As a cyclical sector, there is no doubt that 2023 has been a challenging year for many recruitment & staffing agencies globally. Particularly in the first half of the year, the global economy was clouded by recession fears, rising interest rates, and political instability. As companies sought to remain agile, many organisations cut back on hiring which had a knock-on effect to agency revenues when compared with the same trading period of FY22.
However, the post-Covid boom was recorded as the best years of growth for many agency owners, meaning is it even comparative? Or has trading now just normalised in line with typical industry standards? Nonetheless, in the latter part of 2023 it has been encouraging to see some form of stability returning which has filtered through to M&A. Read below for Connect’s full year summary on sector themes and industry insights affecting the recruitment market.
Healthcare – A Challenging Year
The latter part of the year has seen one of the most turbulent trading periods for the healthcare sector in the UK, with various political and economic factors impacting NHS agency spend. Whilst the labour crisis has not gone away in the demand for healthcare workers, NHS budgets have been more stringent meaning that agreed locum rates have become more difficult for agencies to manage as margins have been squeezed.
This is not a new phenomenon because Healthcare has always been the most politically centric vertical in recruitment, as it is directly governed by changing legislation / economic factors. However, circumstances this year have created a perfect storm of events for many agency owners. This started back in March following the negative press directed at healthcare staffing agencies. Market-leaders such as Acacium Group, Medacs Healthcare and ID Medical, were explicitly called out for their exponential growth in revenues through supplying temporary NHS staff. This stigma feeds the narrative that more legislation should be enacted to reduce reliance on temporary agencies. However, as the REC reports, NHS staff banks and off-framework agencies are responsible for escalated rates because they do not have to comply with pricing caps. On-framework agencies are limited by caps, meaning their assistance to NHS Trusts should not be stigmatised.
Q3 brought about additional challenges for healthcare staffing agencies, with supply and demand heavily impacted by seasonal trends. Typically, most agencies will experience a winter surge, with the NHS under considerable pressure and Trust budgets usually increased to reflect this. Naturally, as flu and cold-related illnesses kick in, the demand for services is heightened. However, this year we experienced an Indian summer in the UK, meaning the abnormal climate delayed winter pressures. Inevitably, agency revenues have been impacted by this 1–2-month delay from NHS supply demand.
Business owners have also suggested that whilst healthcare demand has expectantly resurged now, political developments have impacted Trust budgets. With so many NHS workforce strikes this year, there has incremental salary raises for NHS staff across the board, ranging between 2 – 20%. Subsequently, bandwidth has been more restricted with many Trusts nationwide needing to make cuts somewhere. With lower budgeting, agencies are getting squeezed on margins again contributing to a more challenging trading environment. Another consideration is the uptick seen in overseas healthcare workers emigrating to the UK for permanent positions. For example, a selection of the larger agencies have facilitated c25,000 international placements into the UK this year which forms part of wider trends to reduce NHS reliance on temporary staff.
We’ve also seen a turbulent period for US Healthcare staffing, with projected revenues of $55.7 billion this year which was down from $68.7 billion last year. However, as SIA President Barry Asin discussed, whilst growth has tapered off, the projected industry revenue is still at three times pre-pandemic levels. Explanation for lack of growth was largely down to the travel nursing segment which accelerated during the Pandemic, surging from $18.9 billion in 2019 to $42.7 billion in 2022 and now forecasting $29.9 billion. However, it is important to note that other areas of healthcare have held up well, with allied healthcare staffing growing in the first half of 2023, and also physician recruitment continuing to be robust.
Education – A Buoyant M&A Market
The robustness of Education staffing has proven itself this year, as a sector with chronic labour shortages and highly reliable funding, UK educational institutions are reliant on agency supply. As highlighted by Shadow Education Secretary Bridget Phillipson, the current spend for supply teacher cover surged from £839 million in 2020/2021 to £1.27 billion in 2021/2022. There have been similar growth patterns this year with this increased spend going hand in hand with severe labour shortages in the sector. Education as a recruitment vertical produces quite lucrative margins, with an average day rate for supply teacher spanning anywhere between £30 - £60 a day, meaning it’s quite attractive as an investment opportunity.
Subsequently, in a highly fragmented market, the M&A landscape for Education staffing has seen lots of consolidation this year. Main buyers active in the space have included The Edwin Group, Operam Education Group, Engage Partners and Humly. There are several reasons why this year has brought a hive of M&A activity for Education, with perhaps the main one being the strong growth agencies have experienced in the last 3 years. Many have sought to capitalise on lucrative trading years and take advantage of the fact the sector has been more resilient than most. Additionally, the governance of Education staffing agencies is heavily impacted by political trends, meaning that some owners might be wishing to exit ahead of the upcoming general election.
Hybrid Working
This year we’ve seen a massive shift in working patterns, with the Pandemic accelerating the implementation of remote / hybrid working models. One of the major risks for companies not willing to embrace hybrid working is a potential talent drain as employees who highly value flexibility and work-life balance are likely to seek other opportunities if current policy does not align with their preferences. Inevitably, employers have had to adapt their approach to remain competitive in both attracting and retaining good quality candidates. This is something we saw particularly in H1 of this year with a 3:2 split on home & office working becoming the new norm.
However, the latter part of the year did see a greater push amongst employers to request their employees back into the office for a greater number of days per week. Market-leaders such as Google, Goldman Sachs, Amazon and Netflix were amongst a few, with the Resume Builder conducting a report that 90% of companies had planned to implement return to office policies by the end of 2024. Whilst these trends will fluctuate, there is no doubt that hybrid working is now a key consideration when candidates search for new opportunities, meaning most firms will have to retain some level of flexibility to attract talent.
An Interesting Year for IT
2023 has also been an interesting time for the IT staffing market, with mass layoffs reported from the FANG companies which far outpaced the cuts made in 2022. Increased consumer spending during the Pandemic meant that many of the large tech companies experienced record-level profits and subsequently went on hiring sprees to meet demand. With a notable softening in the market this year and a lack of appetite from large cap companies to make new hires, IT staffing agencies have felt the squeeze, with permanent recruitment impacted the most. As reported by the REC, 2023 has been characterised by a year-long slowdown in permanent vacancies and placements, with companies reluctant to commit to permanent hires during periods of economic uncertainty.
In March 2023, the tech industry also faced another obstacle following the Silicon Valley Bank (SVB) collapse as investments lost value and depositors began withdrawing large sums of money. SVB predominantly funded tech startup companies, which again impacted hiring trends in the wider IT sector. As VC backed organisations, the growth of these organisations was stagnated, escalating wider cuts on hiring spend for the IT sector.
We’ve seen how these trends have made it difficult for recruitment companies in the sector, particularly for those focussed on generalist IT and generating large portions of revenue from the States. On the flip side, more specialist agencies focussed on niche areas of IT, such as ERP, Cloud, and Cyber, have remained relatively robust. Niche verticals in recruitment & staffing are often still highly sought-after during periods of economic downturn because clients are still likely to require specialist expertise in the fewer hires they are making.
Technology Implementation in the Staffing Sector
There’s been a large emphasis on technology integration for staffing agencies this year, with many looking at ways to automate business operations to improve efficiencies and adapt in a more challenging market. For example, the adoption of ChatGPT in administrative day-to-day tasks has become increasingly popular, with consultants using it to vet applications and draft job descriptions, to allow more focus on revenue-generating activities. Additionally, AI holds the potential to enhance an agency’s diversity and inclusion hiring policies, both internally and for their clients. By analysing job descriptions and using more inclusive language, AI can help attract a more diverse pool of applicants while mitigating unconscious biases.
The use of Chatbots is also gaining traction in Recruitment, with bots utilised to handle common queries, schedule interviews, and manage tasks like booking meeting rooms. With 24-hour operation, candidates may have urgent questions answered on the weekend or after hours, which consequently improves the candidates experience also reduces a consultant's administrative workload.
Businesses operating in the verticals within temporary staffing, such as Light Industrial, Education and Healthcare sectors, are now developing in house apps to improve both their client and candidate’s experience. Staffing apps are an efficient way of managing candidate background checks, timesheets and invoices. Moreover, clients can use the tech platform to book staff directly, while candidates can set their own schedules and avoid receiving calls on days they prefer not to work. This tech enabled offering will allow small teams of consultants to manage larger temp books, keeping operational costs low and therefore improving margins. 2024 will mark an uptick in tech implementation, either by acquisition, in house development or the use of third-party providers. This shift will create leaner and more efficient agencies capable of enduring tough hiring markets.
2024 Outlook – Time to Get Ahead of the Curve?
Many of the themes impacting Recruitment this year have meant that M&A deal volumes have been down on previous years. As we look towards 2024, there are several catalysts which have the potential to start encouraging buyers to abandon their previous cautionary approach. With strategies directed towards market consolidation, a potential stability in interest rates, and increasing pressures in the volume of dry powder left to deploy, we may expect to see an uptick in the outlook for M&A activity. Additionally, a disparity between buyer / seller valuation expectations had impeded dealmaking in recent years, whereas now, more normalised trading conditions will assist with bridging the gap.
We might also see an increased volume of distressed M&A activity, as companies that previously maintained market share now face declining revenues, with possible openings for undervalued targets and turnaround opportunities. Companies that borrowed with the expectation of higher returns may find themselves struggling to repay debts due to lower-than-expected growth. An M&A restructuring may be the only solution to provide companies with a new path forward.
Overall, Connect’s outlook for 2024 M&A remains optimistic, with many buyers expected to be getting ahead of the curve on M&A opportunities to capitalise on more realistic valuations the current environment has created.