Why Specialization Is a Winning Formula for Staffing Services

Most job seekers find more suitable openings on niche job sites than general ones. The same logic applies to specialized staffing firms, which have found more success than their generalist peers.

Feb 12, 2014 at 7:00AM

While most staffing firms seem largely indistinguishable from each other, a look at the gross profit margins of the different staffing firms tells a completely different story. At one end of the spectrum, Robert Half (NYSE:RHI) and On Assignment (NYSE:ASGN) deliver gross margins in the 30%-40% range. On the other end, the gross margins for Manpower Group (NYSE:MAN) are only in the high teens.

Specialization (or the lack thereof) accounts for the disparity in profitability between the various companies. Based on research done by Staffing Industry Analysts, professional staffing revenues currently account for more than half of industry revenues compared to only a third of the market nearly two decades ago. It is clear that more staffing firms are moving toward professional and specialized staffing services to get a bigger bang for their buck.

Accounting and finance specialist
Robert Half's brand name is almost synonymous with accounting and finance jobs. Accounting represents a key area of manpower needs where the quality of the staff is critical. If the accountant hired isn't competent, for example, the filing of financial records with the relevant authorities might be delayed and cause negative repercussions for the employer. 

Accounting talent is also scarce relative to demand. According to the 2012-2013 edition of the Occupational Outlook Handbook published by the U.S. Bureau of Labor Statistics, accounting related clerical work expected to be among the top 15 occupations with strongest new job growth between 2010 and 2020. Based on a survey conducted by the American Institute of Certified Public Accountants, hiring of accounting graduates hit a record high of 40,350 in 2012.

Robert Half boasts one of the highest margins in the industry thanks to a few factors. It has lower costs because its knowledge of employers' accounting recruitment needs allows it to target its marketing efforts at potential clients more effectively. Robert Half can also charge a price premium because of its reputation and scale. The network effect comes into play here; more accountants approach Robert Half to handle their job searches, which in turn leads to more employers going to Robert Half to meet their staffing needs in the accounting and finance domains.

IT specialist
On Assignment is the second largest information technology (IT) staffing firm in the U.S., with other specializations in life sciences, physicians, and health care. Its margins are lower than Robert Half because of a low level (2%) of revenue contribution from permanent placement, but On Assignment's overall margins are still much higher that its peers. For example, its high-end IT staffing division Oxford boasts gross margins and average billing rates as high as 34.4% and $123 per hour respectively.

Oxford has strong pricing power because of two key reasons. One is that high-end IT staffers are typically recruited for urgent projects where time pressure makes employers less price sensitive. The other reason is that Oxford provides skilled IT staff who are highest tier of labor in the market. There is a embedded price premium in the billing rates, given that companies don't have to provide additional training on their own.

Industry data validates the huge growth potential of the IT staffing market. Computerworld's annual 2013 survey indicates that close to a third of companies plan to add more IT staff to their ranks in 2014. Also, Staffing Industry Analysts expects the IT staffing industry to grow by 7% in 2014.

Aspiring specialist
In contrast with Robert Half and On Assignment, generalist staffing firms like Manpower supply staff possessing commonplace skill sets and hence they have to compete on price. That explains Manpower's lower gross margins relative to its peers.

Manpower understood the need for having a bigger presence in the more profitable professional staffing segment.  In September 2011, Manpower rebranded its Manpower Professional talent resourcing operation as Experis. Unlike its more generic recruitment workforce solutions branded as Manpower, Experis focuses on specialized recruitment in the area of information technology, finance, engineering, and health care. For example, Experis Health counts 60% of the top 250 health care companies in the world as its customers.

However, Experis is still a small part of Manpower's overall business. In fiscal 2012, Experis accounted for only about 17% of Manpower's gross profits. Manpower has plans to further expand Experis' operations.

Foolish final thoughts
I have talked a lot about demand from employers, but supply of potential job seekers is equally important. Job seekers tend to share common characteristics and needs based on their industry focus. This makes it easier for specialized staffing companies like Robert Half and On Assignment to meet their unique needs. With a group of engaged jobseekers in their portfolio, Robert Half and On Assignment have no problems attracting business from top employers in their respective industries.

 

The one sure way to get wealthy is to invest in a groundbreaking company that goes on to dominate a multibillion dollar industry. Our analysts have done it before with the likes of Amazon and Netflix. And now they think they've done it again with three stock picks that they believe could generate the same type of phenomenal returns. They've revealed these picks in a new free report that you can download instantly by clicking here now.

Mark Lin has no position in any stocks mentioned. The Motley Fool recommends Robert Half International. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Money to your ears - A great FREE investing resource for you

The best way to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as “binge-worthy finance.”

Feb 1, 2016 at 5:03PM

Whether we're in the midst of earnings season or riding out the market's lulls, you want to know the best strategies for your money.

And you'll want to go beyond the hype of screaming TV personalities, fear-mongering ads, and "analysis" from people who might have your email address ... but no track record of success.

In short, you want a voice of reason you can count on.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich," rated The Motley Fool as the #1 place online to get smarter about investing.

And one of the easiest, most enjoyable, most valuable ways to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as "binge-worthy finance."

Whether you make it part of your daily commute or you save up and listen to a handful of episodes for your 50-mile bike rides or long soaks in a bubble bath (or both!), the podcasts make sense of your money.

And unlike so many who want to make the subjects of personal finance and investing complicated and scary, our podcasts are clear, insightful, and (yes, it's true) fun.

Our free suite of podcasts

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. The show is also heard weekly on dozens of radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable. Rule Breaker Investing and Answers are timeless, so it's worth going back to and listening from the very start; the other three are focused more on today's events, so listen to the most recent first.

All are available for free at www.fool.com/podcasts.

If you're looking for a friendly voice ... with great advice on how to make the most of your money ... from a business with a lengthy track record of success ... in clear, compelling language ... I encourage you to give a listen to our free podcasts.

Head to www.fool.com/podcasts, give them a spin, and you can subscribe there (at iTunes, Stitcher, or our other partners) if you want to receive them regularly.

It's money to your ears.

 


Compare Brokers