Support your back office

1 September 2010 | By Scott Beagrie

Agencies that have robust back-office systems and procedures in place will be able to take advantage of new business opportunities, without leaving themselves financially exposed.

Double dip? Recovery? Growth? There’s no shortage of predictions and comment on what might happen next as far as the economy is concerned The only thing we can probably be certain of is yet more uncertainty.

Recent months have brought many dilemmas for recruiters, chiefly around whether to scale up to take advantage of new business opportunities or to remain lean in case there is worse to come.

The most recent Report on Jobs from the Recruitment & Employment Confederation and KPMG indicated a slowdown in the growth of recruitment activity during July, with job vacancies increasing at the slowest pace for eight months. It also found that the public-sector job cuts are starting to have an effect, with demand for permanent and temporary staff in nursing and medical care - a growth sector last year - falling away.

Clearly, the public sector is shrinking and the private sector is growing, but for how long it will continue to do so in the latter is the question.

Aspiring recruiters will want to conduct business with private-sector firms, but at the same time ought to be mindful of the risk in terms of credit worthiness, compared with dealing with the public sector.

“Also, you don’t know who in the private sector may be affected by future government cuts,” says Hugh Fell, managing director of Oriel Group, who neatly sums up the situation facing recruiters over the coming months. “It’s a period that could be characterised as one of dangerous opportunities and volatility,” he says.
While it is difficult to protect against all eventualities in an unpredictable economic climate, having robust back-office systems and procedures can play a big role in allowing agencies to take advantage of new business opportunities, without leaving themselves financially exposed. Unfortunately, some companies don’t recognise the value of investing in back office.

Ian Humphrey, managing director of Back Office Support Services (BOSS), says any optimism is being balanced by caution and recruiters aren’t confident about growing their way out of recession. The upshot is they are still zeroing in on cost areas and, with back office cited as the second-biggest overhead after frontline staff, it can be a target. “It tends to get disproportionate attention because it is seen as a burden,” he says. “So it’s a case of let’s ’slash and burn’ a burden, rather than address some of the process-oriented issues in the front office.”

Opting for an outsourced back-office function can help organisations cope with uncertainty because full-service providers contend that they allow clients to scale up and down in line with fluctuations in business.

“People who have a back-office function essentially have a fixed cost, whereas by the nature of outsourcing we turn a fixed cost into a variable one,” explains Humphrey.

Fell agrees with this and highlights the benefits of outsourcing it. “If you don’t do any business, you won’t spend a penny. If you are doing a lot of business your cost moves in a predictable way to your turnover,” he says. “So, from an accountant’s point of view, the practice of matching your costs to your income is one of the fundamental principles of sound management and sound accounting.”

While service providers report steady demand for services that protect cashflow, such as invoice financing and factoring, nearly all point to a surge in demand for bad debt protection cover. According to a report from business intelligence company Creditsafe, nine out of 10 companies recorded a rise in bad debt during 2009.

With many agencies having lean balance sheets at present, Fell reckons they are vulnerable to the effects of bad debt. “I think we’ll see further interest in credit insurance and bad debt protection that can be purchased as a standalone or via the factors and discounters, or back-office service providers like ourselves,” he says.

Obtaining this type of cover can prove expensive for small agencies though and, for start-ups especially, Fell suggests another benefit of using full back-office support is that expensive minimum costs are avoided. “A back-office service provider can aggregate it into one big policy that it gets from the insurer,” he says.

“So you can insure cost-effectively, whereas if you had a small turnover the percentage you’d be paying for your bad debt protection would be quite high because of that minimum [cost].”

Peter Ewen, managing director of Venture Finance, also points to an increase in bad debt protection cover because of market uncertainty over who is and isn’t a good credit risk. “There are many risks going into business and if you can ameliorate one of the main risks, then it is very powerful for [agencies],” he says.

Through a combination of underwriting some of the risk itself and re-insuring the rest, Ewen claims that Venture is able to cover about 80 per cent of its clients’ requirements.

Ed Winterton, executive director of Bibby Financial Services, similarly reports instances of recruitment clients suffering from bad debt. In these circumstances, rather than reduce their funding immediately, Winterton says Bibby works with them to help manage their cashflow and devise a solution that will turn the situation round over a period of weeks or months. “While they feel the effect, what we don’t want to do is have a knee-jerk reaction and take away the funding,” he says.

“On many occasions we’ve been glad to provide the assistance to smooth those cashflow holes.”

Alongside bad debt, another product of the recession is that businesses are using accounting tricks to delay paying. Research published earlier this year by Creditsafe found that UK businesses were routinely forcing their trading partners to reissue invoices in the hope that the timescale for payment will be restarted to protect their own liquidity. It found that 96% of UK companies had to reissue invoices to customers over the last 12 months, with the number one excuse being that they hadn’t received it in the first place. Others included claiming the purchase order or amount is incorrect or it has been sent to the wrong person or office.

Humphrey attests to many companies having slowed their payment profiles and reckons that credit-control systems can safeguard against the impact of this on a recruiter’s cashflow. He adds that BOSS has also experienced an increase in demand for legal services: “We have the tools available to help them take [a case] through the courts and there is a lot more demand on those kind of services than there normally would be.”

When discussing back-office services, the focus tends to be on how service providers can help protect against bad debt and threats to cashflow, but alongside this routine tasks such as sending out timesheets, payroll provision, vat and paye calculation are also key at a time when recruiters need to concentrate their effort and resources on generating new business.

“It is arguable that they are non-core to the growth of the business, but they are fundamental to the success of it,” says Winterton. “What we are seeing is many more agencies come to us for that [outsourced] provision, especially when they are small-to-medium size or new starts up, and if an individual is trying to do everything [it means] they can’t grow the business.”