by Real Business - Thursday, 30th August 2007

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Fifteen billion pounds of turnover, around 940,000 employees, 200 per cent growth since 1992 and you never have to go far to find another millionaire entrepreneur: the recruitment industry has all the attributes of a winner.

And with all the insouciance you’d expect from the sector that invented temp-to-perm fees – they take a hefty 20 per cent cut if you make “their” temp permanent – one of them recently ignored the fund managers’ downer on companies worth less than £1bn and pulled off a Stock Exchange flotation. Les Clark and Andy Baker, founders of Glotel – a £100m-turnover global provider of specialist engineers for telecommunications projects – hit the City with a little display of the salesmanship for which their industry is renowned. Placed at 140p in May, the shares were 200p within a month. That made it a £76m company and valued Clark and Baker at around £30m each. Not bad for a business they started ten years ago.

And if you knock off a nought, it’s not untypical, either. Glotel came only 28th in the annual listing of UK industry leaders compiled by its cheerleader, Recruitment International magazine. It reckons 155 recruitment consultancies have annual sales exceeding £10m, of which the vast majority are wholly owned by private individuals. The recruitment industry has plenty of reasons to be firmly on its front foot.

But it isn’t. At a big industry conference a year ago, Boss 1 got up and said the industry was sending out CVs indiscriminately and should “take a more professional approach.” Boss 2 said the industry “frequently failed to deliver the quality of service demanded by customers.” Boss 3 said, “Scratch your average consultant for depth of industry knowledge, sector participation, business awareness... and you won’t get very much of an answer.” And Boss 4 sounded as though he was already well into the therapy: “Our dedicated team of recruitment consultants are actively encouraged to listen twice as much as they talk.” Almost the only Boss with nothing to say was the one who made a reputation and a fortune from taping his consultants’ hands to their telephone receivers every morning and forbidding them to sit down until they had scored three appointments with prospective clients.

And when the industry isn’t being drubbed from inside, outsiders are happy to oblige. In June 1999, the government set the moral outrage lobby onto the industry with that little made-for-the-media spat about “temp-to-perm fees.” The government is reviewing recruitment regulations, many of which were swept away by the Tories on the grounds that they were a waste of space. Labour generally agrees, but it’s got a bee in its bonnet about temp-to-perm.

Before Labour turned it into a small incendiary device, the temp-to-perm fee was just a paragraph of small print in the contract you signed when the temp firm sent Gladys round. Two years on, you’ve just registered that Gladys is still there, doing a great job and on the face of it costing you 20 per cent of her salary extra per year, in the form of agency fees. Enough of that, you say in a fit of generosity. Come and join the staff, Gladys. Join the pension scheme and the holiday scheme. And, er, the maternity scheme. And I suppose we’ll be putting you in the share option scheme, too. And just as you are recollecting in detail all the costs that deterred you from putting Gladys on the staff in the first place, here comes a call from the agency. “We’re delighted Gladys is going from temporary to permanent,” they say, “and as you’ll see from clause 14b of our contract, that means we’ll be billing you for 20 per cent of her first year’s salary.” Stuff and off are two of the politer words that might spring to your mind.

Now, just a minute, say recruiters. Gladys might get that job offer after just two weeks, so without temp-to-perm fees, our clients would pinch all our best temps for just a fortnight’s temping fees, which is a lot less than it cost us to find them. To which the government says, Come off it. Many of you do little more than note their name, experience and address. Sometimes, you don’t even interview them. And the more high-minded among you wouldn’t charge a temp-to-perm fee for Gladys, anyway. Those who do are just trying it on. The argument will be back for a few more airings before it’s resolved. The government says it intends to ban temp-to-perm fees, although plenty of recruiters reckon they will be able to dissuade it.

Even if they do, it will remain the solid impression of outsiders that the recruitment industry has a high cowboy quotient. “A lot of this is a hangover from when temp agencies were seen as evil necessities,” says Larry Gould, who sold his Leeds-based chain of 15 high-street temping outlets to stockmarket operator, Spring, in 1996. “But the last recession turned them into respectable necessities. Companies laid off legions of employees, with two effects. One, people realised that the job for life with a company, including holidays and pension schemes, was no longer the only norm. Two, companies cut so deeply that they needed temps to cope with the slightest hiccup. Technology helped, too, by deskilling lots of jobs. Typewriters were intolerant of mistakes. Word processors are much more forgiving and lifted the contribution a temporary secretary could make. And the nature of work changed. In the nineties, data inputting is a huge user of labour and almost anyone can do it.”

Recruitment isn’t just about supplying secretaries and data inputters, though. A huge contributor to current buoyancy, of course, is the professional IT sector, which was making hay even before the millennium bug and the euro came along. In fact some suggest that this is the only component in the boom. “It is not recruitment that has been soaring, but simply the supply of IT staff on contract,” says Ron Moss who, with his partners, sold his IT resourcing firm to stockmarket high-flier, Parity, back in 1993, and stayed on until a few months ago. But as he enumerates the factors that kept him busy – “...booming spend in IT applications, the need for flexible labour resources, the retrenchment to core competencies, onerous employment legislation, skill shortages...” – most of them will resonate with managers in any industry. IT may be getting the clotted cream, but there’s plenty on offer elsewhere.

And not just in temporary positions. Recruitment consultants have also come to dominate the permanent jobs market. “Many companies now find it difficult to do their own recruitment,” says Mary Reilly, an Arthur Andersen partner who specialises in the sector. “As personnel departments transformed themselves into new-style HR departments, a frequent outcome has been the outsourcing of the recruitment process. Partly because firms did not want to carry the resources needed to place adverts, sift CVs, do the initial interviews. And partly because at the middle management level, work has become increasingly specialised. Furthermore the healthy economy means the best candidates have become a scarce commodity. If you want a new sales manager to promote a specific product, there are clear benefits in going to a recruitment firm that spends all day, every day, trawling that particular sector. The biggest successes in recruitment are companies that have created niches for themselves. They know who the candidates are without even needing to advertise.”

And although it is in the temporary contract rather than permanent placement end of the business, statistics buried in Glotel’s prospectus reinforce Reilly’s assessment. The 2,000 engineers which the firm has on placement to its clients have been drawn from a database of 100,000 individuals. And Glotel convinced its sponsors – heavyweight investment bank, HSBC – that “dedicated support staff ensure that information on the database on individual consultants remains current.”

While all sorts of social and industrial trends have been moving in the sector’s favour over recent years, a crucial bottom-up has also moulded its identity. Few other activities can compete with the recruitment consultancy for ease of set-up. The last hurdle was the annually renewed licence from the Department of Employment. This was abolished by the previous government’s reforms. In its review, Labour didn’t take long to concur with its predecessor’s judgment: “Licensing does not appear to have provided an effective control over the industry.” As Reilly observes, “Anyone with a knack for networking and gift for salesmanship can hit the phone and see how far they get.”

Recruitment is the stuff of salesmen’s dreams. Consider the products which are classically associated with the harder end of the salesmanship spectrum. Computers, cars, life insurance. All of these can be inspected and evaluated at the point of sale. But in recruitment services, the product – a shortlist of candidates – is notoriously hard to evaluate, even when it is sitting in front of you.

And at the point of sale you don’t even have that. The industry allows gifted salesman an unusual opportunity to weave their spells. Hence the industry’s huge and still growing number of participants and ample sprinkling of opportunist operators. The umbrella organisation, the well-resourced and effectively organised Federation of Recruitment and Employment Services – “our mission is to be the guardian of professional standards” – counted 5,150 members in March, an increase of 13 per cent on the March 1998 total. And its figures suggest that at least another 3,000 firms get by without subscribing to membership nor, perhaps, to those professional standards.

Such fragmentation, of course, creates the ideal circumstances in which quoted companies – keen to build an empire – can get on with the job. According to merchant bank, Granville, 32 recruitment firms changed hands in 1998 for a total value of £325m, following on from 22 deals in 1997 when almost £700m changed hands. And that’s only purchases of companies based in the UK. Seeking to emulate global giants such as Adecco of Switzerland (revenues $10bn) and the US Man-power ($9bn) – this business is buoyant worldwide – UK aspirants such as Select and Corporate Services Group have spent several hundred millions of their acquisition budgets abroad.

But as often happens when acquisitions are pursued one after another at breakneck speed, the outcome has not always been full of joy. Corporate Services, which in the ten years to 1998 grew from one office to 370 in the UK and France before splurging $250m on a US acquisition, came an almighty cropper this year as the numbers failed to add up time after time. Institutions culled directors en masse and the shares, which had risen 100-fold as the dream reached its climax, have come out of the affair 70 per cent lighter. Another busy buyer, Spring – the purchaser of Larry Gould’s company and ten others in the nineties – has suffered a similar reverse, although in this case the management has had a softer ride from the City.

But as heady earnings forecasts have been trimmed, shares in the rest of the sector, including even its classy IT members, have been heading in the same direction. Messrs Clark and Baker did well to float Glotel, but the satisfactory performance of their shares since the big day reflects the fact that they were priced to go at 17 times earnings, compared with the stockmarket-wide average of 26 times. Clark is philosophical: “The wilder swings of investor enthusiasm are inevitable. But Andy and I retained many more shares than we sold. We’re here for the long term. And the flotation pricing was a silver lining for the staff in our option scheme. They’re already 60p up on their option price.”

But among smaller and unquoted firms, it’s wall-to-wall optimism. One of the industry’s bigger personalities is self-styled pace-setter, James Caan. His company, Alexander Mann, more than doubled sales last year to £66m, “and we’re looking at 30 potential acquisitions.” Caan accords himself the instigator’s role in many industry trends, including inventing the “dealing room approach” to managing the sales team – bell-ringing and cheering when targets were reached (“but your article will be out of date if you think we still do that sort of thing”).

Up to date, he says, is “IT. It still has miles to go. One of our clients has just won a 15-year contract to computerise the Inland Revenue. Other government departments are spending huge sums on technology. Right now there are 30,000 unfilled vacancies in this sector and many firms have still not taken the big upgrade decisions.”

And what of the cowboy quotient? It should fade in time. Any industry experiencing rapid growth and defining itself in the process breeds a goldrush atmosphere, including opportunities to cut corners. The perpetrators can always find new clients to replace the disillusioned ones. And on the customer side, excessive demand inevitably creates a resigned acceptance of questionable practices and second-rate service.

Historically, the next stage might well have been for the government to introduce a swathe of regulations to protect the unwary from the unscrupulous. But it looks like we will escape such an outcome. However the issue of temp to perm is resolved, the government looks set to leave the industry to its own devices.

In the long term, natural forces should knock off the rougher edges. As the industry matures and competition intensifies, big, reliable brands with longer-term ambitions will assert themselves. But this process won’t be without its ironies: it will include many instances of the cowboys being richly pensioned off as they sell their firms to those with more enduring agendas.

Recruitment: it’s hot
In our Hot 100 ranking of the UK’s fastest-growing private companies, co-hosted with Arthur Andersen and Dun & Bradstreet, the recruitment industry fielded six of the hottest 25. IT recruitment, in particular, stole the show. Weybridge and London-based Plexus Personnel took top spot with an average four-year sales turnover growth rate of 112 per cent. So how do you succeed in this fizzing sector? “Networking, networking and networking,” says Mary Reilly of Arthur Andersen, who specialises in the sector. Oh, and make sure you stay focused. So if you want to witness real business growth, take a look at these numbers.

How the recruiters recruit
In an idle moment, you might ponder how recruitment firms recruit their own staff. Answer: from the industry’s ultimate specialists – the recruitment to recruitment sector. James Caan of Alexander Mann claims this was one of his innovations: “This was 15 years ago. I was talking to competitors at a conference and it amazed me how many were looking for staff. I set a team on the job. We were laughed out of court for about two weeks. Then we did a million of revenues out of it. But lots of others copied us, so we moved on.”

One of the others was Andrew Beard. His firm, McCall Associates, now has five offices with two openings due. “There are now something like 80 or 90 firms in our sector,” he says. “It’s very healthy, Our minimum growth in any of the last five years has been 80 per cent.

“Recruitment consultants are control freaks. They have to control the aspirations of both clients and candidates. It’s very money-motivated. In the eighties, these people went into stockbroking. Now, recruitment is a big option. They’re earning £20,000 to £30,000 a year in their mid-twenties. Successful should take you to £40,000 before you’re 30. Typically, their earnings will be usefully ahead of the people they’re placing. Yes, there’s high turnover, but it’s the same in any expanding business. There’s a shortage of experienced recruiters. Where do we get consultants from? Estate agency. There are many similarities in how you structure your day.”

This is no idle concern in the industry: it turns over staff at 20 per cent a year. In a recent survey, 97 per cent of recruitment firms said they thought the industry was poor at recruitment and retention.

Contacts
Alistair Blair, 1999 PPA Business Writer of the Year.
ablair@pobox.com

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