Apr 6, 2023

Staffing Leaders Express Sector Optimism at Staffing Industry Analysts’ (SIA) Executive Forum

SIA Executive Forum
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Front-line Insights from SIA’s Executive Forum North America Conference

Through conversations with staffing firms, keynote speakers, and panel discussions led by C-Suite executives at Staffing Industry Analysts’ (SIA) Executive Forum North America conference, we have identified several factors that are expected to influence staffing leaders’ outlook, shaping the Human Resources (HR) & Staffing Services sector through 2023.

1. Economic Downturn Presents Opportunity for Operational Investments

Despite elevated levels of inflation, HR & Staffing Services sector participants have been able to maintain healthy margins as most firms utilize a mark-up pricing model, raising bill rates in tandem with inflation. In addition, many participants have enacted strict cost-containment plans, managed through periods of economic growth and decline, which have mitigated financial risks during recessionary periods. As a result, the current economic downturn has presented an opportunity for sector players to focus on enhancing operational efficiencies through investments in key areas including new revenue sources, client relationships, technology solutions, sales strategies, and strategic acquisitions. As noted by private equity panelist Mike Kohlsdorf, President at Francisco Partners, staffing firms can supplement revenue streams during a recession through penetrating new verticals, expanding geographic presence, and maximizing the return on investment (ROI) of current offerings. Co-panelist Mahfuz Ahmed, CEO at DISYS, added that mergers and acquisitions (M&A) can serve as a key strategic option to strengthen business operations during a downturn.

“The most difficult time for staffing businesses in a recession is when they are between $250 million and $450 million. If a business is in that range, take a very close look at completing acquisitions to shore-up operations. That is the time when the business is in a position where they cannot cut fast enough if the economy takes a dive. Take the time to see if there is an appropriate M&A candidate for the business to create scale,” said Mahfuz Ahmed during a panel.

2. Sponsors Capitalize on Sector Maturity

Private equity firms have increasingly targeted HR & Staffing Services sector participants, prioritizing target companies with margin strength, low customer concentration, and demonstrated end market expertise. The primary drivers of private equity interest, and overall M&A activity, have been sector maturation and a shift in sponsors’ fund model to rapidly recycle capital. Despite elevated interest rates, private equity has remained armed with ample levels of dry powder, targeting multiple mid-sized deals to offset risks associated with large-scale transactions. Private equity firm Achieve Partners has demonstrated this with four sector add-on engagements completed in 2022. Cassidy Leventhal, Vice President at Achieve Partners, commented on how interest rates have impacted the firm’s HR & Staffing Services acquisition strategy during a panel discussion.

“When interest rates are lower, there is a ton of money than cannot get a return in the interest world, so it is funneled into private equity. As a result, the deals naturally start to get larger as firms want to deploy more capital. With interest rates increasing, there are more opportunities for smaller companies as private equity pulls back from the giant deals. 2023 will be a year for mid-sized companies. With plenty of dry powder, we have started to place it with a few mid-sized companies as opposed to one large transaction. 2023 will also be a year for strategics. We have had multiple strategics reach out to acquire some of our portfolios in the Staffing space as valuations moderate,” said Cassidy Leventhal.

To create optimal exit opportunities for portfolio businesses, sponsors in the space have placed heightened value on sector participants’ ability to create scale and strong, sustained financial results. This investment criteria has created a robust sponsor-to-sponsor deal making environment in the HR & Staffing Services sector, with mature players garnering healthy valuations upon exit. Jim Childs, Principal at private equity firm Childs Capital Partners, provided further rationale on sponsor deal making conditions during a panel discussion. “What is interesting to me in the Staffing space is that vintage year matters. If you look back at private equity investing in the 2010’s, the people who were early cycle did great. We are seeing many of those companies transact twice in this cycle, with a lot of the mature businesses now on their second private equity partner. The late part of the cycle has been dominated by particular segments, but valuations are still pretty high overall as private equity has been more selective,” said Jim Childs.

3. Strategic Buyers Target Founder-Led Businesses

Active strategic and sponsor-backed buyers in the sector have continued to target founder-led businesses with a deep management bench to create scale and strengthen leadership teams. Acquirers’ expectations for management retention may vary, however long-term incentives for staffing founders and executives are often implemented during a M&A process to ensure a successful integration of the selling entity. Executive search firm Vaco has exemplified this strategy with 18 acquisitions completed since its founding in 2002, seven of which were completed following a majority investment from Olympus Partners in November 2017 (undisclosed). Brian Waller, Co-Founder and CEO at Vaco, spoke to the value of acquiring founder-led business during a panel discussion. “We are interested in businesses where the founder wants to stay on and be part of our leadership team going forward. Even if a seller considers private equity and strategic buyers, there are a lot of acquirers who want to the leaders to stay on board for some meaningful amount of time to assist in growth planning, employee retention, and a smooth integration,” said Brian Waller.

4. Labor Supply Faces Reduction Pressures, Driving Direct Sourcing Adoption

The U.S. labor market has continued to experience significant shortages through 2022 and into 2023, supporting demand for recruitment and placement services. Labor shortages are likely to persist beyond 2023, largely driven by an aging U.S. population. Of note, the labor force participation of U.S. adults over the age of 65 dropped to 19.3% in January 2023 from 20.7% in January 2020, according to SIA President Barry Asin. Workers’ affinity for part-time roles has also contributed to recent shortages of full-time candidates, with 1.2 million more voluntary part-time workers in 2022 compared to pre-pandemic levels.

As the pool of qualified full-time candidates has declined, enterprise clients have increasingly turned to staffing providers offering direct sourcing services. In 2022, 35% of enterprise clients leveraged the direct sourcing model as opposed to passive recruitment methods such as job boards, according to SIA President Barry Asin. An additional 49% of enterprise clients indicated an interest in utilizing direct sourcing providers over the next two years. Enterprise clients have placed a premium on direct sourcing services as 71% were forced to raise pay rates in 2022 to bolster employee retention, according to SIA President Barry Asin.

5. Contingent Staffing Segment Sees Heightened Spending

Workers’ flight to the gig economy has spurred elevated spending in the Contingent Staffing segment. Notably, the number of independent contractors in the U.S. rose 60% in January 2023 compared to January 2019, according to SIA President Barry Asin. In 2022, global Contingent Staffing spending reached a record $5.4 trillion. The U.S. market represents the largest recipient of global spending, accounting for 31.5% ($1.7 trillion) of total spending in 2022, marking an increase of 28% from 2019. Although the Healthcare and Information Technology (IT) verticals continued to capture the lion’s share of U.S. Contingent Staffing spending in 2022, the Industrial vertical garnered the greatest year-over-year (YOY) spending increase in 2022, rising 10% YOY to $42 billion.

6. Staffing Firms Increasingly Diversify Offerings to Deliver Total Talent Solutions

Driven by workforce shortages and the need to swiftly onboard new talent, organizations have increasingly relied on outsourced services to deliver total talent solutions and manage all aspects of workforce strategy. Through organic growth and M&A, sector participants have begun to diversify services to include HR consulting, outplacement, employee retention engagement, payrolling, and upskilling services. Although only 17% of sector players offered total talent solutions in 2022, 52% plan to roll out comprehensive services by 2024, according to SIA President Barry Asin. Staffing firms that can contribute to clients’ total talent needs are poised to capture heightened revenue and acquisition opportunities throughout 2023 and beyond.

To discuss our experience at SIA’s Executive Forum North America conference, provide an update on your business, or learn about Capstone’s wide range of advisory services and HR & Staffing Services sector knowledge, please contact us.

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