Recruiters are in trouble. Having expanded rapidly to around 30,000 agencies in recent years, and survived Covid, a dramatic fall in job vacancies is forcing record numbers of company failures in the sector.
A new analysis by CityAM of agency insolvencies in the last six months shows 120 recruitment firms in liquidation. It’s the fastest rate in 15 years for these businesses hitting the wall, with directors squarely blaming tax changes and new employment rules.
Recent hikes in employer National Insurance contributions (NICs) and a lower threshold for paying them are taking their toll on businesses in most sectors. Wider issues of stalled domestic output and lower consumer confidence have piled on the woe. Official GDP growth forecasts for 2025 have halved to 1.0% since the Autumn Budget. Little wonder that major publicly-listed recruitment firms such as Hays, Page Group and Robert Walters have, variously, reported falls in net fee income and gross profit.
The number of jobs available in the UK fell by 3.2% to 781,000 in the three months to March, according to the Office for National Statistics (ONS). The decline has been steady over several quarters: the figure is almost 40% down on March 2022.
Now businesses are steeling themselves for the impact of the Employment Rights Bill presently being scrutinised in parliament. It requires management to offer guaranteed-hours contracts to zero-hours workers, based on hours worked over a 12 week period. Retail and hospitality are set to be hit hardest and many part-time roles across all sectors may prove unsustainable for employers.
The people-based, commission or search fee revenue model of recruitment brings with it financial features and associated challenges that are unusual in many other sectors: relatively low levels of borrowing; in larger players, disproportionately high staff and office costs; a highly competitive market for income-generating senior practitioners; and client relationships that are often too closely linked to individuals, rather than to the firm itself.
In ‘new’ professional services – as distinct from traditional consulting professions such as law or accounting – barriers to entry for operators may be low, partly a result of fewer formal qualifications, lack of official regulation and debatable ‘professionalism’. For these reasons, such businesses are wrongly assumed to be low-risk and relatively easy to manage. In reality – especially in a weak economy – lack of heritage combined with somewhat elastic demand for their services compound perennial challenges of differentiation from competitors and a need for regular reinvention to appeal to clients.
Operationally and financially, SMEs in recruitment and other business services are just as capable as ‘old economy’ companies of getting into serious difficulties. Some problems are obvious, but remain unaddressed year after year: poor business development skills among practitioners who don’t like selling; the comfort zone of consultants who think they have enough clients; little or no formal mentoring or coaching; poor succession planning; unexecuted marketing plans. The road to failure is then signposted by flaky or unenforceable contracts – if there are any at all – and metrics for success that are all too vague. These quickly translate into slow paying clients, poor cash flow and bad debts, usually with no asset backing in the business.
Turnarounds in business services such as recruitment are often possible when management is helped to focus more sharply, improve basic processes and secure better cash outcomes. Owners in these sectors easily forget they are business people as well as advisors to other business people. It’s rarely too late to ask for help, but the sooner existential problems are addressed, the easier it is to move forward successfully.
Written by James Bryan, Restructuring Manager at Buchler Phillips, an independent boutique firm, with an impeccable Mayfair London heritage, specialising in corporate recovery, turnaround, restructuring and insolvency.