Navigating what’s next across the recruitment sector

Navigating what’s next across the recruitment sector

The reopening of the economy has provided a much-needed boost to the recruitment sector after the various challenges brought on by the pandemic.

Indeed, the ONS recently reported the largest number of vacancies available since contemporary records began, with the media overflowing with stories around worker shortages in sectors from manufacturing to hospitality.

Despite the evident post-lockdown revival of the labour market, for recruiters there’s a balance to be struck in the months ahead.

The pandemic has weakened balance sheets across the board, as businesses sought to manage cash flows by stretching the creditor base, deferring certain liabilities, and taking on additional bank debt.

Structural changes in the economy, not least related to Brexit and the transition towards hybrid working for white-collar workers are likely to be reflected in the labour market. Recruiters will also need to be agile to respond to evolving client demands and seize on strategic opportunities.

Impact of IR35 on recruitment companies

One of the most dramatic changes to the labour market in recent years came into force on 5 April 2021, as new rules around off-payroll working (commonly referred to as “IR35”) were finally introduced after a twelve-month COVID-induced delay.

The new regulation extended to the private sector a series of tests aimed at preventing contractors avoiding tax through the use of Personal Service Companies (PSCs) or similar structures. Detail around the tests and the implications for employers and contractors is available here: Understanding off-payroll working (IR35) - GOV.UK (www.gov.uk)

The precise impact of IR35 on the labour market is complex and has perhaps been masked by the wider changes caused by COVID-19.

One potential outcome is that it has become relatively more attractive for workers to become payroll employees than contractors. For recruitment companies that operate principally within the contracting space and/or in sectors where contractors have become extensively used, such as IT or project management, they may find a significant change in placement volumes, as the workforce churn is reduced.

Government support and flexible working

Working from home arrangements have become more popular amongst employers and are likely to have a longer-term impact in terms of attracting new employees.

With more firms adjusting to this new ‘norm’, employers could expect to have more global reach when looking for new candidates as employees can work remotely. This presents both opportunities and challenges for recruiters – potentially providing an avenue for recruiters to expand both their client base and talent pools geographically, if their infrastructure permits.

Labour shortages

According to the Office of National Statistics (ONS), the total number of job vacancies between June-September 2021 stood at around 1.102 million – the highest ever recorded and well above the pre-pandemic peak. This is corroborated by data collected by the Recruitment & Employment Confederation (REC) which highlighted there were 1.90 million live job adverts posted in the UK mid-September.

Source: Office of National Statistics. Seasonally adjusted data. (Vacancies and jobs in the UK - Office for National Statistics (ons.gov.uk)). Contains public sector information licensed under the Open Government Licence v3.0.

Whilst a high number of vacancies is generally music to the ears to recruiters, with unemployment sitting at a relatively low 4.7% the shortage of high-calibre candidates across a range of sectors has itself proven a challenge.

There have been particular issues finding sufficient workers for key sectors, including seasonal workers for agricultural work, trained hospitality staff, and haulage drivers – a product of long-term structural labour issues, the dissipation of much of the non-UK workforce due to COVID-19 and/or Brexit, the much-discussed ‘pingdemic’ and some distortion caused by the Coronavirus Job Retention Scheme.

This shortfall has required recruiters to work harder than ever to fill relatively straightforward roles. 

However, with 1.6 million staff on furlough as of the latest data collected in August 2021, there remains the potential for a temporary spike in unemployment to occur as firms re-assess and manage payroll costs.

Whilst this may go some way to addressing the current staff supply shortages experienced in various sectors of the economy, the challenge will be matching the available jobs with people with the right skills in the right locations (noting many of the staff shortages are in manual jobs where “place” is still critically important). 

Recruiters will need to adapt to this unpredictable operating environment for some time to come.

Going direct

One emerging trend in recent years is the move towards in-house recruitment. Social media networks and online job boards now provide ways for businesses to recruit directly. Larger businesses are bringing recruitment in-house, especially for non-specialist hires. Improved profile matching technology has made this much easier and more efficient for firms by allowing them to reach new talent without recourse to a third-party agency.

It’s increasingly clear that recruiters need to double-down on demonstrating where they can add value to the hiring process.

Technological enhancements also present an avenue to take advantage of being able to interview a larger number of candidates remotely and thereby providing clients with candidates that better fit their requirements.

Going forward

The recruitment sector is diverse, and we expect to see a continued polarisation depending on size, ability to invest in new technology and sector specialisms. Firms with a strong brand, a good client base, strong financials and a skilled management team may take an opportunistic approach to expanding their operations. 

We expect to see a continuation of strong M&A activity over the next 12 months driven by high levels of capital availability, with ongoing interest from both trade and Private Equity investors.  Businesses that have scalable operations, serve resilient sectors, and have strong technology platforms are likely to be in particularly high demand.

At the other end of the spectrum, there are likely to be challenges for subscale operations that have been substantially weakened by the pandemic. For these firms, it will be important to address issues of debt and liquidity head on and develop a robust plan that stakeholders can support.