New models needed for staffing firms: Analysts

The rash of recent layoffs in the IT sector is starting to take its toll on Toronto-based staffing firm Brainhunter Inc., according to industry analysts. As the recession rolls on, the staffing firms that want to be around when the economy starts kicking again will need to change their business models and adapt to new client demands.

Earlier this week, Brainhunter filed a default notice with regulatory authorities in order to keep management from trading securities until after the company files its annual financial report. The staffing firm announced last December that it would be unable to file an audited 2008 financial statement prior to this week’s Feb. 14 deadline.

“Our business is doing fine, the reason for the delay has to do with the accounting treatment write-off of goodwill,” John McKimm, chairman and CEO of Brainhunter, said in an e-mail to ComputerWorld Canada. “As you may know, the primary impairment test is to compare public market capitalization to goodwill. If market cap is below goodwill, then a write-off of goodwill is supposed to take place.”

McKimm added that the value of Brainhunter’s goodwill intangibles is much higher than the goodwill recorded on its balance sheet.

But some industry analysts have a different view of the company and the IT staffing industry, in general.

“When you look at the model of an organization like Brainhunter, the job seekers don’t pay a cent to post their resumes, but rather it’s the potential employers that are the ones that pay,” Jennifer Perrier-Knox, senior research analyst with London, Ont.-based Info-Tech Research Group, said.

With hiring freezes in place at many companies, Brainhunter is not seeing any money come in and some clients might be withdrawing the accounts they have, she added.

For many IT staffing firms, the problem often lies in a lack of diversity, Perrier-Knox said. Simply focusing on IT and engineering recruitment would leave any company in difficult shape during a prolonged hiring freeze.

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“The recruitment firms that might have an HR software offering to go along with the services they provide might be in slightly better shape,” she said, but those companies will still need to find new ways to weather the storm and be around to reap the rewards when the economy rebounds.

In regards to any future shakeups at Brainhunter, McKimm said the company has already made all the planned adjustments it needed earlier this year. Any additional terminations would be in the normal course of business – not related to cost reduction programs.

“Much of our sales and recruiting costs are variable and tied to revenue so we will adjust naturally,” he added.

But according to Carmi Levy, a London, Ont.-based independent technology analyst, layoffs will probably be needed sooner, rather than later.

“Clearly the first step for Brainhunter is to look at downsizing,” he said. “If it turns out they are top heavy, they’re going to have to adjust to the new realities of the market or pay the price. As a publicly traded company, that price will be paid quickly.”

After that, the company will need to start looking at new ways to interact with their clients and stay on their radar, he added.

“There’s a million reasons why a client wouldn’t go with you the next time they’re looking for a contractor, so you can’t simply place someone on-site, start generating revenue streams, and then just walk away,” Levy said. “It has to be a constant discussion, especially when the economy turns down. The savvy operators are getting on the phones with their clients and learning more about their businesses.”

Another area that Brainhunter or any other IT staffing firm would be wise to explore, Perrier-Knox said, is organizational restructuring services – or in other words, assisting their clients to actually make staffing cuts.

“Conducting skills assessments and helping organizations determine where they can best make staffing cuts gives them something to work on within the next six to 12 months,” she said. “Dismissing staff is an absolutely dreadful task for most organizations and some would feel more comfortable having an outside firm actually help them make those decisions and carry out the communication around it.”

Many companies will also be looking for firms that can protect them against the legal ramifications that can arise from layoffs, as well as ways to find short-term contract employees that can be tapped into when needed.

“I was chatting with a friend of mine recently who works for a services firm,” Levy said. “He told me that the president of his company sent an e-mail to all of their clients with very high level strategies on how they can help save money.”

This involved emphasizing to the client base that they can offer whatever assistance they need and for a reduced rate, he added.

“Positioning yourself as a value-added provider during a time of economic distress and perhaps even taking a bottom line hit will help solidify things for the long-term relationship,” Levy said.

He added that those are the players that are going to come out of the gate a lot stronger when the economy bounces back.

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Jim Love, Chief Content Officer, IT World Canada

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