Still no room for complacency

14 April 2010 | By Christopher Goodfellow

What is causing these companies to get into trouble? How do they reinvent themselves and why have the green shoots in the UK’s economy failed to prevent them from failing?

The number of recruitment agencies which went into administration increased to 23 in the first quarter of 2010, compared to 18 in Q4 2009.

Positive indications of growth in a range of sectors has not yet been enough to offset the long-term effects of the recession. Malcolm Scott, director of design, engineering and architecture recruiter Adrem, which went into administration in February, told Recruiter that the business was unable to recover from the downturn in the construction sector which caused its turnover to half between 2008 and 2009.

“A lot of our clients went into administration and in many cases we had already paid the contractors, including National Insurance and the tax contributions. We also had a high level of debtors that were slow in paying and, even now, we have clients owing money from the middle of last year which should have been paid on a 30-day basis.”

Executive search hit
The highest frequency of failures occurred in the executive search and interim management sector, with three companies having administrators appointed in the last three months.

Insolvency experts say lack of diversity in agencies’ client bases is a common cause of failure. Kerry Bailey, a partner at corporate recovery and insolvency specialists PKF, told Recruiter directors should spread risk across a wider commercial range where possible, if they currently rely primarily on one type of trade or a small number of clients.

Turnover no protection
In terms of turnover, the size of the recruitment agencies going into administration increased on the previous quarter, with the average of those that released full annual results growing by 27%. The average was pushed up by several large recruiters on the list including First People Solutions (Holdings) and Hexagon Human Capital, which had annual turnovers of £52m and £35m respectively.

In 2009 Hexagon Human Capital’s net income had fallen from a profit of £1.79m to a loss of £6.56m despite revenue increasing by 22%, after it made a string of acquisitions. On 18 February, 28 days before the company entered into administration, its shares were suspended and notice given that HMRC had asked for a revised repayment proposal.

The administrators would not give a specific reason for the company’s failure, however, a spokesperson told Recruiter: “The various announcements prior to our appointment highlighted the financial difficulties the company was experiencing.” It is likely its HMRC obligations triggered the eventual collapse.

Some still trading
Recruiter was able to establish that at least 14 of the 23 recruitment agencies which went into administration are still trading in some form - often with the goodwill and assets of the company having been bought by the original management.

Scott said the directors of Adrem bought its assets back from the administrators with their own personal funds, facing fierce competition from other parties.

“Administrators have to advertise and there are a lot of predatory companies that monitor these situations,” he said. He added that new terms had been negotiated with creditors and better cost control systems put in place to ensure liquidity is maintained.

Fortis Personnel Services, which was operating 19 branches and had 60 staff, first entered administration in early 2009 when it was bought back by its directors, before failing again in January. Mark Mitchell, chief executive of Meridian Business Support, which bought the company’s assets this time round (Recruiter, 17 February), told Recruiter that the former directors were no longer with the company, adding: “Companies often get into problems because they try and expand too quickly or are over geared [taking on high levels of debt compared to revenue] or they have levels of pay and bonuses that are too high.”

While the economy at large is improving it is clear it will take time for this to feed through the supply chain and ensure the long-term sustainability of businesses in the staffing sector. With placement numbers and contractor levels still well below pre-recession levels, recruitment agencies remain vulnerable to fatal blows from failing clients and large revenue liabilities.

Key facts

• The number of UK recruitment agencies entering administration in Q1 2010 increased by 18% on the previous quarter
• The highest number of failures occurred in the North-West of England and Scotland, where a total of five companies had administrators appointed
• At least seven of the companies which went into administration had turnovers in excess of £1m per year, compared to four the previous quarter