Tech-driven M&A, and tech-driven reskilling are two recent developments in the rapidly evolving recruitment, staffing and talent markets
The increasing rate of digital transformation of so many business processes has had a significant impact on recruitment, staffing and training companies, and others involved in the workforce solutions sectors. We are seeing this transformation on an international scale, particularly in the form of "platformisation", which has disrupted traditional staffing and talent markets across the globe.
Workforce solutions companies are themselves automating many processes and there has been plenty of comment, for example, about the use of algorithms and artificial intelligence (AI) in relation to candidate selection.
But there are two other technology-driven industry developments which are perhaps less obvious.
The first is the amount of technology-driven merger and acquisition (M&A) activity going on in the sector. In recent deals, we have seen technology companies such as online staffing platforms acquire or merge with traditional staffing companies operating in high volume (rather than niche or specialist) markets and a traditional UK staffing company move away from staffing supply altogether to become a Software-as-a-Service offering, eventually being bought by private equity as a tech business.
Staffing companies that do volume staffing and recruitment have increasingly been seen as suppliers of an undifferentiated commodity service and, as a result, their margins have been squeezed so much that it seems the only way to extract any more profit from these businesses is to automate or "platformise" the whole process. For owners of these businesses, the added attraction (as well as higher margins and easier scaleability) is the thought that, when they look to exit, they will be valued as technology companies rather than industrial recruiters, which will usually mean the EBITDA multiples paid by investors will double or more.
However, the balance sheets and skillsets of staffing companies do not really lend themselves to re-invention as technology businesses: except for the largest staffing companies in the world, they do not generally have the ability to invest in or the skills to develop their own solutions. They could look to get relevant software from a third party but the dependency on that third party might mean that the staffing company owners never receive full rewards for the digital transformation of their businesses – many investors do not like to see such dependency.
Technology companies have been filling the gap: they are developing platform-based approaches to recruitment and staffing, and then merging with staffing companies to give the technology companies tried and tested compliance systems (gig platforms having some well-documented current issues with worker rights issues) and a ready-made pool of candidates to deploy and clients to service.
We are also seeing private equity-backed "buy and build" plans with the objective of bringing together traditional staffing companies under a technology-driven central hub.
Of course the pandemic has brought widespread skills shortages and so it has been a profitable time recently for staffing and recruitment companies who do volume staffing. But we suspect margin squeeze will return and, with that, much technology-driven M&A in the sector.
The second development is the transformation by many staffing companies of their businesses in response to their clients' digital transformation. As has been widely observed, there is an increasing range of skills shortages – the UK's Department of Business, Energy and Industrial Strategy recently published a report from PwC on the potential impact of AI and related technologies on UK employment and the demand for skills across different sectors. The report found that 7 million people in the UK could potentially be under-skilled for the jobs that will exist in 2030, and many areas of the economy are already feeling skills shortages.
Some funding for this reskilling is likely to come from the public sector, increased funding for skills training was included in the UK government's recent budget announcements (and, internationally, other governments are making similar noises). However, the scale of reskilling makes it likely that the private sector will also need to contribute significantly to funding the growth in tech skills in the workforce.
IT staffing and recruitment companies have spotted a growing demand for talent development solutions to help grow talent in areas of talent shortage. There is clearly a role for new types of training company in this area. We believe there will be an increase in hire-train-deploy companies, which take on trainees, train them and then make them available for extended contracts of one to two years to end clients on a try-then-hire basis. This model currently works well to develop skills for technology roles but we can see this approach extending to training and reskilling for "green jobs" in the not too distant future. The burden and investment risk of training would be borne in this scenario by the train-and-deploy business, perhaps with some use of government training funding, rather than the end employer.
Margins are up
And, again, this trend is proving highly profitable for owners of staffing companies – margins are increased as they offer their services as consultancy or outsourcing companies (rather than as IT recruiters) and EBITDA multiples go up on exit.