18 February 2015

Red Flashing Lights: How you know when profitability is about to sink

After last week's blog on the Australian publicly listed recruitment companies that have departed the boards of the ASX, I received a few emails from readers asking me follow up questions about the decline in fortunes of such formerly successful companies.

Such questions as:

  • How do such, formerly successful, companies become so unprofitable in a relatively short space of time?
  • Are these mistakes more likely to occur with larger, rather than smaller recruitment agencies?
  • How do the boards of such companies, filled with supposedly smart and successful business people, consistently make such poor decisions?

My post from last December, Why most small recruitment agencies stay small, provides my views on some of the issues raised above.

I think there are certain 'red flashing lights' that are early warning signals of a decline in profitability. Although it's probably unfair to focus on the publicly listed companies in highlighting this area, the reality is that these companies are required by the ASX and ASIC (and equivalent bodies for those recruitment agencies listed on other stock exchanges eg Hays, Page Group, Manpower etc) to publicly release information materially relevant to their operating performance, and hence their share price.

Due to this requirement, we know more about the misfortunes and missteps of these listed recruitment agencies, but that doesn't necessarily mean they are any more guilty of poor decision making than private recruitment agencies are.

What are those 'red flashing lights' to be alert for?

  1. High consultant turnover: As any recruitment leader knows, it is almost impossible to consistently grow profitability if you have staff turnover north of 30%.
  2. High leader turnover: The respective demises of HJB,  Boston Kennedy and Bluestone Global were preceded by a number of years of high turnover in key leadership positions. Unsurprisingly, Hays and Morgan & Banks, two consistently profitable, publicly-listed recruitment agencies, were/are known for having longevity in their executive leadership teams.
  3. Unnecessarily lavish or expensive office space: The attractiveness of, and amenities provided within,  office accommodation will most probably  enhance the morale of an already successful team or positive culture but it certainly won't fix the problems of a poor culture.
  4. A focus on growth via acquisition rather than organic growth: The theoretical business case for any acquisition can always be made to look great ... on paper. The reality is that the most acquisitions both redirect leadership time and diminish shareholder funds to an unexpected, and debilitating degree. As I documented last year ASX-listed recruiters continue to decline: 2013/14 in review the Ross Human Directions acquisition has, in a four year period, lead to a 60% improvement in gross profit but a small decline in net profit for Chandler Macleod. Hays and Morgan & Banks have made occasional acquisitions but overwhelmingly their growth was/is organic growth.  
  5. Company leaders who rarely, if ever, actually observe their coal face recruiters doing their job: As I wrote last year, both Andrew Banks and Greg Savage were recruitment agency CEOs who continually stayed very close to their respective company's coal-face employees; regularly going on visits and consistently talking to consultants. If 'management by walking around' was a key leadership behavior of Sam Walton then what excuse does any other leader have?
Recruitment agencies can, and do, produce high profits on a low capital investment but they can also experience rapid profit decline when poor decisions are made by the very people who are paid large amounts of money to safeguard and grow that same company's profitable future.

Have you seen any 'red flashing lights' lately?

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