Investment Banking

Staffing for IT services: A perspective

September 2020

Read Time: 3 minutes

The staffing industry makes a vital contribution to the economy and provides easy access to jobs and career opportunities. Historically, the global staffing industry has outpaced labor market growth and has grown by 5% CAGR between 2010 and 2018. 

The staffing sector offers opportunities to invest in a fragmented market that is ripe for consolidation. Our report provides insights into a few critical elements which have shaped the global IT staffing industry.  

Scale Advantages are Magnified in the Highly Fragmented Staffing Industry

The professional staffing industry is highly fragmented (<400 HHI Index) with thousands of companies. Most of these companies are small local firms providing limited service offerings to a local client base. Historically, profitability among global recruitment agencies has been directly correlated to scale. Larger agencies have a higher “candidates-consultant” ratio that translates into higher efficiency and profitability. Scaled staffing enterprises are better placed to offer value-added services and to use data solutions to boost efficiency.

Technology is Impacting the Hiring Cycle from Onboarding to Career Advancement

Technology can automate the transactional side of recruitment, changing the role of the recruiter from being a process agency to being a consultant. Staffing firms are incubating early-stage start-ups and investing in artificial intelligence and machine learning tools to optimize their processes and minimize the need for human decision making. Staffing firms have also started to diversify into adjacent areas that are growing faster than their core services, such as managed services. Overall, the managed services segment grew at 11% CAGR, whereas the global staffing industry grew by 2% between 2016 and 2018.

Impact of COVID-19 on Staffing Industry

Macroeconomic indicators have a strong influence on staffing industry. Due to the pandemic, there is a 14%-37% decline expected in the global staffing market in 2020. The magnitude of the decline in individual markets will be driven by the severity of the outbreak, mix of jobs, and the market role in the global supply chain. Smaller players (below USD 20 million) are seeing a relatively more significant impact on their revenue. There is evidence of stabilization in current trends and IT staffing is proving to be among the most resilient of staffing segments.

Opportunities for Strategic and Financial Investors

In the past, M&A activity in the IT staffing industry was primarily driven by private strategic buyers (~70% of deal volume). Acquirers desire companies with a strong blend of recurring revenue growth and profitability, with significant attention paid to customer diversification. As cloud-based platforms and IT infrastructure become more complex, demand for specialized players is expected to increase. The market will carefully evaluate the role of platform offerings and how players leverage the fragmented market for inorganic growth. We expect more firms to emerge as market leaders, with scaled platform solutions and a diversified revenue base. 

To know more about the IT staffing ecosystem, the drivers for growth, market landscape, and trends that have the potential to transform the sector, download our latest report.

Author: Anurag Ghosh, Vice President, Enterprise Technology & Services Investment Banking, Avendus Capital

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