Having read my 47th article of the week on the impact of Brexit on the recruitment industry, I thought it might be interesting to jot down my thoughts on how this summer’s vote will impact suppliers to the sector. From a big picture perspective, Brexit is clearly going to be an absolute disaster / huge opportunity (delete as applicable!), but my focus here is more parochial – looking purely at the impact on the recruitment technology sector that Dillistone Group and its businesses – Dillistone Systems, Voyager Software, FCP Internet and ISV Software all play in.
The UK is one of the largest markets for recruitment technology and hosts many of the leading vendors. Many firms – including our own – began in the UK before opening offices in the US and beyond while many firms from the US – with Bullhorn being the largest example – saw the UK as an ideal first port of call for international expansion. While there are many good firms in other parts of the World, I’d say that the majority of the global leaders now do business in the UK.
Firms in our sector will feel an impact from Brexit on both revenues and costs.
Firstly looking at costs. The vast majority of suppliers today operate a SaaS model. SaaS is a subscription based model – clients never actually own the software, they simply pay a monthly subscription. We host the platform in the Cloud and provide access to the technology and the support service for a fixed monthly fee.
For most vendors, the cost of delivering this service will rise as a result of Brexit. If you take our business as an example; the majority of our SaaS products are hosted via the Microsoft Azure Cloud. Microsoft is a US based firm and – like most – adjusts local costs to reflect exchange rates as they change. The UK Pound has fallen by more than 20% - and so Microsoft has announced a 22% increase in the cost of its Azure service in Sterling. Increases like this are hard for suppliers to swallow without passing on an element of the cost to clients.
For some firms, exchange rates may also impact upon the cost of development. The vast majority of Dillistone’s development is done in the UK and so we are hardly impacted, but many suppliers – particularly younger ones - develop in emerging markets for reasons of cost control. These savings have all just been slashed.
What about the impact of revenue from new sales? Well, speaking to people in the industry it’s clear that some recruiters are seemingly unaffected by Brexit and some believe it to be positive (probably a good time to open an agency specialising in trade negotiators!), but generally recruiters seem to err on the side of negativity – at least for the short term. Michael Page, for example, has cut UK headcount by 3% and say that UK Financial Services is down 14%.
Both of Dillistone Group’s divisions have reported strong growth in new business sales this year – by August we’d seen new business sales of FileFinder and Infinity well ahead of what we achieved in the whole of 2015 but offsetting that we’d seen less our of clients growing. When one of our existing recruitment firm clients hires a new recruiter they typically buy a new licence from us; if a client downsizes they have less need for our licences and so typically will see a drop in our bills. From our perspective, our increased ability to win business in the market combined with a relative paucity in licence purchases from existing clients means that we are likely to be -relatively speaking- more dependent on new business wins to achieve growth for the coming years. Clearly, market share is a zero-sum game – if our market share is growing other firms must be losing out, and combining that with the lack of additional revenue from existing clients is going to cause pain for some firms not able to grow market share.
For many of the suppliers, it’s not just about the UK, however. Nowadays, to be successful in business technology you need scale. Technology is expensive and you can’t keep up without a large customer base. The UK market is too small and too competitive for the level of scale required. That means that we – and most of our larger competitors – put a lot of effort into selling overseas.
The good news is that every US$ that these firms bring home is worth 20% more than it would have been 12 months ago. The bad news is that every US$ they invest in winning that business is 20% more expensive. From our perspective, we like this equation. We have clients in nearly 70 countries and each of our international operations is profitable. As a result, each of our overseas territories is now making a contribution that is larger than it would have been under the exchange rates of a year ago.
For some vendors, though, this is likely to be a tough period. A business already making a loss overseas is suddenly going to see that loss grow dramatically. Cost cutting may well be in order for some of these firms.
For those firms that sell from overseas into the UK but do so without local operations, the market just got that much less interesting. A product sold into the UK at US$ pricing levels will not be competitive – overseas suppliers will need to drop prices. As a result, if you have limited staffing resources available, you’ll investigate other markets first. Speaking to a friendly competitor in the US recently, I was told that they would be stopping proactive sales efforts into the UK - they’d focus on existing clients and deal with any incoming enquiries. First, that are already invested here are likely to see a reduction in contribution or losses – the reverse of UK firms trading overseas.
So, what are my conclusions? Well, it’s hard to say the overall impact on the market. A rising tide carries all ships and the reverse is equally true. However, it is fair to say that different firms will be impacted to different extents. Generally speaking, vendors who are larger, already profitable and enjoy significant profits from overseas operations are likely to benefit from factors that will cause pain to smaller and loss-making businesses*. There is likely to be turbulence in the market, and I’d expect some downsizing with some businesses being acquired or disappearing.
If you are in the recruiting sector, I’d recommend that you check the financial pedigree of your supplier in detail before entering into any new commitment – and consider if your current vendor is likely to survive these choppy waters.
* For clarity – Dillistone Group is one of the largest suppliers to the sector, is profitable and enjoys profits from overseas operations – and so I may be biased!
