For a decade and a half, firms have only known growth, says Staffing Industry Analysts (SIA), but now things are slowing. The so-called “temp penetration rate” is at its lowest level since 2011. Clients are trying to trim their staffing costs with talent platforms, which allow them to source talent on their own. And according to recent data, this approach will be worth $19 billion this year. On top of that, wages have risen.

In this article, we discuss how staffing companies are reacting and how they can put themselves in a strong financial position to decide what’s next. For the full analysis, read our latest report.

The key issue: Labor is rising while bill rates are falling

Staffing companies have accumulated plenty of overhead over the past years. For many in staffing, this was a boom time, even while some sectors like hospitality suffered. But all that labor cost has continued to rise. Median U.S. wages are up $16,700 since 2021, and professional services wages are projected to grow 7.3% over this decade.

And though staffing firms' bill rates rose 30% from 2019 to 2022, it has not been enough for companies to pass along their rising costs to clients.

This rising labor cost is having a double effect. It is eating into staffing firms' margins and EBITDA, but their clients are feeling that cost, too, partly in rising bill rates and partly in their employee costs. The call has gone out for clients to trim staffing costs as they are looking for ways to cut spend.

The result is staffing companies are left with higher overhead and lower realizations as clients defer payments, push back, and negotiate. Many have now reacted swiftly enough, and in that “pinch,” they are watching their profits melt away.

The opportunity: Get margins under control with tax and accounting

Nothing will provide your staffing company with optionality like free cash flow. If your financial foundation isn’t yet sound, you don’t have a service or job-level understanding of where your profit comes from, or you can’t forecast demand, you need to find the financial talent to help you implement this. Have them benchmark your firm against peers so you can understand the lowest-effort, highest-value ways to generate more cash now.

Here are a few actions to take to get your margins under control:

Action: Conduct a bill rate analysis

Analyze the trends in your bill and pay rates and craft a model to ensure you never fall beneath a comfortable threshold, with breakpoints where you act to preserve that margin. Examine this down to an individual employee level. One company we worked with discovered that nine of its recruiters were not even covering their own salaries, but could be, with adjustments.

Consider finding a partner who can help you answer questions like:

• Are you billing enough?
• Are you selling the right services?
• Are you paying too much?
• Does your firm have too many internal staff?
• Are your office spaces affordable?

Learn how we can help with bill rates → 

Action: Benchmark against peers

Benchmark your performance against other staffing firms in your vertical and other staffing firms in general. This can help you spot anomalies and point you to areas where you can increase your profit margin. In order to properly benchmark, ensure your financial statements are organized according to industry standards. For example, cost of goods sold includes all direct employee costs.

Action: Outsource your finance and back office

Unless your firm specializes in finance and accounting, it’s sometimes easier to outsource those functions to focus on what you’re best at. (This is probably a similar story to what you advise clients.) Outside financial experts can help you with month-end close and build you a dashboard for running your business, which clarify the levers you can pull for greater performance.

You might also explore business process outsourcing (BPO). Several companies we’ve worked with have used offshore service centers to support domestic teams. They now have 24/7 support and less downtime between when they receive orders, process them, start work, and bill at a lower cost structure than before.

Benefits to outsourcing include:

• Immediate access to key financial skills
• Immediate access to key tax insights
• The team size flexes to meet your need
• No employment overhead (+20%)
• No added management overhead
• Strategic advice from rotating experts

To relieve the pinch, staff up on finance insights

Staffing companies that want to navigate this new environment are best served by putting their finances first. Rationalize your employee overhead, understand what service lines are facing the greatest pushback, and consider outsourcing pieces of your finance department so you can get clear on a path forward.

For help increasing your bill rates and improving your margins, please reach out to BJ Hoffman, or Michael Napolitano.