How to Start a Staffing Services Business
If there's one thing that can give any business owner a headache, it's staffing. Soothe your clients' pain by finding and placing the best employees for their needs.
This is a good time to be in the staffing industry. Despite the 2000-2002 economic downturn, the industry is picking up steam again, and future prospects are bright. In the first quarter of 2003, U.S. sales of temporary and contract staffing services rose 5 percent, to $13.1 billion, according to the American Staffing Association (ASA). That marked the third consecutive quarter of growth after six straight declining quarters.
The personnel supply services sector, which includes the staffing industry, is projected to grow rapidly over the rest of the decade as the economy expands. In fact, the U.S. Bureau of Labor Statistics (BLS) predicts that more jobs will be created in personnel supply services than in any other industry over the next few years. Further, BLS forecasts that personnel supply services will be the fifth fastest-growing industry through 2010.
Broadly speaking, staffing services are all of the following:
- Employers. Staffing services take on qualified candidates as employees. Such services not only pay their employees, but also withhold income tax and pay workers' compensation, disability and unemployment insurance.
- Businesses. All companies have clients and products. In the staffing industry, clients are the companies that contract for labor or expertise, and the product is that very labor or expertise. As with any corporation, staffing services are in business to make money, which they do either by adding their markup to all labor charges or by charging clients a finder's fee.
- Contractors. Temporary help and staffing services provide business organizations with employees for positions in all sectors of employment, from industrial to clerical to professional. In other words, staffing services match employees to client companies.
Types Of Staffing Services
Now that you know, in the very broadest sense, what a staffing service is, let's discuss the different types. Here they are:
- Temporary staffing services make up the largest chunk of the staffing industry and are the type of service we discuss most in this guide. Temporary staffing services supply client companies with workers on a short-term basis, either to fill in for absent employees or to supplement existing staff during particularly busy times.
- Long-term staffing services, also known as "facilities staffing," specialize in placing employees in long-term assignments, for indefinite periods of time. Project-related assignments, such as those found in the professional and technical sectors, often require long-term staffing.
- Temp-to-perm staffing services are often combined with a temporary staffing service. A temp-to-perm staffing service offers clients a chance to try out a worker on a temporary basis and to hire that worker later if the client wishes to do so.
Although it's important to understand the distinctions between these types of staffing services, keep in mind that the lines between them have become indistinct and, in fact, have nearly disappeared. Many services do all these types of staffing.
Staffing Service Sectors
The industry gets even more interesting when you examine the different sectors within it. The staffing services industry is divided into the following sectors:
- Office and clerical. Accounts for roughly one-third of the staffing industry's revenue and payroll. It covers secretaries, general office clerks, receptionists, administrative assistants, etc.
- Industrial. Currently, it accounts for one-third of the staffing industry's revenue and payroll and includes the following positions: manual laborer, food handler, cleaners, assemblers, drivers, tradesmen, maintenance workers, etc.
- Professional/Technical. This combined sector used to be broken into several smaller divisions, including professional, technical, health care and marketing. All these areas have been growing, thanks to shifts in the market as more people with higher skill and education levels look for the flexibility provided by temporary and contract work, and as the demand for these people increases. As in the first two sectors, the professional/technical area now accounts for about one-third of industry revenue and payroll. It covers a wide range of positions, including engineers, scientists, lab technicians, architects, technical writers and illustrators, draftsmen, physicians, dentists, nurss, hygienists, medical technicians, therapists, home health aides, custodial care workers, accountants, bookkeepers, attorneys, paralegals, middle and senior managers, and advertising and marketing executives.
Finding Your Niche
Traditionally, staffing services have operated in all sectors of employment. Increasingly, however, staffing services operate within a niche market. The many specializations that exist today make the staffing industry much more complex, as well as far more interesting, than it has ever been before.
As you think about niche possibilities, you should consider each of the following factors:
- Local supply and demand. Staffing services need both temporary employees and clients to survive. Before you choose your niche, make sure you know the types of jobs available in your area and the potential labor supply. For example, if there are 10 factories in your town, don't rule out industrial placements. And every owner we talked to does some business in the office and clerical sector. Because this sector accounts for more than 30 percent of the industry, chances are good that virtually every staffing service will place office personnel, even if the major placement emphasis is elsewhere.
- Be aware of niches within a sector. For example, if you decide to focus on office and clerical positions, you'll find it's possible to specialize even further. Some staffing firms focus on providing midlevel administrative support staff to Fortune 500 companies. Rita Z. found that specializing in light industrial work was a natural choice for her company.
- Experience. If you have a background in a particular field, this can be an advantage in several different ways. Not only will you be able to better assess applicants for jobs in that field, but your experience can also lend credibility to your staffing service. And you may feel more comfortable serving an industry with which you are familiar. For example, since Dyana V. is a lawyer, the legal staffing sector was a natural niche for her. Of course, familiarity and a high comfort level won't help if you can't find enough clients and employees, so you still need to do your market research.
- Economic feasibility. Sometimes a market niche that might be a natural choice given an entrepreneur's background isn't possible for financial reasons. For example, in spite of her medical background, One former owner chose not to open a medical staffing service fue to its steep start-up costs. It can also be difficult to get hospitals, nursing homes and other medical institutions to pay in a timely manner, so that owner went into higher-end clerical staffing instead.
The staffing industry has higher startup costs than do many other industries--for a couple of reasons. A home office isn't usually a reasonable option. (You don't really want all those people traipsing through your house, do you?) Also, you'll have to meet payroll immediately, even though your business may have no income for a few months.
That said, how much money will you need to get your staffing service up and running? Some experts suggest that you double the amount of money you think you might need.
Your start-up costs will depend greatly on the following factors:
- Size: Obviously, starting out with a small office and few permanent employees costs less than starting out with a larger facility and numerous permanent employees.
- Niche: Some sectors of the industry are more expensive to operate in than are others. As a rule of thumb, the more highly skilled the job assignments your company handles, the higher your start-up costs will be. There are at least three reasons for this: 1) employee salaries will be higher, 2) the need for a certain image may require a more expensive location, and 3) computer demands (both hardware and software) for testing and training will be greater. The most expensive niche in which to start up appears to be the medical staffing industry.
- Geographical location: Office rent, employee pay, advertising costs, tax rates and insurance rates all depend on both your area of the country and the city/town distinction.
Start-up costs can range from $58,000 to $127,000, and you should have a suggested operating capital of between $80,000 to $135,000 in the bank.
As a general rule, front office work is "people work" and that involves dealing with clients, employees and applicants, either in person, on the phone or at the computer. Your sales staff will usually be out of the office by about 9 a.m. to drum up clients for you, so this section is about the people work those in the office (for instance, recruiters, employment counselors, coordinators, etc.) will be doing.
Most staffing services are open from 8 a.m. to 6 p.m., or some close approximation thereof. During that time, you should always have someone at the front desk, ready to greet those who walk in. The majority of people coming through your doors will be applicants, since clients rarely visit and most employees come in only occasionally (for example, to pick up a paycheck).
Once your staffing service is up and running, you'll no longer be sitting around waiting for the phone to ring. In fact, you (and your employees) can expect to spend a lot of time on the phone, especially in the morning, when staffing services invariably buzz with activity.
So who exactly will be phoning you? Prospective employees, current employees and clients--that's who. They'll be calling you to request information, report availability, place a work order, cancel a work order or report a crisis.
These categories should cover most of the calls your office receives on a typical morning. But incoming calls are only half the picture. Outgoing calls are the other half. Following are some of the types of calls you and your front desk personnel can expect to make: arrival calls, second-day calls, placement calls, replacement calls, courtesy calls, sales calls, follow-up calls and verification calls.
Location, Location, Location
This saying might hail from the real estate industry, but it's equally true for the staffing industry. Office location does matter, and generally speaking, your home is not a good one. You need a professional atmosphere in which to test applicants, interview likely candidates, train employees and hold the occasional business meeting.
Generally speaking, anything from a strip mall location to a street-front location to an office in an industrial park can work for a staffing service. As you scope out possible territory, you should consider all of the following:
- Image. Dyana V. finds that location can be extremely important to image in the legal industry. That's why she and her husband located their company in one of the main bank buildings in downtown Seattle. "We want to let the candidates who come in to interview know that we're professionals--that we're upscale legal placement," she says.
- Client proximity. On the theory that where there are clients, there will also be workers, sometimes choosing your location based on the clientele you'd like to attract is a good plan. For instance, a staffing service in Chicago could support corporate giants such as Ace Hardware, McDonald's, Platinum Technologies and Inland Realty.
- Accessibility: It's important that your location be easy for potential employees to reach. Choose your location with recruiting in mind. "Our biggest concern is being in an area that's good for our employee population, because the clients come into our office very rarely. We go to theirs," says one owner.
- Economic Feasability:You may need to minimize overhead. "One of our competitors has an office outside of the downtown area, under the highway, and he gets away with it," says Dyana V., "his overhead is very low."
- Expansion possibilities: Keep in mind that your business will (you hope) grow. A location that provides room for expansion can be very important, since moving is expensive.
- Lease flexibility: If you're starting small, such that moving wouldn't be an expensive disaster, it's a good idea to consider temporary space for the first few months of your company's life. If you discover you've made a mistake, you don't want to be locked into a long lease. Make sure the landlord will work with you.
Income & Billing
How much can you expect your business to make in gross sales? These figures vary wildly in the staffing services industry. Staffing experts say that privately held companies average somewhere around $750,000 a year. But we talked to several owners whose businesses make closer to $15 million in gross sales. More than one owner topped $1 million in sales the very first year.
Marking It Up
The profit for staffing services is in the markup they add to the price of an employee's labor. There's a huge range for markups in the staffing industry, but several owners noted that industry markups have increased in recent years. In fact, several owners noted that although industry markups have slipped in recent years, markup can remain high even in a slumping economy because there aren't that many qualified applicants to work with. In addition, today's workplace requires more skills and therefore more training.
Wide markup ranges exist even within the same company. For example, the markup for PDQ Personnel Services in Los Angeles is anywhere from 25 to 75 percent.
To determine the amount of markup you can earn for a particular type of placement, you'll need to consider all the following factors:
- Amount of competition
- Client relationship
- Industry sector
- Local standards
Traditional advertising can be effective in the staffing services industry, as long as you do it well. To produce an effective ad, you must first make clients aware of the advantages of using a staffing service. These advantages include the following:
- Pre-tested, pre-screened employees. Clients get employees who are ready to work.
- Reduced turnover. Replacing permanent employees is expensive. All companies want to reduce turnover and its associated costs.
- Savings of time and money. There is no need for clients to invest in recruitment or human resources efforts.
- "Tried and true" employees. Clients get to try out prospective employees to see if they provide a good fit for the company.
Notice that the above points, while important, are very general in nature. In theory, they are true of any staffing company. Put them in your ad, by all means. Just don't imagine that they do anything to differentiate your service from other staffing services. The way you do that is by listing those features that set your company apart from the rest. Emphasize the benefits your clients receive from using your staffing service.
Here are some typical advertising strategies:
- Brochure. A well-designed, high-quality brochure can be an effective advertising vehicle for your staffing company. Note, however, that brochures are generally expensive to produce and not always immediately necessary.
- Direct mail. This strategy works well in the industry. Choose your mailing list well, focusing on those companies whose size and industry sector make them likely prospects.
- Internet. Electronic ads on various industry-specific bulletin boards can be an effective way to advertise for the professional and technical sectors.
- Newspaper. This is a good method for some sectors of the staffing industry. Major newspapers may not be helpful in the professional or technical sectors.
- Specialty publications. These can help you target particular types of companies. Several of the owners we talked to advertise this way.
- Telephone. Some staffing services call existing clients to let them know about applicants currently available. Handled well, this can be an effective way to generate more business.
- Trade journals. These are most effective for attracting clients in the professional and technical industry sectors.
- Word-of-mouth. This is the best kind of advertising. It's the most credible and definitely the least expensive. Dyana V. says her company kept a low advertising profile in the beginning. "If you enter a market that has high competition like Seattle, you don't want to just bust down doors and say 'Here we are.' " Many firms, she explains, have long-standing, loyal staffing relationships. Initially, her company relied heavily on word-of-mouth advertising.
- Yellow Pages. Most owners said their Yellow Pages ad is effective for recruiting employees but not for attracting clients. In fact, some owners are is suspicious of clients who find them via the Yellow Pages. These are often high-risk clients with bad credit.
There are many ways to find employees. Studies show referral is the most effective (i.e., least expensive and most productive) way to recruit employees. Some staffing companies receive as many as 40 percent of their new hires from referrals. Rita Z. estimates that referrals comprise about 36 percent of her applicants.
You can also advertise to find employee prospects. The following are methods of advertising for employees:
- Newspaper. This is a good method if you need lots of people quickly or very broad-based skills. Consider ads in smaller daily or weekly newspapers, especially if the jobs are available in a particular location.
- Specialty publications. These include neighborhood monthlies, arts listings and religious or business publications. All of these can be effective for targeting particular groups. Several of the owners we talked to advertise this way.
- Business cards. Carry business cards with you wherever you go. You never know when the person sitting next to you might be a good prospect.
- Yellow Pages. A good-sized Yellow Pages advertisement is useful for recruiting.
- Television. Consider cable TV, which is less expensive and easier to localize. Recruiting experts in the staffing industry consider cable TV an effective option.
- Internet: For staffing services in certain industry sectors, especially professional and technical, effective recruiting is achieved by searching resume databases.
Associations And Organizations
- American Staffing Association
- National Association for Professional Employer Organizations
- National Association of Personnel Services
Job Listing and Resume Posting Web Sites