Summer of 2010 – Putting It In Perspective

Human nature tends to dictate us remembering the good times of the past while glossing over the difficulties of that same period.   We can remember the fun of attending an amusement park while conveniently forgetting our parents yelling at us that it was time to go.  For those that have been in the staffing industry for a while, we will tend to thrive on the “hey-days” of the late 1990’s and drown in the misery of today.  But were things as good as we remember and as bad as we think they are now? 

Acceptance

“Let’s party like its 1999….” The bottom line is more companies are using temporary help today than they did in the 90’s.  Working as a temporary employee no longer carries the negative stigma it did in the past either.  Thus the temporary help services industry continues to be the largest contributor of new private jobs in the current economy.

Compared to June one year ago, temporary help industry employment is up by 342,000 jobs, with 100,000 more jobs than the second largest gaining industry, health care (up 214,000). Meanwhile, the overall U.S. economy has lost 275,000 private nonfarm jobs compared to June of last year.

Temporary tends to lead the way when the economy recovers.  Most staffing firms experience (and profit) from recoveries before the general public realizes the economy has recovered.  The chart below demonstrates that temporary help rebounds months before overall employment, thus can be used as a leading indicator of what employment will do in the coming months.

More importantly temporary help represents a greater percentage of total employment.  Temporary help accounted for 1.93% of total employment in 1999.  Today it accounts for 2.13% of total employment.  This number does not include the explosive growth in the PEO business.  Moreover, industries such as renewable energy are presenting major staffing opportunities today but only small opportunities in the past.

Today vs. Yesterday

“All my troubles were so far away…” This really isn’t true when comparing statistics from July of 2009 to July of 2010.  Staffing employment in July is 25% higher than in the same month last year, according to the ASA Staffing Index.  Damian clients, which are independent providers of staffing, have experienced similar or better growth.

Lower Cost, Efficient Alternatives Have Become the Norm

Staffing companies today have the ability to brand themselves and cost effectively operate their business in ways that were not fully developed or even around in the late 1990’s.  Technology has changed the way we interact with our applicants and customers.

Recruitment

While company websites and job boards existed then, they were expensive and not very advanced.  Many applicants still used print media when seeking employment and staffing companies still had to pay big dollars to list job openings there.

Today, technology has allowed staffing firms to cost effectively use their own websites as an integral recruiting tool.   Many employment seekers can actually apply and submit their resumes on-line.  That information then populates the applicant fields so your recruiters don’t waste valuable time and money on data entry.

Marketing

Don’t get me wrong, traditional methods of branding are still effective like print, radio, direct mail etc.  But on limited advertizing budgets, staffing companies need to get the most value from their dollars.  Email marketing is cheap and effective, especially when something of value is offered.  In other words, try and avoid using email the same way print advertisement is used.  Offer articles of interest or special offers to readers of your email campaigns. 

Social media is maturing very nicely.  Research the number of recruiters and staffing companies on Linkedin, Facebook or Twitter.  The numbers will astound you.  And there is a reason they are all there – it works!  

Get reviewed.  There are sites such as yelp.com that allow customers to review local businesses.  Have your satisfied customers, whether employees or end-users say positive things about your company.

Electronic media also includes your company marketing materials.  Potential customers tend not to keep as many hard copy marketing materials as in the past so why spend as much money on these items.  Plus, nothing impresses a potential customer more than receiving additional information (via email attachment or web link) about your services within minutes of ending a phone conversation. 

Funding Companies

Yes this extremely important capital source has improved and is less costly in today’s marketplace.  Funding companies are at least 25% cheaper than they were in the late 90’s.  Some of them offer a complete backroom solution that may bring fixed costs down ever further.

The current tightening of the credit markets could have been the death of the staffing industry if funding companies didn’t exist.  Yet while other industries struggle raising money to grow their business, staffing companies have many funding options available. 

Keep the Faith

“The good times weren’t always good and tomorrow ain’t as bad as it seems…”  In today’s uncertain economic climate, it can be hard to see improvements in the market place.  It is important to take a “trip down memory lane” to see how far we’ve come and what opportunities lay ahead as an industry.  The staffing industry has improved in many ways that should allow your company to prosper.

Everything is for sale at the right price and every business owner wants to know the answer to the above question. What determines the “worth” of the business? Most businesses are evaluated by some multiple of earnings, which plays a key role in the total acquisition price. But what factors determine the multiple?

EBITA x multiple = SALE PRICE

There are two driving forces that affect the value of a staffing business. They are internal and external. Some of the external factors that exist are:

• Overall industry growth potential

• Local economy

• Local Political Climate

• Segment of Staffing Market Served

• Amount of Interest by outside investors or larger staffing companies lookingto increase market share

These are factors that individual owners have little control over.

Internal factors are those that an owner can control. They involve the overall financial strength of the company. These include:

• Financial position of your customers and the average turn of your accounts receivable

• Diversification of your accounts receivable portfolio

• Length of contract or exclusivity agreements with your clients

• Percentage of temporary placements to overall business

• Earnings Before Interest, Taxes and Amortization (EBITA)

EBITA is one of the most important internal factors that affect the sale price. This number really affects both sides of the equation. The greater EBITA is then the more your company is worth.

MAXIMIZE YOUR COMPANY’S WORTH BY USING DAMIAN SERVICES

Sales and Income. These are the most important items in the equation that determines the “worth” of your business. The higher the sales, the more market share your company owns. The higher percentage of sales due to temporary help placements, the more valuable your company will be. Lastly, the higher the sales the more dollars will flow to EBITA.

Using Damian Services will maximize the net worth of your business… period. Damian supplies unlimited payroll funding that will allow you to increase the net earnings side of the equation with temporary help placements.

EBITA x multiple = SALE PRICE

Damian also provides a complete back office outsource solution that allows you the time to concentrate on the left side of the equation (multiple). This will help your company accomplish two things. First, choose what segment of the market to develop and second determine which market(s) to expand.

EBITA x multiple = SALE PRICE

Self Funded or Limited Funding Using Damian’s Unlimited Funding

Current Billings = $1,000,000                                          Potential Billing $3,000,000

Current EBITA = $100,000                                                Potential EBITA = $290,000

Current Value of the company                                          Potential Value of the company
$100,000 x 4 = $400,000                                                 $290,000 x 4 = $1,160,000

In this example, the “worth” of the business increased by 290%

By outsourcing your back office you are swapping a fixed expense for a variable one, your company will save thousands of dollars on personnel and general administrative expenses.

Most of the time, the purchaser may increase EBITA by the amount of the variable expenditure. For example, by outsourcing your back office, perspective buyers do not have to add duplicate personnel or offer severance packages to those employees that have to be reassigned. They simply add the outsourcing fee to EBITA which increases the net worth of the business.

For more information call 800.232.6426.

Our clients are receiving notices of hefty tax increases as this article is being written. Make no mistake, increases in the SUI tax rate is a potential jobs killer, since that tax is paid by employers only. Given that the staffing industry’s sole purpose is to give all employers an opportunity to economically add staff, the impact of the SUI tax increase is disproportionately borne by these companies.

Explaining Unemployment Benefits
Unemployment Insurance is a tax paid by every company in the United States that employs people. The more people that are employed, the larger the fund gets. In times of high employment, the unemployment insurance fund has more than enough money to pay its beneficiaries.

It is from this pool of money that employees receive monetary unemployment benefits. Each company pays this tax in the state where the employee works. The tax is calculated as a percentage of payrolls that is determined by each state. It is adjusted each year based on the number of claims that are paid to employees that are no longer employed by your company.

In our current era of high unemployment, it may be difficult to place employees that are ending their current job assignments into new ones. In other words, there may not be enough open orders to offer jobs to the temps. When this happens, the unemployment fund (your tax money) that the state uses to pay benefits dwindles.

Potential Jobs Killer
The impact of this tax on all employers in the United States should not be understated. Large employers, like staffing companies are in for a big surprise. For example, if employers had a $5mm dollar payroll that was subject to a 3% SUI tax in 2009, the SUI burden was $150,000.

$5,000,000 * 3% = $150,000.

In 2010, that same employer with the same $5mm dollar payroll is hit with 50% increase (4.5%) in the SUI tax (we have seen some that have doubled), then the employer will pay $225,000 in 2010.

$5,000,000 * 4.5% = $225,000 – a whopping $75,000 increase.

When employers are faced with this kind of tax increase – one based on payroll – how is that supposed to stimulate job growth?

Opportunity for Staffing Companies
The staffing business is a people business where contract employees typically work alongside your customers’ permanent employees. Your customer knows the SUI tax is going up – since their rate is also increasing. Since this tax increase is affecting them, your customer should now be in the right mindset to expect and accept a price increase. Sure, they may give you a little static but your customer knows firsthand that your cost of providing employees has gone up.

Good selling and negotiating skills are still needed in order to get a higher price and staffing companies need to use this as a selling tool! You may be able to convince your customers to use more temporaries and increase your margins in the process.

Benefit to your Customers
Some end users of contract labor already understand the benefits of using a staffing company. Staffing is one of the only industries to add jobs in the last six months. We are seeing increases in contract usage across the board and in particular manufacturing and IT placements.

Companies are looking for flexibility in hiring. According to a recent article in the New York Times as demand rose after the last two recessions in the early 1990s and in 2001, employers moved more quickly to temporary help. They added temps for only two or three months before stepping up the hiring of permanent workers. Now temp hiring has risen for six months, the economy is starting to grow, and still corporate managers have been reluctant to shift to hiring permanent workers, relying instead on temps and other casual labor easily shed if demand slows again.

“When a job comes open now, our members fill it with a temp, or they extend a part-timer’s hours, or they bring in a freelancer — and then they wait to see what will happen next,” said William J. Dennis Jr., director of research for the National Federation of Independent Business.

One Overlooked Fact
News Flash to Your Customers: Because end users of your services had the flexibility to use and “layoff” contract workers instead of their own employees last year, they are realizing “lower” SUI rates for 2010. When contract employees file for unemployment, those claims go against your company not your customer. Less claims equal lower unemployment rates – thus they pay less tax on their permanent staff and potentially save tens of thousands of dollars per year. This is a very tangible reason to use contract labor. The economy is only marginally better than last year, so it would behoove your customers to stay with this winning strategy.

Increase Your Price
Let’s assume Jane Doe earns $10.00 per hour. Your bill rate for Ms. Doe is $14.50 or a mark-up of 1.45%. The 2009 payroll tax burden is $1.15. In this example the SUI tax is 3%.

$14.50 Bill Rate
$10.00 Pay Rate
$1.15 2009 Payroll Tax Burden (3% SUI)
$3.35 Gross Profit

If SUI increases by 50% then adjust the bill rate by the dollar amount equivalent to keep your margin steady.

$14.65 BILL RATE (slight increase)
10.00 PAY RATE
-.1.30 2010 PAYROLL TAX BURDEN (reflects a 50% increase in SUI tax)
$ 3.35 GROSS PROFIT

Between You and I
Most states “cap” the SUI tax burden on the first $8,000 to $12,000 in wages per employee. In other words once your employee(s) earn the cap amount, then the employer stops paying the tax. However, your $.15 an hour increase in the bill rate stays in place.

Continuing with the above example let’s assume your average employee works 1500 hours and the SUI cap is $10,000. Once your employee works 1,000 hours ($10,000 in wages), your company stops paying the SUI tax. Thus, your company realizes $.15 MORE in profit on the last 500 worked for the year.

500 * .15 = $75.00 additional profit per employee

Multiply that by the number of employees that reach the limit and you could be enjoying a much needed vacation or a nice down payment on a new car next year. Now that can really help stimulate the economy.

Scott Locaccio, president of Encompass Personnel in Virginia Beach, VA contributed to this article.