Stability and profitability are the current bywords for recruiters, according to BDO’s review of the latest outputs from Recruitment Industry Benchmarking (RIB).

Recruiters have remained profitable for the past two years although this has fluctuated between 0.3% at the lowest point in June 2009 to a peak of 4.6%. There has been more stability, however, in the past year as the range narrows broadly between 3% and 4.6% with the exception of December and January. Not surprisingly these months tend to see lower profits for a number of reasons:

• Shorter working months as people are away over the Christmas period.
• Accruals for year-end bonuses being made or ’topped-up’ during December
• Generally lower activity levels from candidates.

What was surprising during the summer of 2010 was that a similar pattern wasn’t adopted during a generally quieter trading month. This indicates that the upturn in activity experienced during 2010 carried the momentum through the summer months. The average profitability year-on-year showed a different pattern, with the year to May 2011 being 3.5%, where as the equivalent period in 2010 was only 2%. With an industry that has revenues of over £20bn, this accounted for an increase in industry profits from around £400m to over £700m, a relative increase of 75%. It is unlikely that this rate of growth will continue into 2012 and overall the average profitability would not be expected to exceed 5% on a long-term basis.

This 5% ceiling for the industry can be beaten by individual companies but on the whole has not been a sustainable position. Most businesses will look for growth opportunities even if they are doing really well, and this requires investment in the business predominantly for people and premises. These costs can escalate quickly if not adequately planned and controlled for the following reasons:

• Increasing headcount invariably requires a larger management structure and adds unproductive cost.
• More people requires more premises and this usually entails taking on larger premises which gives a stepped fixed cost.
• Headcount increases start to occur in new offices that are either overseas or in other cities. This also increases management costs and unproductive time through travel and additional monitoring requirements.

Recruiters have become much better at managing cost, although this was in part forced upon them by economic circumstances. This tight cost control has also helped to absorb the decline that has been seen in the gross profit earned from temporary placements that has been under pressure for the past few years as changes in legislations and regulation have reduced margins. As the gross profit margin chart highlights, gross profit has now settled between 15.5% and 17% but this is 1-2% off what was being achieved during 2008.

With further regulation only three months away when the Agency Worker Regulations (AWR) take effect, declining gross margins and increased overheads could reduce overall agency profitability. Gross profit margins will come under pressure as agencies seek to ensure pay rates are comparable to a permanent employee. This may require them to reduce their margin to maintain client’s costs but increase the rate offered to temporary workers.

The additional overhead required to ensure compliance will be difficult to calculate as computer systems require amending to monitor the data; do you employ a compliance officer or leave AWR compliance to be managed by the consultants, leading to a reduction in output?

As everyone will be preparing for the Christmas festivities in December, somewhere in the UK the first temporary worker will have reached the 12-week qualifying period and be preparing the first claim in the UK. Not the Christmas present most recruiters will be asking Santa for this year.