Staffing firms are uniquely attuned to the economy's normal boom-and-bust cycle due to their involvement in fulfilling workforce demand. In an economy at or near full employment, staffing business abounds as companies need more help convincing highly skilled yet passive candidates to consider direct hire and contingent positions. However, when the situation reverses and the U.S. enters a recession, companies grow hesitant about hiring, limiting the number of placements staffing agencies can make while straining their revenue generation. With economists predicting that a recession is just over the horizon (some say in early 2019), a growing number of staffing firms are contemplating how to make their business recession-proof. If you are concerned about how the next recession will impact your firm, here are some considerations.
Know the Signs (without obsessing)
What will cause the next economic recession? As of yet, there is no definitive answer, although the various circumstances that have contributed to previous recessions are worth mentioning:
- Economic Bubbles Whenever there is excessive speculation in a specific market well beyond its intrinsic value, there are bound to be large scale ramifications. The collapse of the dot-com bubble or the U.S. housing bubble both contributed to separate recessions as their markets nosedived and the larger economy responded in a panic. Currently, there are speculations about the next bubble, but no clear catalyst for the next recession has made itself known.
- Interest Rates Though interest rates change for a variety of reasons, certain patterns can signal an approaching recession. In fact, the arc of the yield curve, which shows the interest rate paid for bonds of different securities, can be a yellow flag for businesses watching for signs. A normal yield curve, where short-term interest rates are lower than long-term rates, is in response to economic expansion, while an inverted yield curve, where long-term interest rates are lower than short-term interest rates, indicates stagnation. Though not a definitive indicator, most of the recessions since 1975 have coincided with a yield spread (the difference between bond yields of varying maturities) that has been low or negative.
- Phillips Curve Another economic curve to monitor is the Phillips curve, which notes an inverse relationship between rates of unemployment and pay. The theory goes that when unemployment is on the rise, the rate of increase for payment is lower, and that as the economy approaches full employment, inflation increases. Though not infallible, the Philips Curve provided warning of the Great Recession and the recession between '81 and '82. Take a look at long-term and short-term Phillips curve projections to see if the warning signs are apparent.
- High Debt Levels Some of the economists who predicted the last recession point to high debt levels as indicator of future recessions. Their findings show that employment levels and credit relative to GDP often synchronize. Though debt in the U.S. market has mostly stabilized since the Great Recession, the Chinese economy is at bubble levels, which when it bursts could have worldwide repercussions.
One key consideration to keep in mind is that an economic slump is not a recession until it has persisted for two consecutive quarters. That means that if some of these signals appear, there's no need to panic. Though awareness is crucial, staffing firms are better served focusing on their day-to-day operations than jumping at shadows.
Prepare Your Recession Contingency Plan
Why go through all of the trouble to plan for a recession? To paraphrase Ben Casselman of FiveThirtyEight, recession planning ensures you are not "arguing about firefighting strategies from inside a burning building." Creating committees to analyze the current economic situation and develop an efficient response takes time that a staffing firm cannot afford when revenue and margins are in the process of eroding.
Each recession contingency plan varies depending on a staffing firm's size, industry verticals, and geographic location, but all firms should keep the following in mind while preparing for a recession:
- Evaluate Possible Scenarios An effective recession contingency plan explores various "what-if" scenarios and explores potential solutions. What if your largest client cuts back on temporary placements and revenue decreases 45%? What if workforce demand for a staffing vertical drastically drops and one of your divisions is on the verge of closing? What if 30% of your clients eliminate vendors to reduce costs? Preparing for each scenario improves response time and lowers the financial impact of each issue.
- Securing Positive Cash Flow How long is your staffing firm prepared to operate with diminished revenue? Run projections in advance to determine how many months you can continue to cover individual employee and program costs (if you want to review all the expenses of an onshore recruiter, read our guide). By establishing a contingency fund and understanding the upper limits of your budgets, it's easier to rein in expenses and maintain solvency for the duration of the recession.
On top of preparing your business to respond in the moment, a recession contingency plan also equips your staffing firm for maximum performance now. Getting the planning out of the way early allows your leadership team to focus on improving talent pipelines, decreasing submittal times, and building sturdy client relationships (all of which improve a staffing firm's odds of being recession proof).
Identify Your Most Profitable Recruiters
Staffing firms are even more dependent during a recession upon their top performing recruiters to continually make placements and prevent profit margins from shrinking. The loss of a top recruiting asset can mean disproportionate loss in a staffing firm's earning power. Effective recession planning identifies the ROI of each recruiting resource, whether onshore or offshore, to better prioritize retention strategies and ensure that any future workforce restructuring is as objective of a decision as possible which can be difficult when made in the spur of the moment.
The reality is that when some staffing firms are faced with downsizing their onshore workforce, an emotional decision to keep junior recruiters with low KPIs and layoff offshore recruiters with high KPIs can be all too appealing to avoid hurting team morale. However, ending a relationship with an offshore recruiting team to avoid onshore discomfort can have the opposite effect as margins continue to drop and your top performers are pressured to pick up the slack.
During their recession preparation, one of our clients on the Staffing Industry Analysts Top 50 list did their due diligence and compared the performance of onshore and offshore resources to find the perfect balance for their team. Crunching the numbers, they found an interesting phenomenon: that PSG's offshore recruiting program accounted for 22% of their margin dollars, but only 11% of their costs while their onshore resources accounted for 78% of margin dollar and 89% of their costs. Offshore resources produced double the ROI compared to their budget, while their onshore team proved to be more of a cost center.
In a tough economic environment, successful staffing firms invest in recruiting solutions that deliver higher ROI. In some case, that will mean expanding the headcount of their offshore team, utilizing their expertise to handle sourcing, screening, administrative support, or even full lifecycle recruiting as they supplement top onshore recruiters on your team.
Want to effectively prepare your staffing firm for the next recession? Get your guide to "Comparing The Cost of Onshore Recruiters vs Offshore Recruiters" to better inform your decisions about streamlining your workforce and improving your ROI.
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