Recently, TempWorks and Lone Oak Payroll President Brett Cavanagh joined the Texas Association of Staffing for their TAS Talks series of webinars to discuss staffing industry trends and the key strategies staffing firms should be taking to protect their profitability in today’s market.
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“I tend to be the bearer of bad news at TAS,” Brett joked early in the presentation before outlining some of the economic headwinds the staffing industry is facing. “The question is, how do you keep your lights on, how do you keep your doors open, and how do you keep driving forward?”
First and foremost, Brett highlighted looking for points of hope. For the staffing industry, one of those points is in the overall profitability of the industry.
Observing trends, there are ebbs and flows, but since the recession in the late 2000s, profitability has generally been on the rise; though there has been a dip since 2022.
Chart of average gross margins among publicly traded companies
“Post ‘22, you can see there’s a decline,” Brett said. “And unfortunately, throughout all of ‘24, [margins] are shrinking. And they’re shrinking for a couple of different reasons: cost of doing business. Your healthcare costs, your insurance costs are really going up through the roof,” he continued.
Perhaps most concerning, however, is a race to the bottom when it comes to what staffing firms are charging.
“We’re kind of cannibalizing ourselves by lowering our rates,” Brett said.
Holding the Line
When times get challenging, it can seem like a smart business decision to take on clients just to put something in the win column. This strategy isn’t sound, according to Brett. It can lead to firms taking on risky clients who might operate in unsafe conditions, or clients who only agree to contract terms that disadvantage staffing agencies.
“Understanding your true cost of your business, defining internal process, I like calling it hold the line, best that you can, and make sure that you’re teaming up with the right customers,” Brett said. “Lowering your rates is not a good decision in terms of keeping your margins as healthy as possible.”
Furthermore, lowering rates doesn’t align with industry trends.
Bill rate trends by industry. Light industrial (top) and Office/clerical (bottom)
“Bill rates are actually still trending up,” Brett said. “So even though you see the dip going on here, customers are still charging more and more and more to their end customers. So, if you feel like you need to more tightly control your bill rates to retain your business — say you’re at a 38% markup and you feel pressure to go down to a 37% markup to keep your business — SIA and BLS are reporting that you do not need to do that. This will give you confidence when you’re going to the negotiation table with your customers.”
Tips and Tricks to Maximizing Margins
After looking at the data and stressing the importance of “holding the line”, Brett provided some actionable advice on profitability, including:
- Moving some shared costs like background checks, drug tests, PPE, and more onto clients. Brett gave an example of how when the Affordable Care Act passed in 2013, many staffing firms took on the costs of administering those fees and passed that service on as an added margin cost to clients. Looking for those opportunities can be a game-changer for maximizing gross margins.
- Working with a broker to negotiate lower rates for workers’ comp insurance, liability insurance, and other burden costs.
- Use a gross profit calculator to fully understand your margins.
- “Be conscious of concentrations. If 80% of your revenue or payroll is stuck within one customer, you better make sure: A, that you’re taking care of them, but that they’re in good standing, and then make sure that you’re continuing to do that ongoing [risk and credit] assessment.”
- Building out an ideal customer profile to ensure you’re taking on the right clients.
- Partnering with clients to identify talent for upskilling opportunities. Turning a generalized laborer into a specialist can have massive impact down the road.
Perhaps above all, Brett stressed the importance of being a part of the staffing community and organizations. Whether SIA, TAS, ASA, or many of the other national and statewide staffing associations out there, joining these communities can help promote education and knowledge sharing that makes a stronger industry as a whole.
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