A recent poll during the TechServe Alliance State of the Industry webinar revealed prevailing sentiments in describing the market — stagnant, slow, and flat with some striking a more optimistic note of recovering. Most attributed the market weakness to prevailing economic uncertainty. Indeed, inflation, GDP growth, job market dynamics, and the hangover from the post-COVID hiring boom are just a few of the economic forces shaping the technology staffing industry today. Navigating the constant changes in the economic and regulatory landscape is critical to ensure your staffing firm thrives through the disruptions and uncertainty. TechServe Alliance CEO Mark Roberts joined Forest Hills Advisory LLC Principal Jim Janesky to discuss their analysis and outlook on the current state of the IT staffing and engineering staffing industry.
“These anecdotal insights reflected in the live polls during the webinar square with our research which shows stabilization of consultants on billing with job orders still under pressure,” Roberts observed.
Economic and Employment Trends
The economy is giving mixed signals. On the one hand, the runaway inflation that kicked into gear in 2022 finally started to calm down in 2023, but it still has not decreased to the Federal Reserve’s target levels. GDP grew at a strong rate of 4.9% in the middle of last year, but has since tapered off to 3.4% at the end of last year and 1.3% in the first quarter of this year.
Janesky commented, “the conference board projects that GDP will increase by only 2% in ‘24, considerably slower than the recent quarters as consumer spending has dramatically slowed.”
The labor market showed unexpected strength, exceeding expectations with the addition of 272,000 new jobs in May and 206,000 jobs added in June.
Demand for skilled workers remained high, with the unemployment rate amongst IT and engineering professionals sitting at 2.5% and 1.96% respectively, well below the overall unemployment rate of 4.1%.
Taken together, the economy is showing signs of recovery, but also signs of vulnerability. If we’re to be optimistic, it had better be cautious optimism.
Industry Performance and Financial Trends
The TechServe Alliance annual Operating Practices Report (OPR) confirms that the industry faced notable challenges in 2023, with median firms contracting and significant declines in job orders. The median firm in the industry contracted by 8.3%. This decline follows significant growth rates in 2021 and 2022.
High profit tech staffing firms, defined as the top quartile based on profitability, outperformed the median firms. However, they also faced challenges as demand receded.
The industry has faced challenges in maintaining gross margins and profitability amid market weaknesses. Gross margins have ticked down, with high-profit firms maintaining better margins through operating expense control. Median operating expenses for typical firms are 22.6% of revenue, while high-profit firms are at 18.8%.
“Scale really does matter in terms of the back office operational costs,” Roberts said, noting that for firms with less than 50 employees averaged 79% higher operational costs on a relative basis. Expense control has been crucial for maintaining profitability during market downturns.
Firms focusing on expense control and leveraging economies of scale have fared better. Smaller firms face higher operational costs, impacting profitability. Larger firms benefit from economies of scale, demonstrating significantly lower operating expenses as a percentage of revenue.
TechServe’s new offering, TechServe360, is an integrated back office solution for IT and engineering staffing firms streamlining operations and boosting their bottom line.
The downward phase of economic cycles tends to impact the staffing industry more acutely since downturns suppress hiring. While no firm is immune, staffing firms with diversified client bases or niche specializations have fared better. Ideally, you want greater diversification than the median firm where the top client and top five clients represent 25% and 62% of revenue, respectively (according to the 2024 TechServe Alliance OPR). In addition to mitigating the risk, if one or more of your top clients were to decrease their business with your firm significantly, diversification also enhances enterprise value.
Market Dynamics and Staffing Challenges
There is a growing divide between employers’ preferences for in-office or hybrid work and employees’ desire for remote work. This misalignment presents a challenge for staffing firms.
According to LinkedIn, the proportion of job postings offering remote work has decreased sharply from 20.3% in April 2022 to 10% in December 2023. However, demand for remote work remains high, with 46% of job applications targeting remote positions.
Artificial Intelligence poses both opportunities and threats to the industry. It is expected to disrupt required skill sets and offer opportunities to enhance efficiency and automation within IT and engineering staffing firms.
While demand has receded during the current downturn, the challenge of tight supply for high-demand skill sets like AI and cybersecurity persists. Firms must navigate the dual realities of a temporary demand pullback and ongoing supply constraints for specialized skills.
Mergers and Acquisitions (M&A) Activity
Despite a quieter year in 2023, 2024 has seen strong M&A activity in the staffing sector, particularly in small deals that require less leverage. Valuations remain high due to the challenges buyers face in achieving organic growth, making inorganic growth through M&A a favorable alternative.
“I think it surprised a lot of folks,” Janesky said. “‘23 was a quieter year, but ‘24 has come out pretty strong for smaller deals.”
Sector-Specific Insights
The staffing industry saw an overall decline in demand for IT staffing, possibly due to the impact of AI, changing hiring practices, and overall post-COVID economic conditions. A $1.2 trillion infrastructure bill recently passed by the Federal government, in addition to an increase in domestic oil production, bodes well for the demand for staffing in the engineering sector.
On the engineering side, substantial government spending, especially in areas like infrastructure, clean energy, and AI data centers, is expected to drive demand in certain engineering segments.
Predictions and Future Outlook
The economic landscape shows a mix of challenges and opportunities. While government spending and a tight labor market may stave off a deep recession, consumers will feel the strain. Key sectors like utilities and infrastructure present growth opportunities, but high debt levels and inflation remain concerns.
With clients continuing to exercise caution in their hiring precipitated by economic uncertainty, an unsettling political environment, and geopolitical tensions, Roberts and Janesky predicted only modest growth of 1-3% for the staffing firms. For the engineering sector, they were more optimistic — 3-5% off the back of increased demand for oil and infrastructure at home.
The relative scarcity of skilled workers, as well as a shifting regulatory landscape, continue to keep the outlook murky. Overall, Roberts and Janesky painted a picture of an industry at a crossroads of technological upheaval with an uncertain economic landscape and the looming shadow of the 2024 election.
“In sum, while not a buoyant market, once the fog of uncertainty lifts, we anticipate demand for IT & Engineering Staffing will accelerate as clients address backlogged projects critical to maintaining their competitive position,” Roberts said.
TechServe members can watch this webinar for more details: The State of the Industry – June 2024
Want to learn more about recent trends and projections for the IT & Engineering staffing industry? Attend the 2024 TechServe Alliance Executive Summit to hear from your peers, thought leaders and clients on navigating marketing uncertainty, constant economic changes, and disruptions in the industry.
