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

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 2013 2014 2015 20% 18% 16% 14% 12% 10% 8% 6% 4% 2% 0% -2% -4% -6% -8% -10% -12%

Source: Recruitment matters, ABU

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 2009-2014

End of September

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

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.

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 changes

In 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 upturn

US temporary penetration rate vs. unemployment rate

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Q4 2006 Adecco’s North America revenues peak Q3 2009 Trough US temp penetration rate October 2006 to November 2007 Unemployment rate remained vetween 4.4% 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

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/Bartenders Manufacturing Workers

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.

Toegevoegde waarde (brutomarge)

Uitzenden Specialistisch

uitzenden Generiekdetacheren Specialistischdetacheren Toegepaste consultancy Specialistischeconsultancy 40%

30%

20%

10%

Source: DPA

Increasing service sophistication

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 and 3rd tier suppliers) • One point of contact • Direct cost savings

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

process Managed Service Provider (MSP) • Contingent workforce spend under management • One contact point • Direct cost savings

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

process • Non-compliant spend elimination • Total cost of ownership savings Total Talent Management

• Total workforce spend under management • Complete workforce

visibility • Direct cost savings

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

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 passive not interested know

nothing know _everything

Attract

Match

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%

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.

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

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.

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.

Colofon

Dit rapport is een uitgave van ABN AMRO Auteurs

Han Mesters

Sector Banker Zakelijke Dienstverlening ABN AMRO Sector Advisory and Sustainability Beeldmateriaal

Shutterstock Distributie

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

Commercieel contact Han Mesters

han.mesters@nl.abnamro.com

Disclaimer

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© ABN AMRO, april 2016