Best people, best managed equals best performance: quality shines through in last year's gloom

How have recruiters been weathering the recessionary storm? Sue Dodd, director of Agile Intelligence, analyses the risers, the fallers and the newcomers in this year’s Hot 100 recruitment companies

The recession has merely confirmed the changing profile of the industry with increasingly sophisticated buyer behaviour and differing delivery models, but this does not take away the evergreen opportunities provided by a changing global market where skill sets and capabilities are in localised, and sometimes worldwide, scarcity.

As clients recognise the need to optimise their workforce and demand from new regions emerges, especially for professional candidates, there is increasing penetration of professional recruitment services with an overall inexorable rising market demand - despite present economic conditions. The present may still be far from certain but globally at least there is a positive tail wind. In the UK 2009, the accounting period mainly used for the 2010 Hot 100, proved a difficult year overall, albeit with some recovery since reported.

Nevertheless, whatever the challenges, quality still shines through in

recession - many of the companies have featured throughout the series of Hot 100 reports, fluctuating a little perhaps but rarely wavering from this sign of excellence.

This year we have an increased presence from public sector recruiters during a period of relative public sector spending freedom when the private sector was in the depths of recession. Next year the story may be a little different but it is primarily many of the same companies, through good and bad

times, that continue to shine.

The 2010 Hot 100 rankings, based upon latest year’s accounts, fully reflect the influence on the recruitment industry of immense public sector buying power countered by the frugality of the banks to lend money. Growth in the public sector during 2009 helped offset the sharp declines across the bulk of the industry, a situation now reversed as both recruitment and the wider economy rely upon private sector recovery to keep UK growth afloat.

The Test match mentality alluded to in the 2009 Hot 100 enabled companies to play the long game - investing for the future, patient with the present - but still considerable casualties have occurred.

For instance, since last year’s report Hexagon Human Capital [last year’s No 3] has been lost to administration (then an MBO), while others have succumbed to acquisition. The long predicted consolidation of the industry appears to have taken a step forward in the past year or so and a prolonged slow recovery may just preclude that rush to form start-ups normally expected as growth returns.

Several companies have been subject to dramatic acquisition, merger and reorganisation activity. Adecco, Morson and Healthcare Locums have been active acquirers. Integration of the Adecco acquisitions (Spring, Badenoch & Clark and Modis) are complete and recent reorganisations have been

undertaken within some of Randstad’s professional businesses. Several private equity deals have been struck and the Teaching Personnel sale at £45m was particularly noticed.

On balance, this year saw a very different performance from the Hot 100 companies. Only 21% increased their own headcount, yet 41% still increased GP/head (gross profit per head), demonstrating skilful management of staff, cutting back staff numbers but increasing productivity per remaining headcount. However, only 9% of companies achieved both these targets versus 22% last year and 40% the previous year. Of these nine companies six are supplying primarily the public sector.

The concerns of a double-dip recession, expressed in this report a year ago,

are now commonplace but still not a certainty.

There has been consolidation; many companies have experienced a substantial reduction in business and may just now be getting back on their feet, but the public sector is about to undergo an unprecedented downsizing and the impact on recruitment services is far from predictable. In this climate, setting a successful strategy is difficult - competition, delivery, buyer behaviour, activity levels are all variables that have become even less predictable to today’s recruiter. Nevertheless, opportunities can be taken and challenges met best with a well-managed, motivated workforce - that is what

much of the Hot 100 represents.

This is now the fifth consecutive year that Agile Intelligence has compiled the Hot 100 Report on behalf of Recruiter to determine which companies are best at leveraging their intellectual assets.

By rigorously measuring the gross profit (net fees) per employee this provides an indication of how effectively an organisation uses the skills of all its own people to generate a profitable return for stakeholders. All in-house employees (excludes temporary workers or contractors) are included in the calculation - not just fee-earners - and this provides a standard KPI [key performance indicator] used by management at many companies.

While wild cards may exist, those companies emerging strongly from this analysis, especially if featuring well for the fifth year running, are primarily those that operate the most efficient organisation, balancing the need for good, well-trained, directed and motivated staff against the need to minimise costs.

In difficult times the best companies stand out from the crowd. Which companies derive most benefit from their own employees before allocating overheads and engender the right atmosphere to encourage a profitable and sustainable sales approach? To answer these questions, here is the 2010 Hot 100.

Key findings

Hot 100 group sales turnover, down by just 8.3%, again substantially out-performed the wider trend across the whole recruitment market which saw a decline of a 19.4%. The Hot 100, with its changing membership each year, accounts for over one-third of industry sales turnover. Nevertheless, profitability was under considerable pressure with three out of five companies seeing productivity per head decline despite widespread job losses, while around one-seventh of the gross profit margin was lost to the tune of 330 basis points - the result of an uncertain mix of temporary pricing and permanent fee decline. The permanent market slowdown has had a significant impact on 2009 results as anticipated in last year’s report. Like for like:

  • The 2010 Hot 100 companies collectively reported a decline from their previous year in latest available sales of 8.3% to around £8.9bn.
  • Hot 100 combined gross profit reached almost £2.1bn, down by a substantial 21.6% on prior year sales.
  • Hot 100 companies’ in-house workforce fell 17.6% to total just below 25,000 employees - a substantial cutback but not as severe as the fall in gross profit.
  • Headcount was reduced sharply but still did not fully reflect the market contraction with gross profit decline even greater. Poor forward visibility led many companies to react in response to the economic climate change rather than making a pre-emptive cut.
  • Productivity (gross profit per employee) for this group of Hot 100 companies declined 4.9% over the year to an average £83,895 - this is 8% below last year’s Hot 100 group average.
  • Hot 100 average gross margin fell 330 basis points for these companies to 20.8%, with the mix also reflecting the 2009 downturn in permanent recruitment now evident in most companies’ results.
  • This new Hot 100 group already started the year with average gross margin around 200 basis points below the 2009 Hot 100 group - clear evidence that the mix has shifted towards lower margin companies - a combination of less permanent fees and lower temporary margin.

Across all Hot 100 companies only 21% expanded their workforce either organically or by acquisition and 41% increased GP/head. As 79% of companies either reduced (mainly) or perhaps held their own headcount, incredibly, two in every five of these managed to increase GP/head - meeting a substantial challenge to improve productivity in the midst of an overall recruitment market sales value decline of almost 20%.
The dream combination of expanding workforce and rising productivity was achieved by just 9% of the Hot 100 2010, a sharp fall from the 22% last year. This year the pattern was the same for both small and larger firms.
only three from the 33 firms with less than 50 employees achieved headcount growth and converted this into GP/head (productivity) growth
two-thirds of firms have over 50 employees and the success rate here was similar - six from 66.

Margin breakdown in more detail

Gross margin is the gross profit (or net fees) as a percentage of sales turnover. Gross profit is a combination of permanent fees (at virtually 100% margin) plus the profit on temporary supply after subtracting payroll and other ’temp’ employment costs. The mix of business between temporary and permanent placements influences the level of gross margin as does the trend in temporary pricing and employment related costs. With larger contract business notoriously competitive compared with SME or ad hoc placements, the type of business and delivery model/cost structure play a crucial part both in determining temporary margin and also bottom line profitability.

  • High end margin (driven by perm) losing ground; middle margin players (15%-30%) holding up well; and bottom end margin suppliers gaining strongly in numbers within this year’s Hot 100.
  • Only 5% (7% last year) of the Hot 100 are predominantly permanent recruiters. Many others report reduced permanent fees mix (see drop in 30% to 50% margin ranges).
  • Shift towards temporary mix reflects 2009 and early 2010 market experience.
  • Biggest losers: the 30% to 40% and >50% bands lost ground sharply as permanent recruiters moved out of the list.
  • Most gains: margin bands making the most gain in representation in the Hot 100 are ’less than 10%’ and ’10% to 15%’ with ’15% to 20% flat and ’20% to 30%’ growing slightly.
  • The ’15%-30%’ combined middle ground companies stood virtually static at 42.
  • 28 agencies achieve gross margin below 15% with 12 of these below 10%.
  • This rise in high productivity/low margin temporary business is a continuing trend from previous years - a reflection of an increased proportion of volume contract, managed service or project managed operations. The pressure towards low-cost, high productivity delivery is driven by market pricing but also by the increased use of technology and other improvements in process efficiency which can maximise output.

Public sector dominates as permanent professional recruitment declined
With the slowdown in permanent hiring throughout 2009 and any recovery in financial recruitment markets only emerging later in the year, it is remarkable that any financial search companies survive at all near the top of the 2010 Hot 100. Nevertheless, Sheffield Haworth moved up from 12th to 9th, no doubt helped by its new practices and Asia/Pacific expansion. Professional candidate recruitment companies again exclusively control the top 10 slots, two with substantial permanent business. More revealing, five of the 10 have significant bias towards the public sector - in executives, IT, and health and social care.

Team24 is the new Hot 100 leader, specialising in healthcare in both the public and private sector. Newcomer IT Human Resources emerges in second place, while fellow IT specialist, Parity Resources, stands 5th with its heavy public sector bias, although recent warnings have now been issued as some of its core business is under pressure. Mayday Healthcare moves up to No 3, benefiting from exceptionally strong temporary nursing demand in 2009.

Just as last year, there are 11 specialists listed in the top 20, with seven of these in the top 10. In addition six IT staffing companies are listed in the top 20, with three of these in the top 10. While Heads Recruitment has lost considerable ground as its core market was hit hard by recession, Interaction Recruitment has stepped in as the single generalist recruiter in the top 20.

However, given its transitory position, following acquisition of the Kelly branches, it is difficult to be certain how secure this ranking will prove in the longer term. With 19 out of the top 20 being specialists and seven of these being heavily dependent upon public sector clients, this is a strong illustration of the importance of that client base to the recruitment industry during an overall challenging year. In the coming months it may be that the reverse will prove the case and private sector business will become the prop for an industry attempting to deal with a further half a million or so unemployed potential candidates as the public sector re-aligns.

The major global players and the large branch network agencies still remain sparse in the Hot 100. Randstad, with its many individual sector specialists, does still feature widely, although reorganisation across some of its operating companies has led to the exclusion of a few old favourites from this year’s list, with comparisons not appropriate. Nevertheless it still has seven named subsidiaries across the Hot 100 based upon 2009 accounts, although not all can be compared like-for-like with previous years as non-UK business has been re-allocated and some internal UK mergers have occurred. Adecco, buoyed by newly acquired MPS brands, Badenoch & Clark and Modis, has three brands in the Hot 100. Pertemps is still the largest single ’national’ to feature - moving up to 67th, while the far more professionally biased Hays has dropped to 97th, using its latest June 2010 UK results.

General recruitment has 13 companies in the Hot 100 but any analysis of staff and branch numbers would show a shift towards centralised, lower-cost delivery models with on-sites clearly the stronger performers. Branch numbers have been considerably reduced in the past year.
For a more meaningful comparison the companies have been separated into three major groupings - specialists (mainly professional or technical), IT/telecoms specialists and general recruiters.

The Hot 10 specialists

This year’s Hot 10 represents a larger group by value than in previous years and it bucks the overall recruitment industry trend by reporting growth. This is clearly driven by its mix of specialisations with healthcare featuring large. Six of the constituents are primarily public sector suppliers and a further one (Badenoch & Clark) has above average public sector business. Four of the six are healthcare staff suppliers, reflecting a strong year for demand in the NHS. Financial sector specialists also began to see recovery during 2009, being the first sector into the recession, but margin has suffered and the search specialists have developed overseas interests to assist momentum. Here is the summary of findings:

  • The Hot 10 represents over £650m in turnover, generating £187m in net fees.
  • Net fee growth among the Hot 10 rose 1.6%, the only one of the three Hot 10 groups not reporting decline.
  • Average GP/head gained 7.2%.
  • Seven companies retain their place in the Hot 10 from last year’s rankings. Of the other three, Hexagon went into administration so is not listed at all, while Career Legal and Joslin Rowe Temporaries moved outside the Hot 10.
  • Team24, specialist supplier of mostly temporary doctors and nursing staff, takes the top spot with a 23.9% rise in productivity to £222,472 GP/head. Presently with just 35 employees, like last year’s winner, it is at the smaller end of the scale but produces £7.8m gross profit on sales of £30.3m at a margin of 25.7%. High investment in technology and IT processes, enabling greater resourcing, left it well placed to benefit from the sharp upturn in healthcare demand in 2009.
  • Other healthcare suppliers have performed well here - Mayday, Healthcare Locums and the Pathology Group, a small but fast growing specialist in the doctor market, especially in A&E.
  • Randstad Education retains its position in the Hot 10, with its nearest education rival well down the Hot 100 list. This, despite a pedestrian year in its underlying market reflected by the modest decline in net fees.
  • Sheffield Haworth sits at 9th despite a challenging permanent market, helped by its overseas expansion. Walker Hamill also stays in the list despite a sharp contraction in net fees and employee numbers.
  • Newcomers are Team24, Badenoch & Clark and the Pathology Group which just squeezed in on the size criteria threshold.
  • Five out of the 10 expanded their workforce and six increased GP but again only three simultaneously expanding GP/head and employee numbers.

Turning to gross margin trends:

  • Sheffield Haworth and Shilton Sharpe Quarry remain the only 100% permanent recruitment firms in the Hot 10 with the remainder mixed but mainly temporary. Only Walker Hamill from the other eight will have significant permanent fees, although all will have some permanent business.
  • Overall weighted average margin fell 150 basis points to 28.6% (last year’s group at 36%). The permanent mix has fallen across the group suggesting relatively modest temporary margin decline overall although some have seen a sharp fall such as Morgan Law and Badenoch & Clark, probably driven by more demanding public sector terms and Pathology Group as it expanded into new specialisations.
  • Two companies increased margin - Healthcare Locums considerably and Randstad Education marginally.

The Hot 10 IT recruiters

Only two companies increased their staff numbers and marginally at that, as the ICT market was finally hit in 2009, particularly by delayed and cancelled projects. Nor did these two small expanding companies convert headcount growth into GP/head - in both cases this fell. As the permanent market especially fell away and contractor numbers contracted Hot 10 net fees fell 8.4% on flat sales and most companies shed staff numbers with the overall Hot 10 workforce dropping 8.8%. This still considerably outperforms the wider market which saw high double-digit reductions. Overseas development, increasingly specialist niche candidate sectors and expansion into a wider range of client sectors and industries, has continued but in an environment which proved difficult for many companies in 2009 and early 2010.
At least 28 IT specialists sit in the Hot 100 (compared with 21 last year), suggesting growing significance of the sector despite weak market performances. This is quite different from previous years where the numbers had remained relatively stable. Highly developed, efficient delivery makes for high productivity per head, driving these companies into the Hot 100 ahead of less effective business models among other candidate sectors. With UK contractor margin remaining very low on volume contract business, many of these constituents are noticeable players in overseas markets but often from very few if any international offices. Late 2009 saw the acquisition by Adecco of Spring Group and MPS’s Modis International in the UK but the combined operation is yet to produce a full year of results. In this particular situation, integration must have proved quite a challenge.

Hot 10 IT in summary…

  • The Hot 10 represents around £940m in turnover, much smaller than last year’s selection due to the exit of SThree which dropped to No 37.
  • None of the 10 companies featured increased both their employee numbers and profit per head.
  • Eight remain from last year - Parity, Networkers (MSB), Resource Solutions Group, Red Commerce, G2, LA International, Aston Carter and Harvey Nash. The latter two may have benefited from the recovery in financial-based clients as their accounting period overlapped into 2010, although Aston Carter has seen a downward step change in margin as it recovered volume while Harvey Nash proved resilient all round, also benefiting from extensive interests overseas.
  • Newcomers are IT Human Resources in at number one and Tangent at 9th. IT Human Resources is the new Hot 10 leader with its 31 employees turning in £5.8m in net fees at a margin of 23.1%. It provides predominantly contract staff - examples being telecoms, mobile and mobile internet, Java and web technologies specialists - into several industries including banking, financial and telecoms but has little exposure to the public sector. It also has some permanent and search business. As a group it supplies over 20 countries.
  • Parity moved back slightly into 2nd place, continuing to place IT contractors from three UK offices with an efficient delivery model, extracting high staff productivity to service the low margin PSL business typical of the sector. Over 70% of its net fees derive from the public sector and it is consequently cautious on its 2010 results. LA International is also a substantial public sector supplier but so specialised, providing high security cleared IT consultants across 23 countries, that its results up to June 2010 still show strong progress.
  • Resource Solutions Group sits at the opposite end of the spectrum supplying mainly private sector clients with mainly temporary recruitment services ranging from ad hoc placements to total project management.
  • SThree and SEC have exited the Hot 10. The weak permanent market particularly affected SThree, while SEC substantially expanded both employees and net fees but could not also keep pace on productivity. However, with its clearly growing business base this biometric, clinical, business intelligence niche supplier could well return to the Hot 10 in future years.
  • Yet again, the larger industry IT majors such as Elan and Ajilon are found further down the Hot 100 list, although the Hot 10 is not so dominated by small companies now - medium-sized niche players appear to be the current winners.
  • Turning to gross margin trends which are dependent not only on temporary pricing but on the business mix between spot, volume contract and permanent:
  • Weighted average gross margin of this Hot 10 fell 150 basis points to 15.1%, a much lower margin mix than the 2009 Hot 10 group due to the absence of SThree with its high permanent and SME contract business.
  • Only G2 managed to increase gross margin - the other nine companies saw a decline.
  • A general erosion of temporary margin mixed with lower permanent fees across the group.
  • The Hot 10 generalists
  • - mainly commercial, industrial and other non-professional candidate sectors
  • Only 13 general recruiters, in the broadest sense, make it into the 2010 Hot 100. This compares with 14 last year but the composition has changed. Nevertheless:
  • This is a larger group measured by turnover than in the 2009 report. Hot 10 2010 generalists represent £783.4m sales turnover but only around £141.3m in gross profit.
  • Although Portfolio Payroll would be positioned in the Hot 10, updated accounts were not available as we went to press so it did not seem appropriate to benchmark them using last year’s report figures.
  • Five out of 10 companies remain from last year with Morgan Hunt (more mixed staffing), Right4Staff, Champion and Pertemps all middle of the table and Jark holding onto its 10th position.
  • Newcomers are Interaction, Eden Brown, Now Recruitment, Huntress and Staffline.
  • Relegated from the Hot 10 and also dropping out of the Hot 100 are Angela Mortimer and Office Angels - two leading premium end office specialists hit especially by the decline in the permanent market in 2009 and its impact upon gross profit. Heads Recruitment and Extrastaff have also moved out of the Hot 10, positioned at 83rd and 85th in the main list now.
  • While Impellam UK (including its healthcare, professional & technical staffing in addition to commercial) has made it into the Hot 100 many of its more generalist peers have not done so, with several featuring well below the £63,500 cut off point.
  • Ranked by turnover, Pertemps, Staffline, Right4Staff, Eden Brown and predominantly public sector provider, Morgan Hunt, are the largest ’generalists’.
  • Five out of the Hot 10 increased their GP/employee, driving productivity upwards by cutting its staff numbers as only Interaction increased GP (major acquisition of Kelly branches).
  • Only Morgan Hunt expanded its workforce but did not convert into growth in GP/head.
  • And 2009 proved even more difficult for the Office specialists than 2008, explaining the loss from the Hot 100 of Office Angels and Mortimer. The new Hot 10 has a strong industrial bias, with onsite specialists such as Staffline clearly performing well. In the wider Hot 100 Pertemps has been joined by Impellam (including its professional staffing) at 88th to represent the UK industry ’majors’ while others such as Adecco and Brook Street feature outwith the Hot 100, at around £50,000 GP/head. Neither Manpower UK nor Reed provide suitable accounts for peer comparison.
  • Turning to gross margin trends:
  • Average weighted gross margin for these Hot 10 fell by 200 basis points to 18.0%. This is better than the overall trend seen in the Hot 100 as this group have a lower dependence upon permanent fees than the Hot 100 average. It also shows that temporary pricing weakness has been an issue but still gross margin is driven by the sharp drop in permanent placements.
  • Lower permanent sales amongst general recruiters places them at a relative advantage.
  • Three Hot 10 companies reported an increase in gross margin - Interaction, Now and Jark - with acquisitions a factor for two of the three.
  • The drop in margin was more pronounced at Eden Brown and Right4Staff, both reporting a sharp drop in temporary margin while Huntress was more clearly driven by lower permanent proportion.
  • Despite temporary pricing generally under pressure, a much lower permanent mix than the specialists and lower investment in resourcing, combined with quicker time to fill has enabled the generalists to maintain their position overall in the Hot 100. Reports of a much improved trading environment, especially in industrial staffing towards the end of 2009 and into 2010, has been a positive influence.

Click here to view the HOT 100 PDF

Compiling the Hot 100

Methodology: the data has been rigorously filtered by turnover and employee numbers; details available on request. The companies featured inthis edition employ around 25,000 in-house staff and account for £8,900m of industry turnover. Latest available accounts have been used - dated 2009 or 2010 for ALL of these companies. Companies whose accounts have not been updated with Companies House since last year’sreport or where required data is not fully disclosed are excluded. Furthermore, wherever possible UK-only companies are
considered; however, in some cases group accounts have been used where these prove more up to date even if some overseas business isevident – examples would be Harvey Nash, Robert Walters, Michael Page International and some IT recruiters. Primarily overseas operators such as Swift have been excluded. Two prominent exclusions are Manpower and Reed Employment since both adopt accounting methods under-stating gross profit and margin, making comparison invalid. Furthermore companies including temporary employees in their employee count are not included as this would grossly underestimate their performance. Small specialists with global interests such as in headhunting may have been omitted for a variety of reasons – incomplete disclosure, overseas business and a shortage of data for peer group comparison.
Disclaimer: while every effort has been made to ensure accurate reporting and analysis no guarantees are made regarding the information portrayed in this document.

Outlook & Conclusion

Despite one of the worst periods in UK recruitment history – especially the first half of 2009 – companies have emerged on the whole with
perhaps fewer casualties (to date) than may have been expected and with a degree of confidence which says volumes about the nature of its people.

Unemployment has all but doubled in the past two years but the best companies, on the whole, have handled the challenges. Further
difficulties may lie ahead as a sharp rise in public sector job losses is anticipated and 2011 will present challenges, especially for many public
sector recruiters that have done so well in this report.

However, evidence here suggests there is a resilience that will prevail. Yet funding any expansion and working capital needs remains a concern to many recruiters as credit is still difficult to secure despite varied attempts by the government and the Bank of England to improve bank lending.

The trend towards specialists, seen two years ago, among these industry high performers appears now to be almost halted with similar numbers of generalists across the Hot 100 as last year. Overall the more generalist multi-nationals (excepting Randstad) do not feature highly but several specialist professional candidate multi nationalists are well positioned – Harvey Nash, SThree, Michael Page and Robert Walters to name a few. However, the real high performers are often those smaller, highly focused and even expanding firms which achieve the highest productivity. Public sector suppliers clearly feature high during the review period but IT specialists have gained considerable ground too

~This year, partly due to sector timing through the recession but also perhaps as other sectors increasingly see the pricing pressures which IT
suppliers have faced and developed suitable delivery models for over many years now. Hays, the largest UK recruitment company, drops
further to 97th this year, as its larger than average public versus private sector business acts as a neutralising hedge. Finance-related recruiters
saw some improvement late into 2009, enabling partial recovery from last year. Nevertheless, regardless of size, productivity, getting the best
out of your people and delivering quality of service to the client in an efficient manner remains key to success whether in a subdued UKrecruitment environment or an expanding global economy

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