If you’ve ever run a screen for quality companies, you may have seen traditional recruitment agencies towards the top of the list. Agencies have few tangible assets and can earn high 20’s ROIC during an upturn. However, when you look at the total returns of agencies like Manpower, Adecco and Randstad, it tells a very different picture.
Historically, a recruitment agency was a group of people, in a room, with a few phones and a handful of customers with vacant roles. It’s a cyclical industry epitomised by low barriers to entry. In a downturn, companies completely stop hiring and the demand for recruitment services plummets. Given the asset base is the customer relationships and the people that run them, they hire and fire employees as the cycle fluctuates. Supply rapidly follows demand which makes it hard to earn sustainable outsized returns. Upwork and Fiverr are looking to change this.
Upwork is a digital marketplace that connects employers with freelancers. Fiverr is going an extra step and offers freelancers as SKU’s on a digital shelf for employers to purchase. These digital intermediaries can place candidates 10x faster at a fraction of the cost of incumbent agencies. However, these are very specific types of customers. Fiverr has 3m active buyers that spend just $200 per year on average. Upwork has ~500k clients that spend $800 per year. So these are much smaller employers that are looking for freelance services. Fiverr seems to be focused on building a digital catalog with freelancers as SKU’s whereas Upwork is actively pushing into the enterprise market to compete with traditional agencies.
The enterprise market is big business. Randstad, Manpower, Adecco, and Robert Half have a combined $65bn in revenue. A quarter of this revenue is from the largest Fortune 100 enterprises of which Randstad claims ‘98% customer retention and often 100% market share’. The large incumbents are not just recruitment agencies but outsourcing partners. They moved from providing transactional staffing services at cost-plus to becoming a full outsourced partner that could hire and run large operations for companies. We recently interviewed a recruitment veteran who signed some of the first global enterprise deals and he explains how the industry has evolved:
The transition from transactional placement of individuals to running parts of their business was the transition in the industry which made a difference to customer stickiness. When you get inside a customer organization and help them work on their strategy and business process, it is sticky and you end up moving up the value chain of human capital management services.
The incumbent agencies are effectively outsourcing businesses. They can recruit and run operations for customers. These are very sticky relationships that have no strict commercial terms with volume guarantees or break clauses. They are trusted to deliver. Whenever we analyse an agency business that is entirely based on customer relationships, we want to truly understand what drives trust. This is where it gets interesting.
Not only are recruitment agencies actually outsourcing businesses, they are fiduciaries of the customers’ brand. Putting the brand at risk is the number one worry for large enterprise customers. Outsourcing recruitment to a large incumbent protects the brand in this way. It’s risk mitigation. Saving some pennies or being slightly quicker is not worth even the slight increase in risk of hiring unethically. So the biggest challenge for the digital marketplaces to break into the enterprise market is to be trusted to recruit at scale in an ethical manner. This is far harder when you’re onboarding freelancers at arms length online versus with a physical presence.
Digital marketplaces need to go from being purely transactional, which is all they are, to making a difference. They need to ensure their aggregation process from many sites and individuals is absolutely ethical. They have to ensure that nobody is abused, misrepresented or put into a situation where they could be embarrassed.
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