Staffing demand could grow in 2017, but industry faces challenges

By Neal England
Managing Director and HCM Practice Leader

With the U.S. economy at full employment, staffing firms will be challenged again this year to find candidates with the skillsets demanded by today’s businesses while they face internal challenges on how best to compete in an industry undergoing consolidation and change.

The U.S. economy continued to expand at a modest pace as 2016 drew to a close, and economic forecasts indicate 2017 growth may be slightly higher, especially if regulations and tax burdens decline under the Trump administration.

The latest Beige Book from the Federal Reserve’s 12 districts notes that staffing firms participating in its survey reported that the volume of worker conversion from temporary to permanent remained at normal levels. Demand for staffing in nonfinancial services generally increased over the last six weeks of 2016 at a slightly faster pace than in the prior period.

Most staffing services firms saw a pickup in demand during that time period, as orders for temporary and contract workers remained solid, while demand for direct hires was mixed. 

Predicted economic expansion this year is, of course, good news, but it comes amid a variety of challenges that the staffing industry must address, including a shrinking pie of potential business.

According to Staffing Industry Analysts, 66% of companies are in the process of reducing the number of staffing suppliers, and 26% anticipate consolidating suppliers over the next two years.

Staffing industry players will need to consider the latest technology, the best internal processes and the most effective leadership and organizational strategies in order to stay one step ahead of the competition. They must also be ready to address changes within the nation’s work force, which includes an expanding gig economy that has more people working from home, often with short-term contracts.

Staffing firm M&A activity

The pace of consolidations in the industry slowed somewhat last year and pricing was stagnant. We are interested to see what happens in 2017 with anticipated reductions in business regulations and a predicted repeal of the Affordable Care Act.

The 69 publicly announced merger & acquisition transactions among staffing firms in North America last year represented a 25% year-over-year decline, according to Staffing Industry Analysts. It was similar to the number of deals reported in 2013 and 2014, SIA said.

The two largest professional segments — IT temp and healthcare temp — together are the preferred acquisition target for about half of potential staffing firm acquirers, SIA notes.

However, SIA said that the intensity of acquisition interest, or the ratio of buyers vs. available targets varied markedly by segment. At the high end of interest, there were nearly four staffing firms seeking to acquire in the clinical/scientific temp segment for every one staffing firm that said clinical/scientific temp was their primary segment offered.

Private equity overview

In 2016, buyout activity receded amid growing concerns about global trade, rising populism and central bank policies, according to PitchBook, which said many large corporations have resorted to competing with private equity firms — pushing up multiples and squeezing out any margin for error.

It said $649 billion in PE transactions were completed last year, accounting for 3,538 deals, representing 12% and 14% year-over-year decreases, respectively. The tech sector, which completed 567 deals with $159.8 billion, saw the most activity than any other time in the last 15 years.

PE firms still have a collective $852 billion in dry powder globally, and the U.S. remains an attractive target for foreign investors seeking yield and security, according to the 2016 “Pitchbook US PE Breakdown,” written in partnership with Merrill Corp.

Conclusions

In the background of these challenges, we have the question everyone wants to know: When will the next recession hit? With seven years of economic expansion under the U.S. belt, a recession, conceivably, could be in the not-too-distant future. Have staffing firms prepared for the downturn that is to come?

Capital Alliance Corp. will continue to report on the latest staffing news, trends and perspectives in its blog throughout the year.

Capital Alliance Corporation is a Dallas-based investment banking firm with an extensive international reach and a 40-year history of providing trustworthy advice to private company shareholders who want to sell their businesses. Our team has deep operational and M&A experience across broad human capital management (HCM) and technology sectors.

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