With the exception of healthcare staffing, the staffing and workforce solutions industry is heavily impacted by the ebb and flow of the U.S. economy. As described earlier, companies use temporary workers to help cope with the variability of labor demand. Consequently, temporary staffing has become an important instrument in reducing costs during the early and late stages of the employment cycle, where demand is less certain. Important academic research has demonstrated that firms that increased their reliance on temporary workers experienced increased operating earnings (before depreciation and amortization) and gross margin (which translated to higher stock returns) without any increase in systematic risk (Source: Decision Sciences, Fall 2001). At the onset of recessions, temporary employees are usually the first to be laid off, as a company gauges the market conditions and keeps their core, permanent personnel intact. During a recession, staffing normally suffers from the systematic labor cuts. Nevertheless, during difficult times staffing companies may be compensated to an extent by outplacement activities. As the economy comes out of a recession, temporary hire becomes more attractive for several reasons, including:
• Client companies are uncertain of the length of recovery. Therefore, they tend to utilize temps more than a permanent workforce to meet a pickup in business activity, not knowing whether or not the trend will be short lived or establish itself.
• The pool of available workers is greater, ensuring the selection of competitive candidates. When the economy finally reaches a boom stage, the demand for temporary staffing is generally at its peak. The clients may be at the peak of their sales and require a large temporary workforce to solve the sales constraints. Similarly, they will also explore prospective candidates for long-term hire and will prefer to draw them from the temporary pool. Not surprisingly, many staffing firms stepped up their recruitment effort in permanent placements in such situations in the past. Figure 2.3 summarizes the relationship between unemployment rate (a proxy for economic activity) and temporary employment.
FIGURE 2.3: TEMP HELP EMPLOYMENT VERSUS NATIONAL UNEMPLOYMENT
0 500 1,000 1,500 2,000 2,500 3,000 199019911992199319941995199619971998199920002001200220032004200 5 20062007 T e m p H e lp W o rk er s ( 0 00 s) 0.0% 1.0% 2.0% 3.0% 4.0% 5.0% 6.0% 7.0% 8.0% U n e m pl oy m e nt R a te
In addition to facing the cyclical influences of the economy, the staffing industry is strongly affected by the regulatory environments at all levels of government. In the past, legislations such as the Equal Opportunity Act have created new services for staffing companies as their clients sought help with workforce diversity requirements. Regulation is a particularly key factor in Europe, where many countries recently relaxed laws restricting flexible staffing services.
On a more granular level, specific staffing segments are affected differently based on the stage of the economic cycle. Typically, as the employment market recovers, the cycle starts with a pickup in the light industrial and clerical market segments – likely a result of the smaller investments involved. Next, as firms sense a recovery is taking root, they start building their professional workforce (e.g., IT, F&A and etc.), which is often aided by the use of temporary workers. Finally, when the recovery is firmly in place, they eventually begin to hire permanent employees. Thus, the macro impact of the economy on staffing firms will depend on both the skill levels and types of services they provide, although the overall trend in staffing indicates that companies are rapidly diversifying their business mix to reflect changing economic conditions.
The branching of the staffing and workforce solutions industry into comprehensive HR management is a growing movement within the segment. The trend has been concurrent with clients’
increasing desire to outsource non-core functions (such as non-executive recruiting and staffing services) and to expand internationally. First, staffing firms become natural contenders for HR-outsourcing because of the ease in transition from hiring to other HR solutions. Second, large staffing companies like Manpower and Adecco maintain an extensive network of global offices and employees that can be leveraged to assess the human capital needs of their clients, who are developing increasingly international operations.
Healthcare staffing companies have different drivers than most other staffing companies which tend to be more impacted by the overall economic environment. In general, the demand for
healthcare staffing is driven by an increasing need for healthcare services combined with an ongoing shortage of physicians, nurses and other allied professionals. Whereas the underlying demand for other types of staffing such as light industrial, IT and F&A tends to move in line with economic growth, the demand for healthcare staffing tends to lag economic growth and can often appear countercyclical. One of the key drivers of future demand for healthcare services is the pending wave of baby boomers that is nearing the age of retirement (see Figure 1.8). As individuals tend to require more healthcare as they grow older, the aging of the population is likely to increase the census at hospitals (census is a point in time count and characterization by a hospital of all its admitted patients and/or patients currently on a waiting list).
However, in our opinion, there are several factors which may temper the growth in hospital census relative to the growth in the population of individuals over age 65. First, due to improvements in technology, many surgical procedures are becoming less invasive which helps to reduce healing time as well as the chance for infection or complication. As a result, many procedures that used to require overnight hospital stays are now being performed on an outpatient basis. Second, cost containment initiatives by managed care providers are promoting the use of hospitals for acute treatment with much of the recovery occurring elsewhere. The impact of both of these factors can be seen in the trends in average length of hospital stays. According to the National Center for Health Statistics, the average length of stay in a hospital for individuals over age 65 (for all diagnoses) has decreased steadily from 12.6 days in 1970 to 5.6 days in 2004. In addition, the average health of individuals at all age levels may improve relative to prior generations due to a greater awareness and understanding of health issues (i.e., understanding the threats of smoking as well as the need to exercise, maintain a healthy diet, monitor cholesterol, etc.). Lastly, more managed care providers are now covering preventative care procedures to promote healthy living and the treatment of problems before they become major issues that could require hospital stays.
Another key driver of future demand for healthcare staffing is the predicted shortages in the supplies of registered nurses and physicians. Despite the expected increase in the demand for healthcare, the number of M.D. degrees conferred between 1980 and 2005 has remained fairly steady. In addition, the
Revenue
less: Gross Costs (wages, benefits, SUTA, workers' comp, etc.) equals: Gross Profit
less: SG&A (salaries (base and commissions), rent, overhead, etc.) equals: EBITDA
number of nurses graduating from colleges with nursing degrees has remained flattish while the entrance of foreign nurses into the U.S. has been hindered due to visa issues. As these shortages of qualified professionals persist, we anticipate that healthcare providers will look to staffing companies to help fill the demand.
Even within the healthcare staffing industry, demand drivers among the four main sub-segments (per diem nursing, travel nursing, locum tenens (physician staffing) and allied services) can vary as well:
• Per Diem Nursing: According to Staffing Industry Analysts, the per diem nursing market generated approximately $4.1 billion in revenue during 2006 and is the largest and most penetrated segment within healthcare staffing and therefore tends to have a lower growth as well as lower margins. Also, given the large number of players in the market and the relative ease of entry for new competitors, we expect the per diem nursing market to remain tough.
• Travel Nursing: The travel nursing segment, which is estimated at approximately $2.3 billion in 2006 according to SIA, is dominated by larger players with more significant resources that are capable of managing the additional expenses such as housing that are associated with travel nursing. One of the keys for the travel nursing market going forward will be the ability to manage rising housing costs which have negatively impacted margins recently.
• Locum Tenens: We anticipate that the locum tenens market should continue to be strong as the market is in the earlier stages of adoption relative to per diem and travel nursing. Locum tenens, which totaled approximately $1.4 billion in revenue in 2006, is offered by fewer than 100 staffing companies as estimated by Staffing Industry Analysts. The locum tenens market should continue to benefit from the continuing shortage of doctors as well as the high margins and high barriers to entry that exist. In order to provide locum tenens, recruiters must have specific knowledge of numerous medical specialties as well as the ability to recruit individuals that often have different motivating factors compared to many other professions. Physicians are often not driven by financial returns but instead are more concerned about providing care in a good environment with many physicians looking for the opportunity to avoid the malpractice insurance costs, financial risk and hassle of managing their own practices.
• Allied: Allied is similar to locum tenens in that allied staffing is also at the earlier stages of adoption relative to nurse staffing. The $2.9 billion market for allied staffing is likely to remain promising given the extremely low unemployment rates for professionals such as occupational therapists, physical therapists, lab/imaging technicians and dental hygienists. These occupations also have some of the highest vacancy rates.