Recruiter administrations start to fall

It's an accepted part of the business landscape. A reality of an agency jobs market in recession; even a sign that all is not lost and some money is still "left in the pot."



Nevertheless, recruitment business going into administration was a growing problem in 2009, not just for the directors concerned but also for their unsecured creditors, particularly IT contractors.



In fact, second half-year figures from Business Sale Report (BSR) show that the number of recruiters filing for administration increased 27 per cent on the same period in 2008.



In the six months to December 2009, 57 recruiters called in administrators, with 53 recruiters doing the same in the year's first-half, the monitoring service found.



Speaking to CUK, industry sources put the blame for the 110 agencies needing insolvency aid on a range of different commercial entities: banks, end-users and the recruiters themselves.



Top of the list for Anthony Brown, contracts manager at IT recruiter Arrows Group, is poor internal finance management at some agencies.



"Cashflow coming in from contractors is relatively consistent but income from permanent placements is less so," he said.



"If money is taken from the contractor side of the business to plug the gap, this can lead to problems and generate further costs. "



A similar juggling act is forced if margins set by the client are too low when the agency's spending in other areas, such as premises, is high, leading to potentially prohibitive running costs.



Tom Hadley, a director of agency body the Recruitment and Employment Confederation (REC), agreed that client companies had played their part in agencies' financial troubles.



"Last year," he reflected, "a lot of employers were squeezing margins and pay rates, which made it very difficult even if agencies were placing staff to do so at a rate that was commercially viable."



Another ongoing challenge for recruiters is the actions of banks trying to boost profits from factoring and invoicing agreements at a time of historically low interest rates.



"The biggest headache out there at the moment is the banks' tendencies to squeeze on invoice discounting facilities," said Bernie Potton, managing director of SQ Computer Personnel.



["These facilities] are vital for agencies with lots of contractors to stay alive. Even with [banks] increasing their charges, the income they make is considerably down, whereas the risk of agencies going under has gone up."



That risk of agencies sinking increases when clients fail to pay on time, said Arrows Group, underlining the importance of credit checking client organisations in advance.



However even if they run the appropriate credit checks, a recruitment business still faces a marked vulnerability if its portfolio has only a few major clients.



"There's a lot to be said for being specialised, but a lot of agencies [that went into administration] had all their eggs in just one basket," said Hadley.



"In particular, some agencies have just a couple of big clients and if those companies' demand for staff dries up, then the agency is left in a very difficult position."



But even agents with a wide spread are not immune: 16 multi-sector recruitment businesses went into administration during the last six month period monitored by BSR.



Though positively for the sector, a sizeable chunk of both the generalist and specialist recruiters in the report continued some form of trading after entering administration.



Some did so by being acquired. A spokesperson for Business Sale Report confirmed: "Recruitment businesses are often sold at the same time as going into administration under a pre-pack arrangement."



This proves that, contrary to popular belief, going into administration is not always the final act before a business dies, explains Michael Coyle, managing director of Lawdit Solicitors.



He sees administration as a "procedure under which a company that is, or likely to become, insolvent can be reorganised, or have its assets realised for the benefit of creditors."



"The alternative is worse - liquidation," Coyle said. "The insolvency practitioner's task is to achieve a return for the company's creditors. If it were placed into liquidation, then there would be nothing 'in the pot'."



Regardless of which individual issue triggered administration for each of the 110 recruiters - whether it was the banks, lax management or client pressures, a single factor unifies them all.



"The causes of recruitment companies going into administration are all linked to the [volume of] business simply not being there anymore," said Hadley.



"This time last year, demand for staff fell quite dramatically and quite suddenly - and although financial services and IT are making a comeback, demand is still an issue."



It follows that alongside contractors, recruiters are also cheering on "signs of stabilisation" in the UK's agency jobs market, which the REC reported on Tuesday.



Any fading of those signs is likely to see recruiters return to, or intensify, the cost cutting that has saved most, but come too late for others.



"Lots of them are under pressure with margins and rates squeezed, and bank charges up," Potton said this week.



But reassuringly for its clients and suppliers, the recruitment sector's tide of administrations is starting to go out, with "an improving picture" of its prospects emerging, says Business Sale Report.



In an exclusive reading for CUK, the BSR authors revealed that the number of recruiters entering administration in the first quarter has fallen from 28 in 2009 to 19 this year.



A BSR spokesperson explained: "The IT sector has been relatively resilient with a number of surveys pointing to growth in this area.



"The tech sector is expected to see a wave of mergers and acquisitions, as some companies with large cash reserves look to grow by acquisition."



The REC confirmed that its member agencies have seen an "improvement in the market" in 2010, but says pressure remains on their margins, especially from the public sector.



"The issue in 2009 wasn't just the low demand, but was also the pressure on agency margins and we're seeing that continuing," says Hadley.



"Many agencies did try and pre-empt the recession and started to make cutbacks quite early. But what caught them out was that it hit them harder than a lot of them had thought."



He added that a lot of agencies also used earlier downturns as a benchmark of what to expect, but were wrong-footed in 2009 when demand for staff dried up more quickly than in previous recessions.