The labor market has remained strong despite the rapid rise in interest rates. But as each month passes, we are seeing stronger signs that the labor market is slowing. Wage growth came in below expectations and Temporary Help posted 3 consecutive months of job losses (December 2022). The good news is that there are still lots of unfilled jobs and once the economy achieves a "soft landing", I expect that demand for temporary help will come roaring back!
Having experienced past slow-downs and recessions while working in the staffing industry (beginning with the early 1990’s), well-run independent staffing companies tend to whether these slowdowns better than the established national chains. The characteristics of these surviving staffing companies are very similar. They all tend to:
1. Keep fixed overhead low
2. Swap fixed for variable cost
3. Have a Stable financing source
4. Have the Ability to scale contract placement
Overhead Costs
Let’s face it when times are good companies tend to be looser with their budget dollars. Monetary rewards for employees are fine. After all, that is one way of retaining good employees. However, adding unnecessary fixed costs like non-revenue generating items (bloated internal staff, too many internal functions, overly luxurious office space etc.) becomes very problematic when the economy slows, and profits shrink.
Swap Fixed for Variable Costs
One recommendation is to swap fixed for variable costs whenever possible. Outsourcing payroll, billing, and technology to a full-service funder (like my employer) is the best way to scale your business when the economy is good and a hedge against an economic downturn. Since the funding fee is variable based on labor billed if billings decrease so does your cost. Cutting employees, benefits and perks is painful and lowers morale for those employees who remain. All of that can easily be avoided by using a full-service funder.
Stable Financing Source
Staffing companies need a financing source that will scale with them and support them during uncertainty.
Traditional lenders are not traditional for staffing companies that need capital quickly to fill orders. Banks typically do not offer large enough lines-of-credit. A funding company will give you an unlimited to opportunity to grow your business without any artificial caps on how much a staffing company can borrow.
And when the economy slows, traditional lenders become very reluctant to lend money to staffing companies. I have seen traditional lenders leave the staffing industry entirely during tougher economic times. Funders that focus on the staffing industry stay in the market during any economic time – period.
Plus, many financing rates with full-service funders are not tied to the Fed and tend not to increase during the contractual period. Traditional credit or ABL lines are almost always based on Prime or SOFR so when rates rise, staffers borrowing costs rise.
Contract Placements as a Key Offering
Contract placements should be part of every staffing company’s offering no matter the economic cycle. Up until recently, direct hire has been in very high demand, and it is tempting to focus more on direct hire because it is a “cleaner” placement. However, with the labor market potentially slowing, direct hire demand will fall but there will always be a demand for contract labor. Contract labor is first to recover when the economy starts to recover.
Bottom line, to survive today’s economy - run mean and lean while growing the contract side of the business. These steps also add value to your business when you decide the time is right to exit the business.
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