RECRUITMENT is a fickle business at the best of times, and one that is, by its very nature, inextricably linked to the macroeconomic cycle. It is also a business which leaves finance with little to no visibility of future incomes and virtually no security regarding its revenue streams.
“In a good economy, we have three to five weeks’ visibility and in a bad economy it is more like three to five days,” explains Paul Venables, finance director of FTSE 250 recruiter Hays. “You have to measure everything that moves.”
Indeed, the past five years have been anything but the best of times, although key indicators for the group have gradually become more positive. From a nadir in 2008, when operating profit slumped to £80.5m, profit has recovered to a healthy £125.5m, generated from fees of £719m.
Since joining the specialist recruitment group in 2006, Venables has ridden a financial whirlwind that saw the collapse of Lehman Brothers – an important client and a bellwether for the finance sector – and an eight-month period in which the top line fell 42%.
The key to managing such a volatile and cyclical business is keeping on top of trading at all times, understanding the run rate of the business and “questioning the hell out of any variations”, explains Venables.
“We run the business like a retailer. By 10am on a Tuesday morning, we have got the results from last week,” he says.
According to Venables, there are four to five drivers of the business, including clients and candidates – two distinct groups that are driven by different things – along with the economic backdrop and what goes on in the press.
“I have to form a view on every major economy in the world and our main sectors. We have got a big mining business in Australia so I analyse what comes out of Rio Tinto and BHP. They are a good bellwethers for the commodities market. If those two come out and say they are cutting expenditure, it is more likely to be a market issue,” he says.
“It’s tracking the data of your business and then having an economic overview, and strong relationships with key operators.”
Hays has reduced costs in the UK by more than 30% over recent years. For one, it consolidated its office footprint from 235 at peak to 102 offices today and reduced headcount by more than 40% since the peak. In its back-office administration, functions have been automated and streamlined while in the front office efforts were focused on maximising the productivity of recruitment consultants, increasing consultant productivity by 7% in 2013.
Whether in the UK or in its overseas jurisdictions, Venables says finance always focuses on office profitability. “What they generate to fixed cost – what fees are generated versus the cost of the office,” he says.
In the aftermath of the Lehman Brothers collapse and subsequent financial crash Venables took steps to “right-size” Hays’ UK footprint, a process that continued until the past financial year. In 2013, Hays finalised the consolidation of its office network in London and focused on offices that failed to make a positive contribution. The business ended the year with 102 offices, a reduction of eight since 30 June 2012.
“Between 2004 and 2007 we had expanded our office network. Standing back now, we right-sized that, but increased the quality of the network. We consolidated 16 offices across London. We didn’t exit any cities; we just got better infrastructure and consolidated it,” Venables says.
At the same time, the business automated many of its processes – paper-based timesheets were moved to an online system – while in 2011 a lot of back-office functions were outsourced to a shared service centre in India. In the UK, it upgraded its back-office systems and automatically linked these to the front office – high-paid consultants were no longer required to upload CVs, for instance.
Venables is an old hand at this – he has undertaken six large IT transformations in his career, though he says he is “not sure I want to do another”.
“It’s like driving a car down the motorway in the outside lane at 70 miles per hour. A brand new car comes along and you jump into it,” he says by way of explaining the complexity involved.
On the rebound
However, Venables is keen to emphasise that managing costs is only one element in protecting the business in a downturn. Building a diversified business worldwide provides Hays with two advantages: a broader platform from which to grow, and a diversification into multiple markets and sectors so it spreads its risk and reduces its reliance on any specific market.
Hays looks at diversification in three ways: by country, by industry sector (or specialism) and by contract form – ie, temporary or permanent contracts. And although FDs are so often sterotyped as the cautious management restraining the wilder ambitions of their CEOs, Venables says he is “one of most aggressive individuals in the business” when it comes to expansion.
“It is very clear from all the data we are seeing that there is a rebound in the UK jobs market. Having seen a reduction in the scale of our UK business, it is important to be aggressive in increasing our own headcount. I would rather take some risk,” he explains.
Indeed, returning the UK business to profit was a key objective at the start of the year. Hays achieved a £12.1m improvement in operating profit in its domestic market. However, its international growth has been more startling. When Venables joined, the recruiter was in 14 countries; it now covers 20 specialisms in 33 countries, employing more than 5,000 consultants worldwide.
In 2013, the business opened new offices in Ulm and Essen in Germany and St Petersburg in Russia, while also developing its global oil and gas-focused business and the roll-out of its IT Contractor model across six countries, including Canada and France. In the Continental Europe & Rest of World division, consultant headcount increased by 6% year on year to 2,084, primarily in Germany and Canada. Asia Pacific consultant headcount was 8% lower, largely reflecting the tougher market conditions in Australia, where headcount was down 15%, but partially offset by continued investment in Asia, where headcount was up 12%, mainly in China, Japan and Malaysia.
“We increase headcount for the business based on what work we expect to have in six to 12 months’ time. In Japan, we grew 28% in the first half. We are now looking to increase headcount in the next six months by 40% because the forward indicators are positive,” he explains.
According to Venables, the cost of setting up an overseas office is about £1m of revenue investment in the first year, which includes advertising, setting up the management team and hiring consultants. In order to figure out the viability of the market, Venables visits the country and meets with existing clients as “part of the qualification for a successful business”.
“You have got to have some jobs to fill to kickstart the business,” he explains.
In terms of risks, one of the biggest exposures the business faces from a treasury standpoint is currency changes. Exchange rate movements decreased net fees and operating profit by £6.8m and £1.3m, respectively, over the past year, primarily as a result of depreciation in the rate of exchange of the euro.
Fluctuations in exchange rates remain a significant sensitivity for the group, particularly in the Australian dollar and the euro. For example, a one-cent change in the exchange rates of these currencies to sterling has a respective operating profit impact of £0.45m and £0.6m per annum.
However, Venables says the business doesn’t hedge that risk. “It’s inappropriate to do translation hedging; our shareholders do that – we clearly show the exposure,” he says.
According to Venables, his responsibility is to continue to diversify the business: “Our strategy as a group is to diversify the profit stream and build a more diversified currency position.”
From a debt standpoint, though, Venables says he always hedges from a fixed interest rate of 20% to 40% of the core debt.
“As our debt comes down, we will reduce that hedging. We are such a highly generative cash business that we will have no debt if we, in the next two financial years, generate an operating profit of £150m,” he explains.
Clearly, Venables has a handle on the nuts and bolts of Hays’ finances, but what interests him is what drives profitability and cash in the business. Despite being aggressive on Hays’ growth strategy, Venables is in fact a “very conservative accountant”.
“Our balance sheet is very simple. You don’t want to get blindsided,” he says. “You don’t want to find out that you have taken an aggressive accounting position.”
Aggressive on growth, conservative on accounting. The best of both worlds. ?
IN BLACK AND WHITE
2006 – present Group finance director, Hays
2005 – 2006 Finance director, DHL Logistics
1992 – 2005 Deputy group finance director, Exel
1983 – 1992 Various roles, Deloitte
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