Home / Reports and Articles / Contractor Management

Research Tidbits & More

Brought to you by Staffing Industry Analysts, Inc.

1Q2006

Research Tidbits

• Temporary staffing firms cut offices. The number of offices declined in 1Q06 from the year earlier by -1%, the largest such drop in over two years and a stark contrast to the roughly +2% growth in offices that was averaged over 2004 and 2005. Branch growth began to slow in the last half of 2005. The decline in branches parallels the slowdown in revenue growth per branch, two items historically correlated.
• Revenue growth once again fueled by more employees per office. Most of the revenue growth in 1Q06 versus the year earlier was fueled by adding more internal employees per office. Aggregate employees per office were up 9.5% from the year earlier. Over the last two years, the ongoing increase in employees per office has been the single most important factor in accommodating industry growth.
• Apocalypse coming? Decline in temps per internal employee accelerates. Lately, temporary staffing firm employees have been supporting fewer and fewer temps. In 1Q06, the ratio of temporary workers to internal employees fell -5.0%. That was the fourth and largest quarterly decline in a row, following shrinkage of roughly -2.5% in each of 4Q05, 3Q05 and 2Q05. By contrast, throughout 2004, year over year comparisons in this ratio were in the +8% to +11% range. 
• Revenue growth expectations: steady as she goes. Despite evidence of a slowdown in temporary staffing growth rates, the typical firm’s expectations for total revenue growth in 2006 showed no change in the first quarter. Large companies expect 10% revenue growth in 2006. Mid-sized companies expect less growth, and small companies expect more. 
• The rich expect to get richer. Revenue growth expectations are very much a function of average bill rate, with companies at the high end of the bill rate spectrum expecting 2006 growth of 20% to 40% and companies at the low end of the bill rate spectrum expecting 2006 growth of 5% to 15%. This is consistent with the ongoing relative prosperity in the professional segments. 
• The slowdown is definitely here. The typical temporary staffing firm saw revenue growth of just 7% in 1Q06 versus the year earlier, and, in a reversal of last quarter’s trend, large firms saw growth slow to the same level. Revenue growth trends are now very much in the form of a bell curve, with 1Q06 growth about equal to that of 1Q04. 
• Up, Up and Away. Gross margin growth accelerates. For the fifth quarter in a row, industry aggregate gross margin as a percent of revenue rose--not only rose but accelerated—this time by a solid 1.2 percentage points. Gross margin was boosted by higher permanent placement and temp to perm revenue as well as lower other temp direct costs.
• Permanent placement--temporarily the best place to be. In 1Q06, aggregate permanent placement revenue continued to boom--up 41% from the year earlier. This represents an acceleration over the previous two quarters. Temp-to-hire revenue grew a like amount. The increase in permanent placements reflected both higher fees per placement as well as double-digit volume growth in placements. 
• Operating cost growth peaking? Operating costs as a percent of revenue were up once again in 1Q06 versus the year earlier, but the rate of increase slowed for the first time in a year. Internal employment and wages/benefits were once again on the increase but non-personnel expense as a percent of revenue actually declined a bit in aggregate. 
• Weekly hours served per recruiter plummets 10%. Weekly hours served per recruiter plummeted 10% for the typical staffing firm in 1Q06 versus the year ago quarter. This is the fourth quarter in a row of year over year declines and represents a sharp acceleration in the generally downward trend this measure has been experiencing over the last year and a half. 
• Industrial and office/clerical segments eke out just 3% growth. The titan of temporary staffing industry, industrial, grew at its slowest rate in 10 quarters, with the typical firm reporting 3% growth in 1Q06 versus the year earlier. The typical firm in the office/clerical segment also reported just 3% growth. Aggregate office clerical revenue, dominated by large firms, actually contracted -2% in 1Q06 versus the year earlier. 
• High-flying finance & accounting segment joins industry slowdown. Perhaps reflecting the diminished effect of SOX, the previously booming finance & accounting segment appears to at last be slowing. The typical firm in this segment saw growth of 12% in 1Q06 versus the year earlier, not bad at all, but down from 25% in 4Q05 and 62% in 1Q05. 
• Information technology segment resists industry slowdown. Of the larger segments in the temporary staffing industry, IT is holding up the best in terms of revenue growth. Aggregate IT revenue grew 12% in 1Q06 from the year earlier, and the typical firm saw about the same growth. By contrast, growth rates are slowing in three of the other four largest industry segments. 
• Temporary staffing industry earnings spike in 1Q06. Operating earnings rose 22% for the typical firm in 1Q06 versus the year earlier, and higher growth at some larger firms sent the industry aggregate up even more--to a 38% gain. The improvement reflected the effect of operating leverage, as the industry gross margin increase of 13% overwhelmed an operating cost increase of 10%. 
• Industry employee turnover dips. Annualized aggregate internal employee turnover at temporary staffing firms fell 4% in 1Q06 from the year earlier, the largest decline in this measure in a year and a half. After trending up in 2004 and the first half of 2005, turnover growth peaked in 3Q05 and has trended down since. 
• Total personnel costs per employee up 6% in 1Q06. For the typical temporary staffing firm, total personnel costs per employee rose 6% from the year earlier. This represents an acceleration in cost per employee growth from the roughly 4% range averaged over the previous three quarters. The industry aggregate, which is dominated by large firms, was also up 6% in 1Q06. 
• Who pays for VMS? Of firms using VMS, about half pay all vendor fees themselves. Another quarter share the fee with staffing buyers. In only 6% of cases, the staffing buyers themselves paid all VMS fees. Other firms using VMS either purchased VMS software or developed it internally.
• One in five industry dollars flows through VMS. On a weighted average basis, 18% of benchmarking consortium revenue in 1Q06 flowed through a VMS. However the proportion of revenue processed via VMS varied markedly by company size. Among companies of less than $10 million in total revenue, the proportion flowing through VMS was just 4%. Among companies of greater than $100 million in total revenue, the proportion flowing through VMS was 20%. 
• VMS usage much more prevalent in professional staffing. Temporary staffing firms with average bill rates of $30 or more are many times more likely to see significant VMS use than companies with lower average bill rates. The typical firm at the lowest end of the bill rate scale passes less than 5% of revenue through VMS. VMS is most frequently used in the IT and tech/engineering segments. 
• VMS not a big problem for most staffing firms. About half of staffing firms are neutral regarding the effect of VMS on their business; on net, the rest are more positive that negative. However, roughly a quarter of staffing firms indicate they have, in at least some cases, avoided clients that required VMS.

Buyer Survey Tidbits 

• Staffing buyer satisfaction improves. Surveyed staffing buyers gave their staffing suppliers a B- grade overall in our latest annual survey, up from a C+ a year earlier and a C the year before that. Organizational bias toward contingent work, previously negative in two separate surveys, turned slightly positive in 2006. And buyer perception of some aspects of worker quality, though still on net negative, was less so this year. 
• Staffing supplier management growth stalls. In two previous annual surveys, staffing buyers indicated a strong intent to expand usage of approved supplier lists, master suppliers and VMS, and to consolidate suppliers. As measured in our most recent buyer survey, that expansion didn’t happen. Only VMS usage increased, and that only slightly. 
• VMS—friend or foe? Though staffing suppliers generally view VMS as a threat to margins, there is a plus side to giving customers what they clearly want. Companies using VMS are bigger contingent work users overall, with nearly double the contingent usage rate of non-VMS users. Companies using VMS are also much more loyal to their staffing providers. 
• Assignment limits are here. Reflecting legal and regulatory concerns over the distinction between temporary and regular workers, most companies now have institutional limits on the maximum length of temporary worker assignments, with a typical limit of one year. In most cases those limits should not be very constraining, however, as the typical temporary assignment is half a year.
• Worker Quality Top Criteria for Temp Buyers. Across all company sizes, across all management levels, across all job functions, in both centralized and decentralized environments, across almost all industries and skill segments, worker quality is the most important staffing supplier selection criteria. 
• Worker Quality Needs Work. Only a bare majority of temporary staffing buyers think contingent workers are as good as regular workers. Of the rest, more than four times as many temporary staffing buyers think contingent workers are not as good as buyers who think such workers better. 
• The easiest markets to enter are… 36% of temporary staffing buyers are seriously considering trying out new suppliers within the next two years. Smaller companies of less than 2,000 employees, companies in the energy/chemical industry and those buying tech/engineering skills are the most open to new suppliers. 
• Recruitment outsourcing interest strongest in tech/telecom industry. Only 4% of temporary staffing buyers are currently outsourcing all or most of their recruitment activities, but within some industries, some size categories and some purchased skill segments, interest is materially stronger. For example, 22% of companies in the technology/telecom industry currently outsource all or most of their recruitment activities and another 11% are seriously considering doing so. 
• Energy/chemical industry has longest temp assignments. Typical assignment lengths vary markedly by industry, size and skill segment. Assignments in high tech industries, high tech skills and larger companies tend to be much longer. Temporary staffing buyers in the energy/chemical industry report the longest worker assignment lengths—at 46 weeks. 
• Direct contact between hiring managers suppliers rare. A majority of temporary staffing buyers either route requests for contingent workers from hiring managers through human resources or force communications through a VMS. Only 3% of companies have no policy on the matter and only 22% allow direct contact between hiring managers and temporary staffing suppliers. Companies purchasing tech/engineering, IT and industrial skills are more likely to allow direct contact. 
• Who loves you, baby? In only one industry do temporary staffing buyers think, on net, that temporary workers are better than regular workers—the finance/insurance industry. Buyers in the business services, healthcare and manufacturing sectors judge temporary worker most negatively. 
• Expect increased temporary help usage in the retail sector. Temporary staffing buyers in the retail/consumer sector project tripling their current usage rate of temporary staffing over the next two years. Currently an industry with very low temporary help usage, such expansion would propel retail/consumer to among the top sectors by usage.

Finance & Accounting Segment Tidbits 

• Finance & accounting prognosis: segment regressing to early teens. In the short run, we expect revenue growth in this segment to slow to the low teens--following two years of 20%+ growth in 2005 and 2005--reflecting both moderated economic growth and reduced need for temporary SOX professionals. In the long run, growth in this segment should exceed that of temporary staffing as a whole, particularly at the higher end of the skill range. 
• Finance & accounting segment closely tied to GDP growth. Over the last eight years, growth in U.S. finance & accounting temporary revenue has been highly correlated with U.S. GDP growth. The effect of economic growth on unemployment appears to be key—rates of less than 2.5% in finance & accounting occupations look like a trigger point. 
• Accountants getting older. The median age of accountants increased 2.6 years between 1995 and 2000 and another 2.1 years between 2000 and 2005. As the median age increases, accountants may be expected to retire in greater numbers, thus tightening the already tight supply. A similar pattern is evident in many accounting support positions. The median age of billing and posting clerks, for instance, increased 6.5 years between 1995 and 2005. Tightening supply means increased staffing revenue opportunities, as well as increased difficulty recruiting. 
• Finance & accounting temporary help segment highly volatile. Over the last eight years, the finance & accounting temporary staffing segment has experienced revenue increases and decreases roughly double that of the temporary staffing industry as a whole. In only one year over the last eight did finance & accounting temporary staffing growth match that of the broader industry. 
• Finance/insurance industry top market for F&A temporary staffing. The most target-rich industry for finance & accounting temporary staffing sales is the finance/insurance sector, followed by energy/chemical. More than half of contingent staffing buyers in these two sectors count finance & accounting among their top purchases. 
• Big companies better markets for F&A temporary staffing. Contingent staffing buyers in large companies are twice as likely to buy finance & accounting contingent staffing as contingent staffing buyers in small companies. 46% of buyers in large companies buy finance & accounting temporary staffing, versus 25% in small companies. 
• Who buys Finance & Accounting temporary staffing? Buyers of office/clerical and information technology temporary staffing are twice as likely or more than buyers of other skills to also purchase finance & accounting temporary staffing. Interestingly, this parallels the skills offerings of large finance & accounting temporary staffing providers, who generally offer office/clerical and information technology temporary staffing services as well. 
• Think accountants are biggest in F&A temporary staffing? Guess again. Of the roughly 100,000 finance & accounting workers employed on a temporary basis, there are roughly 31,000 bookkeepers, accounting & auditing clerks. That contrasts with 10,500 accountants and auditors. 
• Finance & accounting temporary staffing buyers want fewer suppliers. Finance & accounting temporary staffing buyers are particularly interested in consolidating suppliers, more so than temporary staffing buyers generally, and a full 79% are planning to change their relationship with suppliers in some way. About a third are open to trying new suppliers. 
• How do finance & accounting temporary staffing buyers pick suppliers? For the most part, supplier selection criteria used by finance & accounting temporary staffing buyers are the same as those used by temporary staffing buyers generally—worker quality, low cost and relationship focus—but F&A buyers count low cost more heavily. By the same coin, such buyers are more likely to use bill rates as an on ongoing supplier metric. 
• What finance & accounting skills are in greatest shortage? Insurance claims clerk and loan interviewer. The unemployment rate in these two occupations is 0.9% and 1.0% respectively. This compares with the national average unemployment rate of 4.6%. Additionally, mid-level and higher-level finance & accounting skills are also in short supply, with unemployment rates typically in the range of 2%. 
• The place to be in coming decade? Accountants & auditors. In general, higher-skilled finance & accounting occupations are expected to experience the fastest growth in temporary employment over the next decade, with accountants & auditors projected to see 5.5% volume growth annually. At the lower end of the skill spectrum, two other occupations should also see rapid growth: tellers and payroll/timekeeping clerks.
  

Click here for more information from Staffing Industry Analysts, Inc.