gain of 14.8% on prior year sales.
- Hot 100 companies’ in-house headcount rose 2.1% to total just below 18,000 employees.
- Productivity (GP per employee) for this group of Hot 100 companies increased by 12.5% over the year to an average £104,989 a full 25% above last year’s Hot 100 group average.
- Hot 100 average gross margin rose 80 basis points for these companies to 22.6%, with the mix also reflecting a partial recovery in permanent recruitment.
- This Hot 100 group in the past year added over £240m in net fees with only an additional 361 staff at an incremental gross margin of 30%.
- 2011’s Hot 100 group already started the year with average gross margin around 100 basis points above the 2010 Hot 100 group reflecting a shift in the constituent mix back towards smaller, higher margin companies with higher permanent fees.
- Across all Hot 100 firms, 50% expanded their workforce either organically or by acquisition, compared to 21% in 2010, and 72% increased GP/head, increasing from last year’s 41%. This is a direct result of the headcount cuts made during 2009 combining with the partial market recovery that followed.
- The dream combination of expanding workforce and rising productivity was achieved by an impressive 34% of the Hot 100 2010, versus just 9% last year. This year a higher percentage of larger firms achieved this growth combination.
- 11 from the 37 firms with less than 50 employees achieved headcount growth and converted this into GP/head (productivity) growth
- Over three-fifths of firms employ above 50 employees and the success rate here was higher 23 from 63.
Examining the margin breakdown
Gross margin is the gross profit (or net fees) as a percentage of sales turnover. Gross profit is a combination of permanent fees (at virtually 100% margin) plus the profit on temporary supply after subtracting payroll and other temp employment costs. The mix of business between temp and permanent placements influences the level of gross margin as does the trend in temporary pricing and employment-related costs. With larger contract business notoriously competitive compared with SME or ad hoc placements, the type of business and delivery model/cost structure play a crucial part both in determining temporary margin and also bottom line profitability.
- Many companies within this year’s Hot 100: high-end margin (driven by perm) regained substantial ground; middle margin players (15-30%) held steady but saw a shift towards the lower end of its range, while bottom end margin suppliers (<15%) declined sharply.
- 6% of the Hot 100 compared to 5% last year are almost entirely permanent recruiters. Many others grew the permanent fees mix reflected in rise in ’30-50%’ margin ranges.
- Reversal in trend of recent years as shift away from temporary mix; recovery in permanent placements.
- Biggest losers: the 10% to 15% band with low margin recruiters failing to make the cut.
- Most gains: margin bands making the most gain in representation in the Hot 100 are >50% and ’30-40%’.
- The ’15-30%’ combined middle ground companies again held its position with 42.
- 20 agencies achieve gross margin below 15% with 13 of these below 10%.
- Clear reversal of the trend seen towards purely temporary, low margin constituents, helped by a recovering permanent mix but also perhaps evidence that excess capacity has now been eliminated in those highly efficient companies operating at the extreme margin of profitability. Further productivity gains are now limited, enabling out-performance from companies that have suffered less margin pressure in the past and still have potential to improve their capacity utilisation.
Company trends: permanent recovery but a weaker public sector
At a glance, this year saw a considerable improvement in performance from the Hot 100 companies. Fifty per cent, compared to 21% last year, increased their own headcount and a massive 72%, compared to 41%, increased GP/head. Thirty-four per cent of companies achieved both these targets versus 9% last year and 22% the prior year. Of these 34 companies only one is a public sector specialist compared with two thirds of the category last year. This illustrates the remarkably rapid reversal in fortunes in the public sector as anticipated last year. Several such companies slid down the rankings as the downturn in demand has impacted upon their productivity. Indeed, a few specialist healthcare recruiters may have dropped out of the Hot 100 altogether as their size fell below the required criteria.
Fewer liquidations but more consolidation was seen in this past year. On the mergers & acquisitions (M&A) front, deals struck include some high profile social care suppliers, with Saga an active buyer, while ITN Mark Education was acquired by India’s Core Projects from Ochre House. Material consolidation was especially evident in the Healthcare sector with several deals. In particular Team24, winner in 2010, was acquired by Capita while an IT high-flyer, Aston Carter, went to Allegis. Badenoch & Clark and Modis are now part of Adecco, although still separately reported here. Randstad has re-branded and merged several of its specialist recruiters, with some long established names now absent or changed, yet the SThree brands, always autonomous, are now separately listed here.
There has also been a slight shift in the Hot 100 towards permanent specialists. More importantly is a rise in the average permanent mix as this market partially recovered. Simultaneously, fewer low margin suppliers made the cut with several being pushed out due to the increased GP/head. A threshold of almost £77k is an especially difficult ask for any of the ’general’ recruiters which still operate a multi-branch business model. This represents a full 21% rise on last year’s minimum threshold a remarkable shift upwards in productivity as the 2009 headcount cuts led to strong gains when the market did begin to recover. Consequently, 92% of this Hot 100 now places professional level/specialist candidates in some form. This, despite perhaps a third or more of recruitment companies around the UK operating mainly in commercial or industrial candidate sectors.
Professional candidate recruitment companies again dominate the top 20 slots. There are 11 professionals listed in the top 20, with eight in the top 10. Six IT staffing firms are listed in the top 20, but none are in the top 10 while the balance comprises two public sector (healthcare) and one technical recruiter. Generalist recruiters have dropped well down the Hot 100. Public sector specialists, unsurprisingly, have also lost ground: last year there were seven in the top 20. Further re-alignment of the UK workforce seems likely to ensure that those heady days in public sector will not be re-visited soon, although residual demand will always exist for front-line staff and the greater the permanent job cuts that are made, the more likely the need for temp infilling.
Sheffield Haworth returns to become the new Hot 100 leader, benefiting from the recovery in permanent demand, improved City performance in 2010 and its own expansion into overseas markets. It last topped the rankings in the 2008 Hot 100 and it has just surpassed that year’s winning GP/head. The top 10 are all highly focused specialists SMEs by recruitment standards and only one owned by a multi-national.
While many larger companies appear across the whole of the Hot 100, the major global players and the large national branch network recruiters are not very well represented. SThree has four highly placed subsidiaries; Harvey Nash, Michael Page and Robert Walters also feature in the top 50. Randstad, despite substantial reorganisation and brand mergers in the UK, has eight companies placed between 9th and 99th. while Adecco still has its three professional UK subsidiaries in the Hot 100, and Manpower has Elan. Pertemps moved up to 48th but sees few of its peers. Impellam, despite a 6.4% rise in its GP/head, dropped just below the new, higher threshold while professionally-biased Hays has dropped considerably below 100 in the ratings, reporting flat GP/head using its latest June 2011 UK results.
Death of general staffing?
As the market evolves and ’generalists’ have either developed a multitude of other specialisms or moved heavily into lower margin onsites and other managed service models, their presence in the Hot 100 has diminished. Specialist office suppliers’ fortunes have weakened and are now mainly outside the Hot 100, despite often a higher permanent mix.
Staffline Group is typical of a successful industrial recruiter it lost 800 basis points of margin over five years but still increased GP/head by over a quarter as it developed its onsite business model. The step change in productivity this year, however, has pushed several generalists down and out, and they now account for at most eight companies in the Hot 100 with First Call at 46th the highest placed, closely followed by Pertemps.
Consequently, instead of the Hot 10 generalists, this report now includes two alternative break-out categories: public sector and technical. The Hot 100 companies
The Hot ’10 plus 3’ IT/telecoms recruiters
This year SThree’s autonomous subsidiaries are listed separately, providing much more transparency, but now account for four of the Hot 10 IT recruiters. To compensate, the next three companies in line are also examined as part of a ’baker’s dozen’. Last year’s leader ITHR moved down the list as it undertook major investment in expansion, relocation and new technology infrastructure but is now forecasting an 80% rise in revenues in its current financial year. Parity has been transferred to the public sector Hot 10 category and Aston Carter, acquired by Allegis, is currently integrating operations with new accounts not yet due.
The IT market proved mixed with early gains perhaps slowing down later in the year and lower growth rates reported by Q4 2010 and into 2011. Nevertheless, compared to the prior year there has been recovery with some evidence of stabilised temporary margin. However, the better performers have significant overseas interest, have developed non-IT presence or are small and niche enough to buck the wider UK trend.
There are at least 37 IT/telecoms specialists in the Hot 100 (compared with 28 last year and 21 previously), illustrating IT’s increasing presence in recruitment as a profitable sector despite the stereotype image of its low margin procurement-driven clientele.
Five factors appear to be evident:
- First, permanent activity levels have shown some recovery and shifted the productivity levels upwards.
- Secondly, heavy contract market competition/low margin ensures only the most productive can succeed.
- Thirdly, the frequent emergence of new skills/niches constantly refreshes demand and enables at least some premium pricing.
- Fourthly, bank integration IT project demand came to fruition, while finally the UK is a resourcing hub for contractors increasingly being placed overseas, especially in Europe where structural growth exists.
Key facts about the Hot 10+3
- The 2011 Hot 10+3 represents around £1.18bn in turnover and generated £284.8m in net fees.
- Net fees grew by 3.3%; average GP/head added 2.9% on almost flat employee numbers.
- Yet six of these 13 companies increased both their employee numbers and GP/head.
- Six constituents remain from last year at least three of these (Red Commerce, LA International and Harvey Nash) are major beneficiaries of overseas business.
- The SThree companies Real Staffing, Progressive, Computer Futures and Huxley all have significant overseas interests but equally some have developed other specialist sectors, which now are estimated to account for over one third of net fees. Hot 10 leader, Real, has significant life sciences and financial business while Progressive has engineering and life sciences. Huxley developed both financial and engineering but SThree’s purest IT supplier, Computer Futures, was in the fact the weakest performer.
- Other newcomers to the Hot 10 are Templeton & Partners and MRL Group, another company with sizeable placements into Europe.
- SEC, as predicted, has returned to the Hot 10 with its biometric, clinical & business intelligence niche offer benefiting from strong growth.
- The large industry IT majors such as Ajilon and Elan stand 39th and 53rd respectively in the Hot 100.
- Turning to gross margin trends which are dependent not only on temporary pricing but on the business mix between spot, volume contract and permanent:
- Weighted average gross margin of this Hot 10+3 rose slightly to 24.1%, with its margin mix benefiting from the re-entry of SThree and an overall higher permanent contribution.
- Six companies increased gross margin.
- Evidence across the sector suggests previous temporary margin losses were broadly stemmed. Little erosion can be seen among contract specialists.
The Hot 10 technical recruiters
- Around 13 technical specialists are included in the 2011 Hot 100. The Hot 10 comprises a polarised mix of either large recruitment firms or relatively small ones only Coyle sits in the middle ground on size. Furthermore, the overseas mix varies widely and it is impractical to filter this out from all companies. For several constituents, the full impact of the Strategic Defence Review on MoD suppliers may not yet have been seen but most companies have a compensating mix of clients and candidate sectors to help mitigate any single vertical downturn. The sector was slow to be affected by recession, has several compensatory segments but is often partially reliant upon a mix of large government-guided projects: defence, rail or power policy related.
- The 2011 Hot 10 Technicals represent £1.719bn sales turnover but only around £159.4m in gross profit in this highly competitive sector, with companies often combining a traditional recruitment model or managed services with a project solutions or consulting business.
- Net fees were flat year-on-year, with GP/head growth of just 1.5% driven by slightly lower headcount.
- Hot 10 leader, CBSbutler, derives about 80% sales in the UK and has strong specialities which have proved relatively defensive against recession with productivity driven by lower headcount. The firm’s expansion into Germany and the Middle East is expected to improve the future margin mix. Even so UK margin is strengthened by permanent placements contributing over 20% of GP.
- Newcomer Eurostaff has grown quickly and generates over 75% of business from overseas, mainly Europe, with its broad mix of financial and technical roles including an expanding position in oil & gas and renewables sectors.
- Power, especially oil & gas, is an increasingly visible contributor through companies such as Fircroft but several of the Hot 10 now have some presence. A mix including nuclear and petrochem is seen at Scantec, which also adds pharmaceutical to its key sectors.
- Seven out of the Hot 10 increased their GP/head but only two companies increased both employee numbers and productivity simultaneously. Only four firms increased gross profit.
Turning to gross margin trends:
- Average weighted gross margin for these Hot 10 fell by 50 basis points to 9.3%. Six of the Hot 10 have gross margin below 10%. Over two years, 130 basis points were shed from mainly temp/other non-perm margin.
- Three Hot 10 companies reported marginal increases in gross margin CBSbutler, Fircroft and Scantec but mainly further erosion is evident.
- Overall low permanent mix keeps gross margin nearer to temporary margin levels but some companies do operate in-house project management or consulting.
- Eurostaff stands out as the most permanent-orientated firm with 40% of GP so derived, followed by CBSbutler at over 20%
The Hot 10 public sector recruiters
This newly split category boasts at least 12 constituents in the Hot 100. Several others have well above average public sector business. The reversal in public sector business is apparent in the slippage seen down the Hot 100 by several companies and the general loss of productivity and margin. Public sector specialists mainly saw their markets contract in size and pricing squeezed by organisations and government looking to meet lower budgets, with several major recruitment firms citing up to 35% reductions in fees. Front line services have been least affected with GP holding up relatively well in healthcare, although more mixed in education. Social care has seen client budgets under pressure and managed services dominate pricing. Support services staffing has been most affected by direct cutbacks as Morgan Hunt, Parity and Morgan Law all report lower GP. Trends have most likely continued into the current year, with reports that healthcare, too, is now affected.
In the Hot 10, five are health & social care specialists. Winner last year, Team24, is excluded following its acquisition by and integration into Capita Resourcing, while small, niche operator, Pathology Group, has not filed full details this year.
- Mayday and Surgi-Call also feature in the top 10 of the whole Hot 100, although Surgi-Call does show a sharp drop in margin. Social care specialist Caritas has qualified for the first time, but troubled Healthcare Locums has headed downwards.
- Randstad Education remains the highest in its class but has slipped significantly versus prior years; Mark, part of ITN Mark recently bought by Core Projects, and Protocol both report growth.
- Hot 10 represents £541.6m in turnover generating £121.1m in net fees.
- Net fee growth among the Hot 10 fell 14.5%, as those cutbacks impacted.
- Average GP/head declined 21%. All but two companies reported decline.
- Six out of the 10 expanded their workforce and four increased gross profit but none expanded GP/head and employee numbers. Eight companies saw GP/head contract often substantially.
- Turning to gross margin trends:
- All are predominantly temporary staff suppliers.
- Average gross margin at 22.4%, a decline of 140 basis points.
- The two education firms stand apart and show the only material increase in gross margin; the greatest loss of margin was seen at Healthcare Locums.
- Parity (IT) and Morgan Hunt (mixed government) are both less reliant on public sector business than a few years ago and their margin is more representative of their positioning in underlying client sectors.
The Hot 10 professionals recruiters
With public sector and engineering/technical specialities newly split out, this group now covers the main professional candidate segments accounting, finance, legal, HR, sales & marketing etc and accounts for 33 or one-third of the whole Hot 100. Recovery continued through much of 2010 for financial sector specialists in particular with overseas expansion by several firms. Gains in other disciplines were also well in evidence marketing, media, HR and legal. The mix of permanent placements increased over the year.
- Hot 10 represents £167.2m in turnover generating £81m in net fees.
- Many of the sector’s ’majors’ did not make the Hot 10 as SMEs were the most productive. Badenoch & Clark and Morgan McKinley were 23rd and 24th, with Michael Page 30th and Robert Walters at 44th.
- Net fee growth among the Hot 10 rose a staggering 43.4%, a stunning comeback mainly achieved in 2010 or early 2011. Average GP/head gained 26.9%.
- Only four companies are familiar from the 2010 Hot 100 new to the list are Green Park, Investigo, Eames, Selby Jennings, Randstad Interims and IPS Holdings.
- Six out of the 10 expanded their workforce and nine increased gross profit but only five simultaneously expanded GP/head and employee numbers. Only two companies saw GP/head contract Green Park, due to rapid people expansion and Randstad Interims caused by gross profit contraction.
- Turning to gross margin trends:
- Sheffield Haworth, Shilton Sharpe Quarry and Selby Jennings are almost wholly permanent recruiters.
- Green Park, Investigo and Randstad Interims are more temporary biased.
- The remainder average between 60% and 80% of gross profit from permanent fees.
- Average gross margin at 48.5%, a rise of 520 basis points.
- Three companies increased margin: Walker Hamill, Eames and Digby Morgan, almost certainly all driven by higher permanent mix.
Outlook & conclusion
The modest recovery in the 2010/11 UK market and continued growth overseas has enabled many recruiters to improve their KPIs ahead of further future uncertainty. Visibility is poor now and business confidence weakened by the ongoing eurozone crisis, sluggish UK gross domestic production (GDP) and the wider global economic outlook. Unemployment is again increasing and more public sector job cuts are anticipated while many companies report a slowdown in activity. Nevertheless, private sector job creation is apparent, skill shortages still exist and projected demand in most sectors is positive after factoring in the effect of retirement.
Furthermore, looking ahead, as legislation becomes ever more complex, increasing penetration rates for professional recruitment services — Agency Workers Regulations impact notwithstanding — seems still to be an inevitable positive driver for the industry.
The economics cannot be ignored and the cuts to public spending now being muted across Europe will have a negative impact upon growth — directly correlating with recruitment industry turnover. However, recruitment is also about keeping the ball rolling to ensure an active market and, whatever the challenges ahead, having the right, dynamic people in place makes all the difference.
Recruitment is no longer just a casualty or beneficiary of the economy — its effective deployment is becoming part of the solution.
Compiling the Hot 100
Methodology: the data has been rigorously filtered by turnover and employee numbers; details available on request. The companies featured in this edition employ around 18,000 in-house staff and account for £8.3bn of industry turnover. Latest available accounts have been used dated 2010 or 2011 for all of these companies.
Companies without updated accounts since last year’s report or filing abbreviated accounts are excluded. Furthermore, wherever possible UK-only companies are considered; however, in some cases group accounts have been used where these prove more up to date even if some overseas business is evident examples would be Harvey Nash, Robert Walters, Michael Page International and several IT recruiters. Primarily overseas operators have been excluded. Two prominent exclusions are Manpower and Reed due to accounting differences which invalidate comparisons. Furthermore companies combining temporary employees in their employee count are not included as this grossly underestimates their performance. Small specialists with global interests such as ’headhunting’ are omitted for a variety of reasons incomplete disclosure, overseas business and a shortage of data for peer group comparison.
Disclaimer: while every effort has been made to ensure accurate reporting and analysis no guarantees are made regarding the information portrayed in this document.
Click here to view the Hot 100 pdf
Sue Dodd is the joint founder of Agile Intelligence, specialising in business intelligence and leading-edge analysis of the recruitment market