There was a time when the staffing industry was awash with margin. Not so long ago, actually. In the early 1990s, staffing agencies were being well paid for a valuable service — a service customers relied on.
In the intervening years, procurement departments have brought contingent labor spend onto the radar. As a result, staffing suppliers eager to achieve preferred supplier or managed service provider tier-1 status have, on numerous occasions, been involved in a competitive “race-to-the-bottom.” The differentiator has repeatedly been one of price and overall cost reductions.
As the old saying goes, “you get what you pay for,” and it seems this also pertains to staffing providers as buyers have come to take a somewhat dim view of their service, according to the data from our 2014 Contingent Buyer Survey. In that survey, a Net Promoter Score (NPS) was used to benchmark buyer perception of customer performance.
To determine an NPS, customers are asked, “On a scale from 0 to 10, with ‘0’ being ‘very unlikely’ and ’10’ being ‘extremely likely,’ how likely are you to recommend the company, product or service to a friend or colleague?” Scores of “9” and “10” are recognized as “promoters.” Scores of “7” or “8” are recognized as “passives.” Scores of “6” or lower are considered “detractors.” The NPS is derived by subtracting the percent of “detractors” from the “promoters.” Buyers participating in our survey gave primary staffing suppliers an NPS of -24%. As a frame of reference, customer-focused powerhouses like Apple score north of 75%. Given this poor performance of the staffing industry, it is not so surprising supplier margins have trended at a rate that is seemingly inversely proportional to the complexity of the solutions they are providing. This is surely not sustainable.
Without a doubt, the work effort to deliver complex staffing services has increased over the years. One only has to consider the additional work effort necessary for a staffing company to ensure its own and its client’s compliance to the numerous legislative requirements that didn’t even exist 20 years ago. Whether that be the Affordable Care Act in the US, Agency Workers Regulation across Europe, or amendments to the Japanese and Chinese Dispatch Laws in Asia, all have to be managed while at the same time reducing fees and sourcing ever harder to find candidates.
There is a genuine race for skills and staffing companies are having to engage in innovative methods to locate, engage and attract suitable candidates for their clients.
So the question is: Can service levels continue to improve if margins continue to fall? Is there a tipping point when the reduced price paid to staffing service providers (lower margins/markups, MSP/VMS fees and more volume/tenure/early payment discounts) have a measurable and detrimental impact on the end client’s market competitiveness? At what point does “cheap become expensive?”
When this happens, in the absence of a viable alternative, contingent workforce managers are going to have to adjust their way of thinking to maintain and improve (ultimately) their shareholder value.
Of course, a reduction in cost and an improvement in quality are both valid objectives. But how can they both be achieved effectively? How can you measure the true value you are receiving (as a buyer) or providing (as a seller)? And are there other ways to measure value that are actually consistent with rising costs?
Organizations are starting to ask staffing providers how they can measure productivity. Let’s face it, a worker who delivers three times the output of someone who is half their daily rate is 33% more cost effective. However, measuring productivity is a real challenge where the output cannot be easily counted.
It is interesting how differently some of us spend company money versus our own money. Not many of us would make a key purchasing decision such as what house, car, clothes or the next gadget to buy on price alone. Personal key purchases are generally made based on a subconscious belief that we get what we pay for.
Skills attraction/retention and legal/regulatory compliance are consistently considered the top two priorities for buyers over the next 10 years. In fact, in our 2014 Contingent Buyer Survey, the following percentages of respondents rated these drivers as either the first or second issues/concern over the next 10 years: Europe: 86%, North America: 42%, APAC: 46%
Everybody wants value for their money and staffing providers need to be recognized for the undoubted measurable value they provide in such areas as skills attraction/retention and legal/regulatory compliance.
If procurement and HR buyers can communicate with suppliers in a language that they all understand, then a fair price can be agreed for a service that enables the end client to be more competitive in its chosen market. In the future we may even see staffing margins increasing and a sustainable improvement in service levels.