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Page last updated
February 16, 2003




Cost is a Four Letter Word


I doubt whether many people working in the financial markets sector would say that its been anything other than a tough year for recruitment. And I doubt they'll say it quite as politely as that. For end-users, vendors and consulting firms (including recruitment consultancies) alike, one of the most obvious and immediately transparent areas for cost-management has been headcount. There is nothing new in this. For the area in which my own firm specialises (investment banking and securities trading), headcost has always constituted the single largest cost component in the P&L statement.

However, there is a general sense in the sector that new, more fundamental changes are afoot; phrases like "paradigm shift" and "tectonic movement" are being bandied around. The most immediate realisation is that for the first time IT is not immune from sustained cost pressures. For many in IT this has come as a genuine shock; they frequently seem as surprised and aggrieved as they do worried. They can understand why fabulously paid investment bankers and front-office traders should be vulnerable; less clear to them is the ruthless scrutiny to which the human IT cost base has been exposed over the past 18 months.

The initial counter-reaction to this growing realisation was a collective affirmation that the situation was simply a reflection of the economic cycle. And, as with all things cyclical, all that was needed to be done was hang in there till the good times came around again. Accord- ingly, the business challenge became accurately calling the timing of the upturn and planning for it. Very rapidly however, CEOs started to talk about limited or no "visibility" to support business planning; so the future is now and we'd better get on with it.

It was at this point, around the end of last year, that the technology sector started to realise that while the general downturns in the US and the UK had been relatively modest and were already over, their own sector downturns were the severest ever and were showing no signs of ending. In fact, the "cyclical" school of analysis had got it right all along; for the first time ever, the IT industry was experiencing a genuine cyclical downturn. Previous to 2001, the annual growth rates of PC sales may have gone up and down; but there was always growth. In 2001 for the first time, sales actually went down.

Coupled with the tremendous overhang of hardware and software purchases from the telco and dot.com periods of the late '90s, the downturn has meant a serious scaling back (sometimes to zero) of corporate purchasing of technology products and services. This has been particularly true of the investment banking and securities trading sector which has been the victim of its own "perfect storm"; it spent much of the late 90's purchasing technology with the profits it had made from advisory or trading revenues generated from the technology sector boom.

The sector also spent much of its time and money purchasing technology people and well as products. Unfortunately, technology people aren't like technology products; you can't simply leave them in the box and stack them on a shelf to depreciate. So for the past two years, those sectors most exposed to the famously excessive exhuberances of the last 90's; telcos, comms hardware and investment banks/securities houses; have been dramatically managing headcount and headcost.

Against this backdrop of an IT industry maturing and becoming cyclical with the likelihood of single digit growth rates becoming the norm, further, unambiguously structural changes have transformed the recruitment industry.

The first is the ineluctable spread of business process outsourcing. Just as outsourcing has become an accepted feature of the technology landscape, so recruitment outsoucing has rapidly grown over the past 2 to 3 years. This growth has been clearly stimulated by an economic climate which is emphasising both cost control and business models which stress a return to core competences. "If recruitment is not one of our core competences, why do it ourselves?" is a question which many firms, including their HR management are asking themselves.

Having asked the question, the replies differ. Many firms have argued that recruitment is something which they have always "outsourced" by using recruitment consutancies and agencies. To a degree this is true. What has changed, however, is the willingness to view recruitment issues in their totality. Whereas previously firms have limited their management of recruitment to compiling and managing a preferred suppliers' list ; the ubiquitous but unruly PSL; today firms are increasingly to view recruitment as a procurement or supply chain issue. A clear indication of this is the degree to which strategic, firmwide decisions about recruitment (particularly technology recruitment) are increasingly being made by purchasing as well as line or HR management.

More radically, the cost-control/core competency syndrome is also driving a willingness to appoint single entities to manage recruitment and to recognise such entities as a new, inevitable and permanent link in the supply chain. Wish may be father to the deed, but a desire to reduce costs does not in itself guarantee success in doing so. This leads us to the second structural change affecting the recruitment industry: the internet.

In certain respects early impact the internet on recruitment was not dissimilar to its impact in other industries: overhyped and minimal. As elsewhere it spawned innumerable startups with advertising based B2C business models. And as elsewhere, the vast majority are no longer with us. At the other, slightly more sophisticated, end of the specturn were to be found B2C exchange models which facilitated online, disintermediated procurement of human resource. And just as in the case of the large corporately funded industrial procurement exchanges, almost none have survived.

What has survived is the internet as a powerful tool which allows outsourcing firms to effectively manage the logistics of recruitment from candidate acquisition via online, advertising/ broadcasting, 3rd party supplier management as well as workflow management. The net effect of the internet has been to allow firm to reduce the average cost of hire by a number of factors: establishing and enforcing harmonised pay rates (especially for technology contractors), increased direct hiring with no associated recruitment fees, more systematic management of 3rd party fees, and general efficiency savings in the procurement process itself. Added to this have been the hidden benefits of improved quality management, many of which have been achieved as well as promised.

Initially the overall implications for those of us working at the end of the recruitment supply chain appeared less than encouraging. Either clients were going to disintermediate the entire recruitment process by doing it themselves online. Sorry guys, didn't happen. Or they were going to appoint single outsourcing firms to replace the existing supply chain. To a degree this has happened. In the current economic and employment climate, clients and their appointed outsourcers are successfully meeting recruitment requirements at a commodity level where supply is plentiful or the market is liquid (for example, at certain levels of the contract marketplace). However, where the need is for permanent staff or specialist skills, or both, outsourcers and their human supply chain management tools have not so much disintermediated the supply chain as reshaped it and populated it with different kinds of intermediaries.

In broad terms, we believe that the eventual effect on the technology recruitment supply chain will be profoundly changed. At one level, there will be a process of consolidation which will see the growth of extremely large outsourcing/recruiting entities recruiting or managing recruiting at a commodity level. Also integrated into this chain, or existing in parallel with it, will be a large population of well branded 3rd party specialist recruitment suppliers fulfiling non-commodity requirements.

With purchasing power dominant in the current climate, most attention is being placed on cost-saving at the level of commodity recruitment. Nevertheless, even within the especially vulnerable realm off financial markets technology recruitment, my firm is already detecting increasing opportunities for specialist recruiter's and specialist candidates in a reconstituted supply chain.


In this respect, recruitment outsourcing is not behaving dissimilarly to general IT outsourcing trends of in the 80's and early 90's. At that time outsourcing was seen implicitly (but never described explicitly) as a panacea, a problem off-loaded rather than solved. This was followed by a period of disillusionment accompanied by selective insourcing until a pragmatic, business sensitive solution was achieved.

Today, recruitment firms such as our own are experiencing structural change against a backdrop of cyclical downturn. On the one hand, we can blunder on in a state of denial. Or we can adapt quickly and actually exploit change for competitive advantage. In challenging times, it's nice to be offered a no-brainer.


Laurie Boyall
Managing Director
McGregor Boyall Associates

McGregor Boyall Associates are a leading financial markets recruitment firm with offices in London, New York and Frankfurt, e-mail lboyall@mcgregor-boyall.com.



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