Business Leadership
September 9, 2019

A New Recession Could Hit by 2020: How Staffing Companies Can Help Clients Survive and Succeed

Since the Great Recession of 2008, a sustained period of economic progress and growth has defined the intervening years.Lately, however, more financial analysts and market watchers have begun voicing concerns that another recession could strike by the end of 2020 to rattle the foundations we’ve built over the past decade. The resilience of the staffing industry became a hallmark of the 2008 crash, with companies recovering in half the time of other businesses. But another major downturn could unleash crippling effects on any thriving enterprise. Let’s explore how staffing companies can prepare to weather the storms that a new recession may bring while helping MSPs and hiring managers.

Economic Warning Signs and Worries

At the forefront of the problems that have troubled global financial markets is the intensifying trade war between theUnited States and China. The imposition of tariffs, a lot of political swagger, and highly publicized saber rattling have not produced the results the currentU.S. administration had intended. As the Associated Press (AP) explained, the fallout has “financial markets flashing a key warning sign of a recession.”

On Wednesday, a rare realignment in interest rates intensified those worries: The yield on the benchmark 10-year U.S. Treasury note briefly fell below the yield on the 2-year Treasury for the first time since 2007.

Normally, investors earn higher interest on longer-term bonds than on short-term ones. Put another way, the government will usually pay more to investors who are willing to lend their money for longer periods.

So when that equation reverses itself — when longer-term Treasurys pay less than shorter-term ones — economists call it an "inverted yield curve." An inverted curve suggests that bond investors expect growth to slow so much that the Federal Reserve will soon feel compelled to slash short-term rates to try to support the economy.

The move indicates the presence of “economic pessimism.” Unfortunately, inverted yield curves have proven to be exceptionally prescient predictors of recessions, occurring before each of the past five significant downturns.

Complicating the predicament of trade wars and interest rates are labor market conditions. The jobless rate remains at an historic low, not seen since the 1960s. Talent has become more scarce, which also hints at further challenges with the widening skills gap. If interest rates rise and spending shrinks, the situation could worsen.

As Staffing Industry Analysts (SIA) reported on August 15, “Initial jobless claims rose by 9,000 in the week ended Aug. 10 to a level of 220,000, the USDepartment of Labor announced today. However, the four-week moving average of jobless claims rose by only 500 from the previous week.” And while layoffs have stayed at post-2008 recession lows, according to MarketWatch, “Advance claims inCalifornia rose by 5,887.” Experts cautioned against panic, stating that the increase is a weak indicator of a catalyst to “sustained deterioration.” 

Rounding out the worries is a series of stock market corrections, which have fluctuated nervously since 2018. Most recently, as Jack Kelly noted in Forbes, the Dow’s 800-point plummet could dramatically hurt the job market.

How Recessions Impact Staffing

“As a country, we survived a cumulative decline of 5.1% in GDP, and saw 8.7 million jobs disappear,” wrote Advance Partners’ Adam Stern in a highly informative article about the effects of recessions on the staffing industry. “It took almost five years to recover the jobs lost during the 18 months of the Great Recession. In terms of the staffing industry, US staffing revenue declined 28% in 2009 and more than a third of staffing employees lost their jobs. The industry bounced back fairly quickly compared to other ones, reaching pre-recession highs in 2011 and 2012. The rest of the economy did not recover fully until 2014. Staffing revenue has grown ever since as a tightening labor market and skills gaps made such services even more in demand, and as of recently we have nearly doubled revenue since the dip in 2009.”

History, however, teaches us that the longer the time elapses between recessions, the greater the tolls when another one hits. We’ve enjoyed a rather lengthy era of expansion. But beyond the normal concerns of unemployment and financial instability, Stern pointed out a couple of other areas that could make the next recession more problematic for workers.

First off, Congress allowed the extended duration of unemployment benefits in 2008 to lapse. Not only has the enhanced coverage expired, many states have cut their programs or made claims difficult to obtain. The gig economy also has elements in play.

“Another unique aspect of the next recession will be the prevalence of alternative work – aka temporary jobs with no benefits, such as driving for Lyft or Uber,” Stern explained. “16% of the workforce currently takes part in alternative work, or gigs, and in a recession that is likely to grow. The people working such jobs may also be ineligible for unemployment, since if they’re not actual employees of the firm they work for their state won’t have W2 forms on file reflecting their earnings.”

How Can Staffing Companies Can Help During a Recession?

If there’s one good thing about recessions (and that’s a big stretch, right?), it’s that most of us have seen and experienced them before. With that aspect of the unknown out of the way, there’s less to fear. We can anticipate the obstacles and even some of the accompanying uncertainty. The trick is remembering lessons learned and acting preventatively in advance of a potential collapse.

Employer of Record Services

Companies confronting a recession may have no choice but to eliminate some positions. This is a harsh reality that no hiring manager enjoys. However, a creative alternative is to transition workers to contract status through a staffing agency, acting as Employer of Record (EOR). An EOR takes over as employer for tax purposes. Clients and MSPs can use an EOR to payroll their workers and alleviate burdens such as payroll processing and funding, tax deposits and filings, I-9 and E-Verify compliance, unemployment insurance, employment contracts and paperwork, and the thrill-a-minute joys of worker’s compensation.

The client company or staffing agency retains control over business operations and responsibility for workplace safety guidance. Meanwhile, the EOR handles compliance, tax withholdings and reporting, workers’ comp claims, and the intricacies of on-time payroll processing.

Plan Ahead

Business continuity planning shouldn’t be exclusive to natural disasters or IT breaches. One of the best ways to steel clients against the pitfalls of a recession is to help them develop contingency plans.

  • Conceive possible scenarios, the unfavorable kind, and develop workarounds to negate the impacts. What if clients cut back on requisitions or must eliminate roles; which positions would suffer most and could the staffing agency bring the talent back as contractors? What if revenues were to decrease by a particularly damaging threshold; what would that threshold look like (30%, 45%. 50%)? What major verticals or locations would be hit hard by the recession? Staffing companies monitor market trends and could provide clients and MSPs with tremendous insight here.
  • Ensure that you’re not putting all your eggs in one basket. It’s common for staffing companies to survive on one large client, which may make up over half of their revenues. Optimism and complacency won’t overcome the ill effects of a financial crash. Cliché as it may sound, there’s a lot of wisdom in the adage of diversifying your portfolio, especially with clients who may be more recession proof. While pursuing those avenues, staffing suppliers can help those companies manage their workforce needs as situations become more complex.
  • Clients that rely on cyclical and seasonal needs (e.g., manufacturing, construction, retail, one-off projects, etc.) can encounter serious hurdles. Savvy staffing companies can build virtual benches and standby talent pools for these roles to help customers when markets tighten.
  • Some industries typically remain immune to recessionary perils. Try to shift your sales focus and capture business in those markets. Examples include health, pharmaceuticals, IT and computer science, wholesale distributors, energy, etc.). These businesses will still need staffing assistance regardless of the economic climate. Preparing your agency to handle these requisitions benefits all parties involved—clients, talent, and MSPs.
  • Even in a recession, clients are less willing to let go of entrenched vendors. Strong performance matters, and it’s magnified in embedded programs like MSP/VMS, SOW, RPO, and other integrated solutions that can cause serious operational disruptions when they are displaced. Make every attempt to concentrate on your output in these programs to ensure that hiring managers and MSPs receive optimal support in trying times.
  • Revisit existing payment terms, tenure and volume discounts, SLAs, fees at risk, and mark ups to ensure that the program can remain solvent if conditions sour.
  • Make sure your billing, invoicing, payment, and receivables processes are as efficient and prompt as possible. Delays will matter more to clients in tight economic environments.

Solidify Positive Cash Flow

As PSG Global Solutions President Brian Cotter remarked in SIA’s Staffing Stream, “Run projections in advance to determine how many months you can continue to cover individual employee and program costs. By establishing a contingency fund and understanding the upper limits of your budgets, it’s easier to rein in expenses and maintain solvency for the duration of the recession.”

Bolster Performance Processes

As a recession looms, it’s critical to reevaluate your performance standards and systems.

  • Fast and effective recruiting endures as the lifeblood of your company’s offerings. Before a recession, while funds are available and revenues remain healthy, you would do well to invest in the best ATS, reporting, candidate engagement, and ERP systems you can afford. Revamping your website, careers pages, marketing tools, and outreach campaigns can also return dividends. Clients and MSPs will see these steps as commitment to their ongoing success in tight markets.
  • Review internal performance metrics and personnel costs to ensure that you are operating with a lean, agile, and optimized team. Some attrition and internal turnover will occur during a recession, but it’s imperative to retain your best talent to prevent service degradation to programs.
  • As Mike Starich commented in Recruiting Daily, “Remember, once the streamlining starts, your best-performing people will be taking up the slack.  Prioritize keeping them productive and happy, even if financial options are restrained.  Allowing remote workers can help keep costs low as well as improve flexibility to address hiring bursts as the rebound kicks in.”

“Offshore” Is Not a Bad Word During a Recession

It’s no surprise to staffing companies with resources abroad that “offshoring” has carried negative connotations with customers. But during a recession, access to lower-cost professionals overseas can be a lifeline to any contingent labor program.

From Brian Cotter’s post on Staffing Stream: “During their recession preparation, one of our clients on the Staffing Industry Analysts Top 50 list did their due diligence and compared the performance of onshore and offshore resources to find the perfect balance for their team. Crunching the numbers, they found an interesting phenomenon: Offshore resources produced double the ROI compared to their budget, while their onshore team proved to be more of a cost center.”

Clients and MSPs that have suppliers with offshore support may find themselves in an enviable position when a recession strikes. Offshore and nearshore workers prove instrumental in delivering economical services that will persist as mission critical outside of pure recruitment. For example:

  • They can process onboarding paperwork and background screenings.
  • They can provide administrative support for forms, processes, and solutions that don’t require direct interaction with clients or candidates (where language barriers may exist).
  • They can provide written updates and communications to keep engagement and information sharing going.
  • They can oversee automated systems and help desk support that are essential to the agency’s operations.
  • They can successfully handle billing, invoicing, payrolling, and benefits administration.

Understanding the drivers of recessions, the likely impacts, and planning ahead can not only help your staffing company survive a recession but ensure that your enterprise and MSP clients continue to operate effectively and generate profits quickly when the tide turns in more favorable directions.

Photo by Felix Mittermeier on Unsplash

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