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.
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.
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.