With the continued talent shortage creating demand for contingent workers, staffing firms are experiencing new opportunities to expand and diversify their services. Many are joining forces to seize growth, as seen by a flurry of mergers and acquisitions in this dynamic space. To learn more about the challenges, opportunities, and outlook for the US staffing industry, read on.
The US staffing industry and contingent workforce have become integral to the economy. Driven by the unique employee recruitment environment over the past year with the Great Resignation and dramatic labor pyramid shifts, staffing firms are being presented with new growth opportunities as they help fill the talent gap.
On the back of strong economic growth in 2021, the staffing industry grew significantly. However, this momentum is expected to drop off due to a myriad of internal systemic challenges and increased competition from traditional and non-traditional players.
Despite the anticipated slowdown, the market is still expected to remain above pre-pandemic levels as enterprises increasingly turn to the contingent workforce in the next 12 to 18 months, according to Everest Group’s Future of Work 2021 survey.
Additionally, the fear of a looming economic downturn and associated layoffs will further add to contingent talent demand because enterprises will not want to invest in full-time hiring with the uncertainty.
Given such rapid fluctuations in the market, staffing firms must navigate various challenges to sustain their growth trajectory, including:
- Rise of alternate sourcing channels: As contingent talent gains hold, enterprises are increasing investments in advanced contingent workforce management solutions and alternate sourcing channels. The current lack of sophistication in leveraging contingent workers will likely prevent any single alternate channel from threatening the staffing industry’s business. However, enterprises are looking at the entire gamut of hiring approaches such as direct sourcing and gig platforms to broaden their search scope and meet talent requirements. This increased competition in the staffing space, coupled with higher penetration of Managed Service Providers (MSPs), who aim to reduce supplier costs and draw their fees from supplier margins, will impact traditional suppliers’ or staffing firms’ net fee incomes
- Lack of differentiation and commoditization: The staffing industry globally and especially in the US, has two unique characteristics.
- Staffing firms do not enjoy an exclusive relationship with associates. Associates/candidates typically have relationships with multiple staffing firms and have next to no switching costs.
- Clients release a requisition to several staffing firms simultaneously. Price and speed of execution play a significant role in winning business.
The combination of the above factors results in commoditization and difficulties in creating and sustaining differentiation in a highly fragmented industry with low entry barriers
- Cyclical and uncertain business: The staffing business is cyclical, and growth is linked to broader economic growth. While some market segments/roles may be resilient to changes in the business environment, the overall industry is vulnerable to business cycles. Leading economic indicators suggest the possibility of a recession in the future, which would impact the staffing industry’s growth
While current market conditions present a significant number of challenges and disruptions for staffing firms, many of these obstacles can be pre-empted if staffing firms begin to differentiate themselves.
While staff augmentation is largely commoditized, going up the value chain is one of the main ways through which staffing firms can differentiate themselves. Staffing firms can also invest in areas such as associate upskilling/reskilling, technology integration with services, and Diversity, Equity, and Inclusion (DE&I) to stand out. Based on their historic growth and penetration levels, staffing firms may explore opportunities to diversify across the following areas
- Geography: Expansion across new domestic and international geographies
- Industry: Expansion across new sectors and clientele
- Skill categories: Expansion across new and adjacent skill categories
- Solutions: Building capabilities to offer high-value solutions beyond staff augmentation, such as managed services
The staffing industry has been very dynamic in recent years, with service providers expanding their capabilities and diversifying their portfolios, both organically and inorganically. Service providers have been quick to capitalize on the opportunity offered by the pandemic and moved quickly to expand their capabilities and portfolios via mergers and acquisitions. Some of the most interesting and significant developments include:
- ManpowerGroup, a workforce solutions firm, acquired Ettain group, a staffing firm focusing on IT, healthcare, and digital creative managed services, to bolster its global IT staffing and managed services brand, Experis. The deal is expected to improve ManpowerGroup’s strength in delivering IT staffing services to financial services and healthcare clients
- Adecco Group, a staffing and talent advisory firm, acquired AKKA, an engineering and R&D staffing firm, to bolster its high-tech services brand, Modis. AKKA and Modis will jointly form Akkodis to strengthen its capabilities as a digital solutions provider in the smart-industry market
- Motion Recruitment Partners, an IT talent solutions firm, acquired MATRIX Resources, an IT staffing and managed services firm, to bolster its specialized IT staffing business. This acquisition will enable MRP to expand into six new sales markets. It also acquired The Goal, an IT staffing provider, to strengthen its presence with federal government clients
- Kelly Services, an IT, science, and engineering staffing firm, acquired Softworld, a specialty IT staffing firm, to add new high-tech skill categories as well as to deepen its presence in industries such as financial services, healthcare and life sciences, aerospace, defense, and retail
- Swoon, a US-based staffing firm, acquired Grapevine Talent Acquisition, an executive search firm, to expand into niche industries such as sensors and controls, pharmaceutical, petrochemical, biotechnology, satellite agriculture, linear components, and process instrumentation
- Digital Intelligence Systems (DISYS), a global staffing and managed services firm, acquired Signature Consultants, an IT staffing, managed services, and consulting firm, to deepen its IT staffing capabilities and expand into new North American clients.
Thus, the staffing space continues to provide opportunities for staffing firms to diversify their portfolios into new geographies, skill categories, and managed services solutions through M&A activity. As the economic environment is frequenting between crest and trough, the staffing industry will continue to remain dynamic. Additionally, fears of looming recessions and funding freezes across industries will offer a unique opportunity for well-capitalized staffing providers to pursue M&A targets at attractive valuations.
Learn more about workforce changes, read the blog, Deconstructing the Future of Work Trends.