staffing & executive search industry: Temps find a permanent place in the U.S. economy, The

Weekly Corporate Growth Report, May 28, 2002 by Bailey, John

What once were human resource functions provided by small, privately-owned support firms to any organization temporarily in need of key employees have grown into the second fastest growing industry in the U.S. with 2.2 million employees. Now, one in eight professionals in the workforce is a temp. These temps generated $56 billion in revenue in 2001, which when added to the almost $10 billion in revenue produced by executive search firms, adds up to a sizeable industry. The employee staffing and executive search industry is still widely decentralized, but now has a half dozen industry giants.

The staffing and executive search sectors are highly cyclical. In 2001 the industry shrank faster than the nation's economy, as there were fewer temporary and permanent positions available to fill. Annual revenue of temporary staffing services fell by 12% while permanent placement revenue fell by 25% from the 2000 levels. Forward thinking companies are seeking innovative ways to protest themselves from economic downswings by expanding their revenue base into corporate human resources. Professional employer organizations, or PEOs, have been formed take over most of the functions normally performed by a corporate human resources department. PEOs handle payroll, state and federal paperwork, workers' compensation, and benefits administration, charging 2% to 5% of payroll to cover costs, plus 9% to 20% of payroll to pay for benefits and cover their profit.

Expanding market share through acquisitions of both PEOs and other employee staffing and executive search firms is another growth strategy. Cyclical swings vary both geographically and within employment sectors. With the industry so decentralized, companies can search among many acquisition candidates to fill geographic areas not yet covered or move into an employment sector where demand is inelastic.

Among the larger acquisitions in the staffing industry in 2001 were CareerBuilder's $200 million purchase of HeadHunter.net, and Yahoo!'s $436 million acquisition of HotJobs.com. The latter is an example of a company dependent on cyclical advertising revenues seeking revenues in an equally cyclical employee staffing industry. Among smaller-cap companies there were a number of small transactions, most of which were acquisitions of temporary employee staffing firms in local markets. Since assets of companies in the industry are largely intangible and earnings of small firms are sometimes difficult to identify, the most telling multiple is the Price/Revenue multiple, which in 2001 moved back to historic levels.

Outlook

The 2001 recession of had a greater impact on the human resources industry than perhaps any other as the unemployment level climbed to its highest level in ten years. But there are faint signs of a turnaround. Robert Half International, the world's largest specialized staffing service, saw its revenues from permanent placement services fall by 19% in the fourth-quarter of 2001 and by 9% in the first-quarter of 2002. Korn/Ferry International's figures showed a 20% jump in executive demand in the first-quarter of 2002 from the prior quarter. Rather than wait for the economic cycle to turn up, many firms in the industry will continue to diversify and seek strategic acquisitions.

By John Bailey

Contributing Editor