With recruitment growth and investment slowing in recent months, what should leaders invest in to build value and scale profitability this year?
Despite the boom in recruitment in the last two years, and a record 168 M&A transactions in 2022, many recruiters across the sector have seen a slower than anticipated Q1 in 2023. The protracted conflict in Ukraine, high inflation and rising interest rates have made employers more cautious about recruitment – with vacancies falling for their ninth consecutive month to 1.1m in April (ONS). Sectors such as hospitality, farming, healthcare and construction are still challenged by the legacy of Brexit, with a 330,000 shortfall of workers (Indeed, January 2023). “The most visible result of an inflationary environment is the sharp increase in the cost of debt, which has had a considerable impact on buying activity in 2023, especially among investors,” said Ronny Grosman, Managing Partner at Blackwood Capital, speaking at TALiNT Partners M&A Lunch & Learn on 27th April. “Strategic buyers are pursuing growth acquisitions of scale, at a discount, with increased appetite from large US strategic buyers for STEM-focused targets in Europe within the last few months.”
Whilst 41 transactions in the first quarter of 2023 looked like a good start to the year, deals have been delayed by monthly targets not being hit. “Valuation multiples had recovered to pre-Covid levels in 2022, but we are experiencing some set-backs due to uncertainty over the permanent recruitment segment and concerns about a potential global recession,” added Ronny. Mishcon de Reya partner, Nick Davis, who advised nGage Talent backed i-Resource on the acquisition of Ryalto in January, observed that strategic buyers still have a strong appetite for tech-enabled recruiters.
Investor caution
While advisors agree there is still abundant capital available, a tighter debt market means investors and buyers are being more selective. “We have seen lots of small deals so far in 2023, but few mid-market deals,” said Geraint Rowe, Managing Partner of Gambit Corporate Finance, speaking at our High Growth Lunch & Learn on 16th May. “Buyers are willing to pay higher multiples for niche businesses in markets with strong fundamentals. Scale, geographic coverage and diff erentiated services are key value drivers.”
Recruiters of all sizes are outsourcing for agility and bandwidth to augment their offering and bolt on people as they scale – Julie Fouad, EVP Director at IMS People Possible
“With the comparative strength of the US dollar against sterling, it is a matt er of time before US acquirors significantly increase their engagement with UK assets,” added Geraint. “Constraints in the debt markets will reverse in the second half of the year, when private equity acquirors return to the market. Momentum and optimism remain, but the current environment offers a precious window to create, enhance and maximise value ahead of the next wave of consolidation in H2 2023.” So what can recruiters do to maximise value and grow profitability over the coming months?
Value drivers
TALiNT Partners invited some members and industry experts to share the secrets of their success in sustaining growth and building the foundations for scale over the last year. Tim Cook, Group CEO of nGage Talent, has built a portfolio of 21 businesses operating in 24 global offices across 70 countries. Its first acquisition in 2023 was Ryalto, a tech business specialising in workforce communications, engagement and flexible work management. “Recruitment is only part of the solution, it’s about managing talent and keeping it,” Tim explained. “We’re moving from a tactical to a strategic partnership with clients, with platforms like Ryalto enabling us to support them in managing and redeploying contractors.” Tim added that he has embraced outsourcing to not only reduce fixed costs but fl ex up and down for different projects and clients – with a third of his own workforce sourced through partners like IMS People Possible. “Margins are being eroded by demand for higher salaries, so outsourcing to access specialist talent makes a lot of commercial sense,” he explained. “Data is vital to see how to make our workforce work smarter for us and our clients.”
“Recruiters of all sizes are outsourcing for agility and bandwidth to augment their offering and bolt on people as they scale,” said Julie Fouad, EVP Director at IMS People Possible. “It means recruiters can scale delivery in new markets and leverage wider solutions expertise.” Staffing firms have looked at ways to recover lost revenue from lockdown and grow new revenue streams by offering a wider range of high value services. Mark Thompson, Group Head of Sales at Sonovate explained that it had lent £1.1 billion to recruiters in 2022 – which has allowed them to support their growth through acquisitions, investment in analytics and talent strategies such as train and deploy, which differentiates them to compete for higher value clients. “It’s harder for large, corporate recruiters to change their models and processes, which is why we’re seeing trade buyers active in acquiring more agile businesses with good tech and well-managed candidate networks,” Mark explained. “Mid-market agencies that haven’t pivoted quickly enough have lost out to competitors able to off er more in-demand services.” “The growing contractor workforce has created opportunities for those able to capitalise on them, particularly in the re-deployment of talent. Everyone is moving towards strategic TA and we’re seeing higher adoption of talent intelligence to build business cases for train and deploy and other solutions.”
Smart use of data
Talent intelligence (TI) was explored in a panel on the new models for future growth in recruitment in April. “Bett er use of tech and talent insight is helping recruiters to choose the right clients and projects, price more confidently and deliver more cost-effectively – which improves profitability and enhance valuations,” said Alison Ettridge, CEO of TI platform Stratigens. “Talent intelligence is also enabling the ‘Zoopla-risation’ of talent – more accurate comparisons of candidate market value and tracking the premium around key skills.”
Martin Ewings, MD of Outsource, explained that the fi rm has used TI to identify when a lack of available talent and skills creates the need for train and deploy solutions – and has helped the fi rm to price projects more confidently. As more employers have adopted a ‘talent anywhere’ strategy, contributing to the growth in demand for contingent workforce solutions, TI has become a fundamental part of a recruiter’s offering to map where skills and talent are located. Tech, payroll and umbrella partners are enabling SMEs to compete with larger competitors at home and abroad – with compliance and analytics helping recruiters to de-risk for clients and themselves. “‘Growth compliance’ has become a way for recruiters to deliver a more high value service for clients, particularly those accessing overseas talent,” said Greetje Brosens, CRO of Workwell. “Tax and regulation changes have opened up new talent markets, in various US states and the DACH region, but Brexit complexities delayed by Covid are now posing new challenges. Recruiters need the right partners to help them manage costly risks.”
Buyers are willing to pay higher multi ples for niche businesses in markets with strong fundamentals. Scale, geographic coverage and differentiated services are key value drivers. – Geraint Rowe, Managing Partner of Gambit Corporate Finance
Pay and bill is becoming another key area of differentiation for those looking to capitalise on contingent workforce solutions. Access Recruitment has seen an opportunity to differentiate from its own competitors and help recruiters add value with its same day pay solution. “Our EarlyPay app allows people to drawdown on their salary before payday or take pay in increments,” said Jason Martin, Head of Strategy at Access Recruitment. “We can also enable shift workers to be paid aft er completing shift s, which helps recruiters to deploy and re-deploy contractors. This will be a game-changer for recruiters.”
Growth leadership
Finding, incentivising and developing recruitment talent has become a higher priority for recruiters looking to build value and scale profitably as competition has intensified over the last couple of years. Employee ownership schemes are becoming more popular to keep growth leaders in the business and dissuade them from becoming a competitor. SF Recruitment announced a £1.2 million EOS in 2021 where the management team became owners and everyone else became shareholders. “Employee ownership has improved retention and accountability but also made senior managers better advocates to attract more of the right people,” said Saira Demmer, CEO of SF Recruitment. NEDs, board advisors and coaches are in higher demand to help recruitment leaders manage complex transformations or investors. “A new generation of NEDs and board advisors are helping founders to gain more value from investors and access tech, funding and data expertise,” said Dave Pye, co-founder of Jump Advisory Group. James Strickland works with a range of staffing and talent solutions businesses – including Talent Works, HCRG and Daniel Owen – as a NED and advisor. “Investors want to see strong leadership teams with good financial management and governance, but they now want to see a depth of expertise in tech, data and marketing to underpin new solutions,” he observed.
So what skills do recruitment leaders need to navigate a route to sustainable growth over the next few years? “Agility and the ability to pivot is key,” said Saira Demmer, with IMS People’s Julieann Fouad adding that adaptability and being able to listen – to what clients and their own people want – are important leadership traits. “Strategic thinking is the most important leadership skill in the rapidly evolving recruitment industry,” said SME coach Denise Walker, Founder of Absolutely Business. “Leaders need to find time to step out of their business, gain a new perspective and discover new ways to grow – and that’s why peer networks are vital.” With further interest rate rises expected to bring down inflation, and both employers and investors expected to be more cautious over the next few months, recruitment leaders need to maximise data, partners and networks to stay ahead of the competition.
