07 September 2012

Is your recruitment business model sustainable?

The employment market in Australia continues to be robust. In July a further 14,000 new jobs were created and unemployment dropped by 2,500 people to leave the unemployment rate unchanged at 5.2%.

Recruitment agency business has, generally, been slightly less robust. Owners I have spoken to have had a very uneven past 6 months or so. Record months have been preceded, or succeeded, by very average months. Clients continue to put pressure on pricing as the focus on restraining costs continues throughout the economy.

The recruitment industry is facing a challenging time. All the recent financial results for the 2011/12 year that have been published so far (the ASX reporting season ends on 30 September) in industry news service, ShortList, indicate stagnating sales, continual goodwill write-downs and tiny profits, if any profit at all).

Geoff Morgan and Andrew Banks, for years the golden couple of the recruitment sector in this country, presided over a forgettable year for Talent2 as the share price headed for the floor, ahead of profit warnings and, ultimately, a full year operating loss of $2.2 million and delisting.

Only profit powerhouse Hays (Aus & NZ), continued to climb, although their reported 18% year-on-year temp gross profit improvement was partially offset by a 1% decline in perm gross profit, they still grew overall gross profit by 10% in Australian and New Zealand. Hays also bucked the overall trend in slightly increasing (37.2% to 37.5%) their already stellar conversion rate (operating profit as a percentage of gross profit).

Is this a cyclical phase or something more serious?

Respected business commentator Alan Kohler, wrote last month in an article Why structural change is forcing sectors to shrink and rethink that ‘... more and more businesses are being forced to confront the unhappy reality that they are in the middle of a big one-off structural change to their businesses. Business after business, industry after industry, is being forced to fundamentally change the way they do things.'

As Kohler went on to say about another ‘agency' sector used to making money through all economic cycles;

‘Most medium-sized stockbrokers are now talking to each other about consolidation and these talks will soon result in a series of mergers and acquisitions. Virtually all of them are losing far too much money to survive alone; maybe they can't even survive together.

The plain fact is that there are too many firms, and too many commission-writers for the level of business being written.

The firms, and the individual advisers, have been hanging on for two or three years, cutting outgoings and doing it tough, but now they can't hang on any more. They have to look for new jobs, or head into the garden.'

How sustainable is your current business model?

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