Staffing growth drivers changing from cyclical to structural

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Update employment services sector: growth drivers changing from cyclical to structural

1. A shift from permanent labor to flexible labor.

2. Improve value-added proposition

3. Disintermediation, disruption and the Clicks and Bricks sweet spot

Conclusion

Contents

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Update employment services sector: growth drivers changing from cyclical to structural

The January staffing data reported by the Dutch branche organisation ABU were strong and made us

forget the weak (year on year) growth over the last period (13) of last year. Earlier in 2015, we already

had two consecutive periods of lower growth than the previous year. For the time being it seems the

staffing sector will benefit from a projected 2016 GDP growth of around 1 3/4%. At the same time we

know that the world no longer is the same compared to ten years ago. The outlook for the staffing

industry is more difficult to interpret. The strong dependence of the sector on macroeconomic growth

has decreased and at the same time other drivers for growth in the industry have become more

important. Let’s examine these drivers more in detail.

Year on Year growth/decline in % of staffing volume 2013 -2015

1 2 3 4 5 6 7 8 9 10 11 12 13

201320142015

20%

18%

16%

14%

12%

10%

8%

6%

4%

2%

0%

-2%

-4%

-6%

-8%

-10%

-12%

Source: Recruitment matters, ABU

For the time being it seems the staffing sector will benefit from a projected 2016 GDP growth of around

1 3/4%. The first quarter of 2016 showed a continuation of relatively strong staffing volume growth and

gives us more confidence in the underlying strength of the economic recovery. Also, growth in the

more late-cyclical administration segment is accelerating.

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1. A shift from permanent labor to flexible labor.

We saw earlier in the United States that employers convert permanent jobs to staffing jobs. In the

Netherlands, we see a similar development (see communication by UWV - The Dutch organisation

responsible for employee related social security). It is still unclear what the impact is of the so called

‘Work and Security’ law.

In the October 2015 UWV report: “Temporary employment, Nature, Size and Developments,” the overall

growth of the total staffing sector as well as the growth of staffing in different industries is discussed in

detail. In the picture below it is clear that measured from the crisis year 2009, five years later in 2014, in

most industries, there has been a remarkable growth in the number of temporary workers. Front

runners are the Port Authorities and Business Services sector. The biggest growth in the demand for

staffing, however, occurred after 2015.

Number of temporary staffing jobs by industry 2009-2014End of September

Source: UWV (2015) o.b.v. polisadministratie

NB: Sectors mentioned in English are (from top to bottom): Staffing companies, Port Authorities,

business services (type III) , hospitality, retail, healthcare, technical (metal), electro technical, business

services (type II). ‘Mutatie’ means ‘change’

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One of the theories regarding the growth of the staffing sector has always been that the so called

penetration rate of temporary labour increased after every new cyclical recovery after a recession. The

penetration rate being the number of temporary workers in relation to the employed labor force.

Percentage of temporary staffing employees in the employed labour force, by industry‘Uitzendkrachten’ means temporary agency workers

Source: CBS Arbeidsrekeningen (2014)

NB: sectors mentioned in English are (from top to bottom): agriculture, Industry, construction, trade,

storage, hospitality, information and communication, financial services, other business services, public

sector, education, healthcare, culture and sports, other services.

More jobs primarily driven by the staffing industry

The UWV projects job growth again for 2016. The staffing industry is as always the engine for job growth.

This is evident from the October 2015 UWV study: Labour Market Forecast 2015-2016. The staffing sector

was responsible for the lion’s share of the job growth in 2015; according to the UWV, the number of

temporary jobs increased by 28,000 that year. For 2016, the UWV assumes further growth, with 54,000 jobs.

Of these, 23,000 are projected to be temporary jobs.

Digitization

According to the UWV, the recovery of the labor market continues, but not everyone benefits. In financial

services, healthcare, manufacturing and government thousands of jobs will disappear in the coming years.

This is partly due to digitization and government cutbacks. The predicted increase in jobs is modest

compared to the decrease in the number of jobs during the crisis. Since 2008, the number of jobs declined

by about 300,000.

Source: ANP/UWV

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The image above also shows that the penetration of temporary staffing as a percentage of the total

working population has remained stable over a ten year period and that other forms of flex (like

payrolling) grow faster.

Structural changesIn the picture below we get more detail on the penetration of staffing in the United States. We see a

relatively strong increase in the demand for temporary staffing post Q3 2009 (start of the recovery).

One consequence of this is that the traditional cyclical signal (demand for staffing increases, so

economic growth will increase as well) becomes less important because there is also a structural

component in the growth of temporary employment: employers are replacing permanent jobs with

temporary (staffing) jobs.

Structural shift to temporary staffing in current upturnUS temporary penetration rate vs. unemployment rate

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Q4 2006Adecco’s North Americarevenues peak Q3 2009

Trough US temppenetration rate

October 2006 toNovember 2007Unemployment rateremained vetween4.4% and 4.7%

1.6%5.7%

2.0%

5.1%

1.34%

US unempolyment rate s.a. inverted (lhs)US temp penetration rate s.a. (rhs)

Source: Bureau of Labor Statistics

Note: The share of temporary workers in the total working population remains almost unchanged between 2003 and 2013.

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In the United States there are also concerns about the quality of the jobs created during the post 2009

recovery. The picture below clearly shows why this is the case.

2007 2008 2009 2010 2011 2012 2013 2014 2015

2000

1500

1000

500

0

-500

-1000

-1500

-2000

-2500

1.6 million

1.4 million

Waiters/BartendersManufacturing Workers

Source: Bureau of Labor Statistics

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2. Improve value-added proposition

For a long time, the difference in complexity between the services flex providers deliver, has been

depicted in the manner shown in the image below. General staffing (uitzenden in the picture below))has

become a volume driven extreme commodity and many secondment companies will reluctantly admit

that they too experience margin pressure for quite some time. Also, the secondment product (generiek

detacheren) is perceived by purchase departments as a commodity as well. Specialised secondment

(specialistisch detacheren)is the next step in the value chain: margins are less sensitive to pricing

pressure here. Consultancy is the next in the value chain. The reality is that specialised secondment and

consultancy are the most logical strategic roads up in the value chain for both large general staffing

companies that offer all flex services ‘in house’ as well as big general secondment firms. Specialised

consultancy, however, is a different ball game. It is not part of the evolutionary development of the flex

sector.

Toeg

evoe

gde

waa

rde

(bru

tom

arge

)

Uitzenden Specialistischuitzenden

Generiekdetacheren

Specialistischdetacheren

Toegepaste consultancy

Specialistischeconsultancy

40%

30%

20%

10%

Source: DPA

The U.S. research firm Staffing Industry Analysts (SIA) has published a paper some time ago, with a

nice overview of the evolutionary development of staffing companies (see picture below). The ‘End

Game’, in their eyes, is Total Talent Management.

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Increasing service sophistication

Value

Time

Decentralized• Several suppliers• Procurement

done on anad-hoc basis

• Managementdone internally

Increasing service sophistication

Preferred Suppliers• Selective set of

suppliers selected• Contracts in place• Service level

agreements (SLA’s)in place

Master Vendor• One supplier (possibly

managing 2nd and3rd tier suppliers)

• One point of contact• Direct cost savings

on bill/rate and usage• Customized SLA’s and

process

Managed ServiceProvider (MSP)• Contingent workforce

spend under management

• One contact point• Direct cost savings


process• Non-compliant spend

elimination• Total cost of

ownership savings

Total Talent Management• Total workforce spend

under management• Complete workforce

visibility• Direct cost savings


process• Non-compliant spend

elimination• Increased total cost

of ownership savings• Addional productivity

and process savings• High degree of value

added services

Source: Staffing Industry Analysts

The question is whether the ‘Total Talent Management’ endgame description is the desired endgame.

The explanation in the figure almost completely focusses on volume and operational excellence-like

features that suit a low-margin situation. We see a trend within purchase departments of large

corporations (consisting more and more of integrated HR- and purchase professionals) that there is a

need for a strategic discussion on the role of flex within their organisation. The contract type (staffing,

payrolling, Independent Contactor) of hired flex workers is becoming less relevant. The staffing

company is asked to deliver talent. But that doesn’t mean talent in a temporary staffing format only.

Finding and retaining talent is far more important for staffing companies now the recruitment function is

becoming far more external in nature, both for staffing companies as well as within corporations. The

challenge for staffing companies is to position themselves differently. Away from the capacity (volume)

driven function to a provider of innovation and change. A number of staffing companies have already

successfully made this change.

seeking

very passivenot interested

knownothing

know everything

Attract Match

Source Cultivate

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3. Disintermediation, disruption and the Clicks and Bricks sweet spot

Like many other activities within business services, the staffing industry is also changing due to

technological developments. In the picture below we can see that Randstad’s revenue model changes

because of new distribution channels in which technology plays an important role. In 2005, the

Randstad offices were responsible for 79% of sales. In 2015 this was only 43%. The operating margin

of the fast growing ‘in-house’ concept has also become higher than that of traditional staffing.

2005 2010 2015 YTD

79% 69%

43%16%

16%

79% 25%

31%15%

6%

BranchInhouseCentral delivery

The equally fast growing so called MSP (Managed Service Providers) companies are cause of another

risk to traditional staffing companies: they might get disintermediated and lose the opportunity to be in

direct contact with their large clients. MSP companies often take care of the total flex-needs of large

organisations by arranging and purchasing flexibility from staffing companies and other providers of flex

workers (secondment providers and independent contractors). All major staffing companies have their

own MSP proposition in which the so-called “neutral” MSP variant tends to be the most frequent one:

assume the Randstad MSP is responsible for organizing the entire ‘flexible layer’ for Philips. Within that

construction it is entirely possible that Adecco’s staffing employees are sourced by the Randstad MSP.

The U.S. market is the most mature MSP market: 45-50% of US staffing volumes are already flowing

through MSP structures.

A more serious threat to many large companies is underway. It involves the emergence of innovative,

nimble and small businesses using the latest technology to compete on individual services of a large

player. Upwork is a good example. It offers freelancers online and is a serious threat to the traditional

office-based staffing companies. Below a summary of a trend taking place in more and more different

sectors. It shows how small companies put pressure on services within large companies by offering

better and (often) cheaper solutions.

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Source: Randstad investor presentation

The clicks and bricks sweet spot There are traditional businesses that have matured and grown from an office based infrastructure and

are developing on-line competencies (the big staffing companies) as we speak. Alternatively, there are

companies that have grown on-line and are opening offices now (Cool Blue, Young Capital). The big

question is where the ‘sweet spot’ lies between on-line and off-line presence. What is the ideal mix of

online and outlets (clicks and bricks) ? Probably the best way to find out is to experiment. A number of

staffing companies (and retail) currently are doing just that.

Technology Another comment on technology and disruption. The question is to what extent the staffing industry is

susceptible to automation. An examination of the aforementioned Staffing Industry Analysts showed

that more than 60% of the temporary staffing jobs in the long term is lost through automation. That’s

more than the 47% which was calculated for the total U.S. workforce by Osbourne and Frey in 2013.

The question is also how many new temporary jobs are created by new technologies. In an interview

with a major national staffing company it became clear that they saw a strong increase in demand for

couriers. The reason is that the strong growth in orders over the Internet also leads to a greater demand

for people who deliver these products at home.

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Conclusion

Not only staffing companies but all companies providing workforce flexibility related solutions are facing

the three issues mentioned in this paper. For now all providers are benefitting from economic growth.

The law Work and Security, contrary to the expectation of many, has not led to the death of staffing and

patrolling. The industry flourishes as never before and the ABU figures also show recovery in the

administrative segment, a part of the economy which has always been considered in the past as late

cyclical in its recovery. The traditional divide between permanent jobs and flexible jobs is fading rapidly

and flex jobs will grow faster than permanent jobs. These are two important structural drivers for the

growth of flex (not just staffing) in the coming years.

The current period of economic tailwind does not mean that staffing companies do not need to

innovate and invest. The expectation still is that staffing margins will not recover to the level we have

seen before 2009. Also, back office and front office technology must be top notch (payrolling and time

records) and it is certainly worth thinking about future USP’s (unique selling points). For many smaller

staffing companies their USP will be specialization (in a specific area of expertise, region or service).

Finally, non staffing related flex services are expected to continue to grow faster than staffing. The

future for payrollers and freelancers is looking bright. How will staffing companies take advantage of

this?

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Bevindingen

Onderscheidend vermogen in de professionele zakelijk dienstverlening heeft steeds meer te maken

met creativiteit: het vermogen om voor de klant oplossingen aan te dragen die buiten de gebruikelijke

referentiekaders liggen. Nu in vele sectoren de backoffice activiteiten en grote delen van de werk-

processen geautomatiseerd zijn, valt hier nog weinig toegevoegde waarde te behalen. De Advocatuur

is hierin een uitzondering: de automatisering van werkprocessen staat nog in de kinderschoenen.

Het aanbieden van maatwerk juridische diensten door advocaten op de domeinen die voor hun klanten

het verschil maken, biedt voldoende basis voor groei. Het gaat dan om het faciliteren van wendbaar-

heid (strategische personeelsplanning), innovatie (het organiseren, borgen en bijeenbrengen van de

juiste kennis en vaardigheden) en helpen bij het ‘toekomst vast’ maken van de ICT infrastructuur. De

juridische achtergrond van de advocaat zal hierbij steeds meer een ‘hygiene’ factor worden. Een goed

bedrijfskundig referentie kader en het op de juiste wijze inzetten van zijn netwerk zullen daarentegen

het verschil gaan maken.

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Colofon

Dit rapport is een uitgave van ABN AMRO

AuteursHan MestersSector Banker Zakelijke DienstverleningABN AMRO Sector Advisory and Sustainability

BeeldmateriaalShutterstock

DistributieWebsite: www.abnamro.nl/sectoren Telefoon: 0900-0024 (0,10 per minuut)

insights.abnamro.nl

Commercieel contactHan [email protected]

DisclaimerDe in deze publicatie neergelegde opvattingen zijn gebaseerd op door ABN AMRO betrouwbaar geachte gegevens en informatie, die op zorgvuldige wijze in onze analyses en prognoses zijn verwerkt. Noch ABN AMRO, noch functionarissen van de bank kunnen aansprakelijk worden gesteld voor in deze publicatie eventueel aanwezige onjuistheden. De weergegeven opvattingen en prognoses houden niet meer in dan onze eigen visie en kunnen zonder nadere aankondiging worden gewijzigd. Het gebruik van tekst en/of cijfers uit deze publicatie is toegestaan mits de bron duidelijk wordt vermeld.

© ABN AMRO, april 2016 Deze publicatie is alleen bedoeld voor eigen gebruik. Verveelvoudiging en/of openbaarmaking van deze publicatie is niet toegestaan, behalve indien hiervoor schriftelijk toestemming is gekregen van ABN AMRO Bank. Teksten zijn afgesloten op 4 april 2016.

Staffing growth drivers changing from cyclical to structural

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