Weighing the Pros, Cons, and Strategies for Expanding Beyond Traditional IT Staffing

Despite the chaotic recent years, we are hearing from industry leaders that demand for IT staffing is starting to pick up. However, this growth might be coming from areas that are new to some IT staffing firms and push the boundaries of their comfort zone — such as working with MSPs, SOW, placing other skill sets, and more. The question is, should IT staffing firms follow this shift and diversify?

In a recent presentation to TechServe members, industry experts Kip Wright and Anna Frazzetto got together to discuss the pros and cons of diversification, and the factors to consider if considering such a shift. Wright, founder and CEO of The Wright Path Advisors, is also vice president of the TechServe Alliance Board of Directors. Frazzetto is the founder of AFM Strategic Partners and is also on the TechServe Alliance Board of Directors.

While diversification can drive growth and mitigate risk, it also introduces complexities and challenges. Keeping this in mind, Frazzetto and Wright focused on six common areas in which diversification can make sense for IT staffing companies.

“You’re trying to find ways to really get back to some level of growth. You’re seeing opportunities that come in front of you,” Wright said. “You’re anxious because the old model feels like it’s dated, and you need to try something new. And in every one of the scenarios we [share], there’s a way you can do it and there’s plenty of reasons why you might say no.”

Scenario #1: Expanding into the MSP Sector

This can be an attractive possibility, particularly if the client suggesting it accounts for a large portion of your overall revenue. The consequences of saying no, in that case, can be significant.

While there are situations where this makes sense, structuring the new business correctly is key as there is an impact on your gross margins, sales structure, and SLAs.

If moving into MSP work is a possibility for your firm, take into consideration the impact of this move to your infrastructure. “You don’t want to cannibalize the rest of your business because the recruiters are so focused on meeting the SLAs for the MSP, which then is going to hurt the revenue that you currently have,” Frazzetto said. It may make more sense to set up an entirely different way of dealing with that work.
“This might be a great play where you might want to offshore some of the MSP activity, so you don’t cannibalize your own recruiters,” she added.

Scenario #2: Payrolling services

According to Wright and Frazzetto, there are only limited cases in which this kind of shift makes sense. The primary consideration is whether the firm is even set up with the proper foundation to deliver this kind of service. There are competitive risks as there are multiple companies that specialize in payrolling services. Then there are compliance-related risks associated with the different geographical regions clients are located in.

If the margins are such that there is a business case, both presenters recommended carving it out from the rest of the business, managing and reporting it separately.

Scenario #3: Expanding into Different Skill Sets

Could expanding your staffing service to include skill sets other than IT make sense? Perhaps, but it depends on the vertical. While there is a fair amount of consistency, and differences, in the sales and recruiting models within different verticals of professional staffing, it is incredibly different when it comes to say, light industrial staffing.

“What you find is that the pay and bill rates are sometimes eight to 10 times lower than where you are, which has dramatic implications in terms of what you can afford to pay for sales and what you can afford to pay for delivery,” Wright said. Then there are workers compensation costs to consider, too. Keeping this in mind, expanding into light industrial staffing, for example, would make little or no sense for most IT staffing companies.

Staffing in UI and UX, on the other hand, is a natural fit for many firms. Research-oriented fields like life sciences could make sense. There may even be a case for expanding into accounting and finance staffing.

Scenario #4: Statement of Work service (SOW)

Frazzetto acknowledged that she is passionate about encouraging traditional staffing companies that are purely in the staff augmentation space venture into SOW, but she cautions that navigating SOW requires careful planning. “It’s like the shiny apple—everybody wants to go to SOW work, but there’s a lot of risk associated with it.”

She strongly advised against fixed-price contracts unless a company has the internal expertise to accurately scope and manage project deliverables. Instead, she recommended structuring agreements where the client remains responsible for managing the workload while the staffing firm provides the project team. “You set up sprint cycles that chip away at that number, and the client is buying off on each step of the way,” Frazzetto explained. This ensures transparency and mitigates financial risks.

Wright agreed, adding that companies considering SOW work must invest in key project management resources. “You’re going to need someone who’s really good from a project management or engagement management perspective,” he noted, highlighting the need for predictable expertise. Wright also pointed out that successful SOW engagements often emerge from repeatable, specialized services—such as data analysis practices—that allow firms to refine their processes before moving to fixed-price contracts.

He stressed the importance of higher margins in SOW work, stating, “I wouldn’t be pricing anything less than 45% gross margin… because there’s risk associated with it.”

Both speakers underscored that while SOW projects can provide opportunities for growth and differentiation, companies must carefully evaluate their capabilities and pricing strategies before diving in.

Scenario #5: Remote staffing

There are a lot of reasons why IT staffing firms should consider remote staffing. Even mid-market clients are moving in this direction, or considering doing so. In addition to India and the Philippines, there are talent pool opportunities in South America and in Eastern Europe that could be targets for this kind of expansion.

Frazzetto and Wright emphasized that redeploying your current recruiters to this business is likely not the answer. Finding an employee or a partner who knows the market will mitigate the risk.

While payment and management of employees are important considerations to keep in mind, this could be a good fit for your firm if the expansion is consistent with your overall business objectives and current service mix. It might not necessarily be the volume of work and the revenue that drive a staffing firm to go this route. But if it is important for the staffing firm to be perceived by the client as a partner, responsive solution provider for their needs, this opportunity is worth exploring, Wright added.

Scenario #6: Investing in growth

Coming out of a ‘messy’ few years into a period of greater opportunity might be the perfect time to invest in growth. Perhaps that means acquiring another company that already has depth in a niche you want to target – maybe one of the five scenarios mentioned above. It could also mean expanding your sales organization with new hires.

One common mistake firms make, according to the two speakers, is hiring salespeople at too junior a level. This can lead to a longer ramp up time, of course, but it can also result in a ‘revolving door’ in which you’re investing a great deal of time training employees for other companies.

Their advice? Consider hiring experienced salespeople from other industries. Make sure you have processes in place that are documented and adhered to. Create a standardized path to success for getting new salespeople up to speed.

Is it time to diversify?

There are risks and rewards to putting eggs in different baskets.

Experimentation is key, and that experimentation depends on your ability to manage risk. For firms under $20 million, Frazzetto recommended trying only a couple of diversification strategies, and perhaps more for larger companies that can absorb the potential downside of a less successful experiment.

Protecting your current business is important as well. “The common theme here is that you don’t want to cannibalize your current business at the expense of introducing something new into the organization,” Frazzetto advised.

Wright noted that diversification may not be the answer for every firm. “I get frustrated seeing people try to turn their company into solutions because they believe it’s the noble thing to do. We provide an incredible service for our people, for the clients that are willing to pay for it. There is nothing wrong with being a really good staffing company.”