Staffing M&A: How Technology Is Transforming Staffing Deals

Recently, I had the opportunity to participate at Becker LLC’s Buy-Side Merger and Acquisition Summit, which focused on the unique challenges associated with acquiring and integrating staffing companies. The setting in Kiawah Island, South Carolina was idyllic, but the discussions among veteran staffing executives and professional advisors were focused and intense. M&A remains a time-tested growth strategy for the staffing industry but realizing the full value of an acquisition can be challenging even for experienced leaders. I know this well from personal experience, having participated in multiple deals in HCM, healthcare, and staffing over the past 20 years, as well as working directly with Avionté customers. In any given year, Avionté will provide technical integration support and a core platform for several dozen acquisitions undertaken by our customers.

But this year’s M&A summit had special urgency. In current economic times, accretive M&A remains a smart growth strategy for staffing agencies, but deal criteria and post-merger integration tactics are rapidly evolving.  Our industry has reached a point of convergence where mobile technology, new business models, labor shortages, and the expanding gig economy are forcing us to rethink the rules of competition. Digital assets such as end-to-end ATS systems, mobile talent platforms, and customer data have become crucial determinants of a company’s overall value. To negotiate the best terms for a deal, companies must consider these assets when assessing a potential target.

Staffing M&A Today: Situational and Opportunistic

To understand the evolution of Staffing M&A, it’s helpful to look at where we are today. Many M&A staffing deals on the market today are situational and opportunistic. Everyone likes a great deal, and sometimes it helps to be lucky. With roughly 25,000 staffing agencies currently operating in the marketplace, and well over half of them operating at less than $10 million in revenue, there will always be an inventory of deals. Perhaps an agency owner in a coveted market has decided to retire. Maybe you have a large customer that just opened a facility in a new state, and you want local presence. There are also agencies that have great people and valuable expertise but lack the financial heft and technical expertise to grow. Private equity firms have taken notice, adding sizzle to a busy deal space.

Staffing is all about how we develop our relationships with customers and talent, and profitability comes from scale. In most merger scenarios that we see today, aggregating multiple branch offices and verticals onto a single technology platform with standard SOPs and centralized governance makes perfect sense. Scale allows you to deliver enterprise grade reliability and offer better service and features, while improving both gross and net margins.

Emerging: Strategic and Technology Driven Deals

But the digital transformation of staffing has created new opportunities and threats. With staffing software available today, you can reach talent and potential customers remotely and deliver services virtually at lower cost. You may be able to consolidate your physical brick-and-mortar locations by expanding your digital footprint. You may decide that you want to deliver a distinctive branded experience for all talent within a specialized vertical division—think traveling nurses or off-shore oil workers. Some companies are now creating digital marketplaces that focus on growing the candidate pool rather than recruiting for individual placements. To conduct successful M&A deals in this type of environment, we need to be more precise and strategic in our approach to M&A deals.

As a local brick and mortar agency, you may prefer to be independent, but without advanced technology, and the ability to effectively use it, your options may be limited. If you can’t make the necessary investments in technology, you may prefer to join forces with a larger agency or adapt to a franchise model that provides you with access to the technology you need.

Not only does new technology change the motivations of buyers and sellers, it also changes the critical milestones and objectives during post-merger integration. It’s not just teaching sales and recruiting associates how to do their old jobs on a new system. Rather, it’s teaching the acquired organization to adopt a whole new way of approaching business, and use technology differently, with a focus on building customer and talent loyalty.

  • Your digital brand—your identity to both talent and customers—is now a critical success factor—and provides a strong motivation for staffing agencies to consolidate their market identity, either through a franchise agreement, or through a single national brand focused on an industry vertical.
  • The deployment of Artificial Intelligence for selection and engagement also permits agencies to mine their existing talent databases more effectively, driving higher rates of talent redeployment and talent reactivation. Increasingly, recruiters will spend more time on talent coaching and upskilling, and less time on the phone looking for new talent.
  • Automated workforce management and shift scheduling software enables agencies to expand their services to offer short-term on-demand staffing services, which can be crucial to compete in healthcare and hospitality industry verticals, as well as some types of clerical and light industrial work.
  • And finally, large employers have taken notice regarding the consumerization of employment and staffing. For agencies seeking strategic, long-term relationships with larger employers, advanced technologies with strong mobile talent capabilities are an absolute requirement.

In summary, we need to be careful and intentional in our approach to deal-making. Opportunistic deals that don’t fit well into your broader vision are simply a distraction. A local branch that moves to a new technology platform but refuses to change its business practices is a set-up for failure. On the flip side, if you can unify disparate physical branches under a single digital marketing brand and deliver a consistent service experience to both customers and talent experience, you can develop a formidable competitive advantage against local competitors. With the right integrations feeding jobs to your staffing platform, and the right mobile talent app maximizing your reach to talent, you can effectively block out any local competitor who lacks these capabilities.

But here is the real payout. Ask yourself—how much is your talent database worth? What would you pay to add 1,000 vetted and reliable talent names to your database in a new local market? If every name can only be reached by phone call or text, the value is limited. However, if the entire talent database can be accessed on mobile talent app that pushes out relevant opportunities in real time, the value of those 1,000 names increases by a factor of 10X. So a smart M&A strategy would be to pursue smaller staffing agencies who undervalue their talent database because they lack the right technology and drive mobile adoption to their talent database. Digital transformation means that the risks for Staffing M&A are higher, but so are the rewards when we get it right.

The Basics Still Matter

Before closing, I do want to circle back to something I have learned from my own hard-earned experience. Strategy is important, but leadership and post-merger execution deliver the true return on investment. When you bring two companies together to operate under one roof, you need to know exactly why you are bringing them together, with a clear vision of intended outcomes, and consensus buy-in from all stakeholders. Here are my simple rules:

Know what you are buying and why.

What is your value creation strategy? Do you have a clear investment horizon and expected payback? Are you trying to extend a specific market, build depth in a vertical market, or add complementary capabilities? Have you tested your assumptions?

Know the risks.

In staffing, business risk comes in many forms—people, data, compliance, technology, customers, and competitors. Without understanding risks, you have no basis for prioritizing your post-merger integration tactics.

Envision the outcome.

How will you structure the new organization? Which technology platforms will you consolidate on? How will governance and metrics be handled? When and where will you tolerate differences in SOP? Where will you defer decisions, and where will you drive standardization?

Build a playbook that maps to outcomes and mitigates the risks.

When the deal closes on day zero, all leaders and teams need to know what is expected of them. Everyone needs to agree on how progress will be evaluated. The support and buy-in of customers, executives, and front-line supervisors is critical. Clear directions lead to clear outcomes.

Establish objective milestones and metrics.

Establish revenue, productivity, and margin goals. Embrace the truth without ego or bias and manage against it to become excellent. In a post-merger environment, job insecurity and defensive behaviors are often the biggest challenges to success. Embracing transparency across the entire process is critical.

Prioritize people issues.

In staffing, people are your one true asset. Our industry is built on trust and authentic human relationships. Without trust, deal value can be destroyed overnight.

Don’t forget to lead.

Through transition, you will face unanticipated issues and difficult decisions. In some cases, the right choice will be tough and unpopular. This is inevitable. But in my experience, the failure to act quickly and decisively is one of the biggest pitfalls to a successful acquisition.

Everything I described here is easy to talk about but hard to do. But these are not normal times in the staffing industry. Future employment trends and technological innovation are driving extraordinary change in temporary and contingent employment. With technology transforming the rationale behind mergers, the ability to identify and seize on these new opportunities has become a crucial factor in determining a company’s success. Now is the time for leaders within the staffing industry to step up and take control of their own destinies.

Rishabh Mehrotra, CEO at Avionté

A serial entrepreneur and seasoned CEO, Rishabh has successfully led technology-enabled businesses in payroll, benefits, and healthcare services with leading US and international private equity funds. At Avionté, Rishabh is focused on helping customers succeed through thought leadership, innovation and service excellence.