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Things are rocking right now.

It’s clear from the conversations I’ve had with many people in the recruitment industry since the beginning of the year that the market is moving at Usain Bolt-like speed.

Agencies are reporting record levels of job registrations and the subsequent placements are leading to healthy bottom line results.

The other key indicator is the number of recruiters going out on their own. I can’t recall a period with so many LinkedIn updates indicating self-employment for many of those that were previously employees of a large(ish) agency.

Despite all those ‘recruitment industry disruptors’ who are forever threatening to make recruitment easier, cheaper and better, it appears that we are in the middle of another golden age of recruitment (as accurately predicted by Greg Savage exactly two years ago)

This is great news, mostly.

I add the note of caution having read Rod Hore’s excellent new and free eBook Business Valuation in the Recruitment Industry: A guide for recruitment agency owners.

Rod’s firm, HHMC, is the go-to firm in Australia for recruitment agency sales and purchase advice and associated consulting services. Over twenty plus years in the industry Rod has seen the good, the bad and the ugly in our industry’s M&A space.

The eBook has been the product of many conversations Rod has had with both potential vendors and buyers in the recruitment industry underpinned by research from HHMC’s activities and information gathered from Rod’s frequent attendance at industry conferences, both in Australia and internationally. The most common conversation topic with agency owners is, unsurprisingly, agency value.

Here’s what Rod has to say about agency value:

‘….if we are going to buy the business then we want to know how it is going to perform in the future.  What happened until now is the domain of the existing owner. They have pocketed the profits. We are interested in how future profits are going to be generated.

The equity value of a business can be described as the risk associated with earning future profits.’

The challenge for business owners is to demonstrate they have built a business that has a strong opportunity to operate profitably in the future.

Business Valuation in the Recruitment Industry: A guide for recruitment agency owners by Rod Hore, page 26

This all sounds like relatively straight forward and common sense advice. Surely this is what almost all owners do?

Unfortunately, as Rod observes, and I strongly concur, the history of successful small recruitment agencies (20-25 staff) strongly supports the evidence that very few owners manage to build an agency with a sound foundation for growth to take it to the next critical growth indicator (around 50 staff). The history of massive write-downs across the ASX-listed recruitment sector since the boom of 2005-2007 demonstrates how little of the growth of those purchased agencies was sustainable growth.

As Rod explains:

‘Successful emerging recruitment agencies are like maxed-out lifestyle businesses. They are usually under the spell of a strong, charismatic owner that is able to gain maximum performance    through force of personality. They build organisations that are top performers in the RIB report.

But the challenge is to turn that into something sustainable over time, that can thrive without the dedicated influence of the owner. Fail to make the transition and the business will fall back to being an average business, usually in the 10-15 person size.’ (Hore, page 75)

Rod articulates a number of reasons for this failure to successfully transition from small to medium-sized. I have also written about this topic previously.

Rod lists little experience in dealing with adversity and an underdeveloped management team, amongst other reasons.

I’m particularly interested in why this occurs. What’s common in the typical recruitment agency owner’s beliefs, traits or skills that have them make the same mistakes that thousands of other recruitment agency owners have also made?

I would speculate that one of the most common is optimism.

Successful recruiters are optimists and successful recruitment agency owners are optimists. This powerful streak of optimism creates the foundation of the initial success experienced by the agency owner; employees, clients and candidates buy into this optimism. The momentum of this optimism carries the agency from one employee to five, to ten, to fifteen, maybe to 20 employees. But somewhere along the way the wheels of growth start to wobble, and often fall off.

The optimistic owner, typically, continues to do what they have always done, and they keep getting the same result. In my experience this is caused by an optimist having a bias for action rather than thought.

The optimistic recruiter has built their success on taking consistent action; very little strategic thinking is required. As an owner this pattern continues. The ceiling of their business’ growth corresponds to a lack of effective strategic thinking and application of the sort necessary to grow a business sustainably.

The deep well of optimism that has, until now, been a fundamental strength of the agency recruiter-turned-agency owner, is now a fundamental weakness. This weakness, if unrecognised, becomes the core reason that the owner is unsuccessful at transitioning the business from a successful small agency to a successful medium-sized agency.

’Strategic thinking is the generation and application of business insights on a continual basis to achieve competitive advantage. Too often in the ‘action is everything’ world we live in, we are [like] hamsters running on a wheel. Day in and day out, we run faster and faster, doing the same things in the same ways we’ve always done them. Trouble is, we’re often doing the wrong things: things that drain critical resources from those few effective tasks that really will make us successful.’

Deep Dive: The Proven Method for Building Strategy, Focusing Your Resources, and Taking Smart Action by Rich Horwath pages. 5 & 6

Optimism; it’s our industry’s greatest attribute and its greatest weakness. And at ‘gold rush’ times, like right now, it’s a weakness that sows the seeds of today’s shining star becoming the next decade’s perennial underperformer.

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Rod Hore

Ross, this is a great topic and one worthy of further discussion. Why doesn’t the ANZ industry generate a greater number of larger businesses? A few make it, but not many.

I think the optimism discussion you’ve raised is an important part of the story but there is more to explore. Other factors might be:

– A lack of pull factors that exist in other countries, such as Private Equity or a better public company environment, that encourage owners to keep striving to a higher position.

– The Enron factor, sometimes thinking that they are the smartest people in the room, when what has been achieved is just the first phase of a very long process. You can’t grow a business without additional assistance; you can’t be insular.

– As owners, not making the transition from being a recruitment industry person to a business person. Once the company gets beyond say 20 staff the owner needs to focus “on the business”, not “in the industry”.

Maybe in your interview series you could talk to some of the business owners that have grown through the 50-consultant barrier and understand the changes they had to make to meet the challenges faced.

Would love your thoughts, please comment.x
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