Workforce.com

A Tight Talent Supply Drives Up Staffing Costs

March 16, 2007
A tight labor market and strong demand for contingent workers will likely drive up prices for contract and temporary workers in 2007, according to professionals in the field. Corporations using temporary and contract workers may find themselves paying more as staffing companies struggle to meet demand, particularly for higher-skilled workers in fields like information technology and health care.

"The No. 1 challenge is filling the pipeline with qualified people," says Richard A. Wahlquist, president and CEO of the American Staffing Association.

If trends under way in 2006 continue into 2007, U.S. corporations will spend more on contingent staffing without a corresponding increase in the number of temporary workers hired. American Staffing Association statistics show an emerging pattern of slowing growth in the contingent staffing workforce but a continued rise in overall spending on those workers.

After the economic slump of 2001 and 2002, when contingent staffing shed jobs and revenue, the industry went on a tear. According to the association’s figures, daily average temporary employment grew at an annual rate of 10.3 percent in 2003, 12.4 percent in 2004 and 8.7 percent in 2005. Annual temporary-help sales kept pace, rising 2.4 percent in 2003, 13 percent in 2004 and 8.5 percent in 2005.

But growth virtually came to a halt by the third quarter of 2006, with the average daily number of contingent workers—2.9 million—virtually unchanged from the same quarter in 2005.

Temporary-help sales continued to rise, however, climbing 1.9 percent in the third quarter of 2006 to $18.2 billion. Indeed, sales growth consistently outpaced the increase in the number of workers throughout 2006. Translation: higher cost per worker.

"Two things are happening," says association vice president Steve Berchem. "First, staffing companies have been able to raise rates. Second, staffing employees are moving up the skill ladder, providing more skills." And higher skills command higher prices. So while companies may be paying more for the same number of workers, they are also often getting a higher level of employee in return.

John Owen, metro marketing manager for Robert Half International in Washington, says one reason for the increased skill level is that many companies now test-drive contingent workers for possible permanent jobs that tend to have higher requirements than temporary jobs. If the worker passes the test, a full-time offer follows. Owen says companies are also using temps to determine whether a particular job requires a permanent employee, or if the skills outlined in a job description truly match the demands of the position.

"They may say, what we need is someone who has this experience and that experience," Owen says. "They put a temp in the seat and they may uncover that the thing they thought they needed they don’t need so much. They can benchmark a position."
By using temps in that way, companies can refine the hiring process. They may spend more on skilled temps, but they could wind up saving money long term by avoiding mistakes in permanent hiring.

Steve Walker, COO at Manpower of America, says that while a tight labor market and price increases are the main contingent workforce trends for 2007, how they play out will vary by sector and region. The differences are apparent not just in the U.S. but globally as well. Walker points out that while contingent workers make up about 2 percent of the U.S. workforce, they account for 20 percent of the global workforce.
"It appears that the same issues that we face here apply globally: finding individuals with the right skills, regardless of the fact that there is a vast population of skills," Walker says.

Manpower foresees a slowing demand for workers in 2007 in the South and West, both in temps and full-time jobs, but not enough to boost the labor supply.

"There clearly is a shortage of people out there," he says.

One of the tightest contingent staffing sectors likely will be health care, where a chronic national shortage of nurses and other health care professionals makes it difficult for staffing companies to meet demand, regardless of the labor rates. Demand for contingent health care workers is expected to continue growing in 2007.

Bob Livonius, CEO of Nursefinders, an Arlington, Virginia-based health staffing company, said 25 percent to 30 percent of the orders placed with his company now go unfilled for lack of qualified workers. "We expect to see continued difficulty filling orders," Livonius says. "There is tremendous demand."

Hospitals are particularly reliant on contingent workers to meet the needs of fluctuating patient populations. Some hospitals and health care organizations have responded by setting up their own hiring pools from which to draw temporary nurses and other health workers. Thus, while most every other industry now outsources the contingent staffing function, hospitals have started insourcing.

"The good news is that they can probably do that for something less than they would pay a staffing agency," Livonius says. "The bad news is that they are not in the staffing business. Their core competency is patient care. It’s a strategic mistake to decide that they want to be in the staffing business."

Another growing sector is legal staffing, where a spurt in merger activity has increased demand for temporary paralegals, lawyers and legal secretaries to handle increased workloads. Staffing Industry Analysts, a contingent staffing research firm, estimates that over the next decade, demand for paralegals and legal assistants will grow 6 percent annually, while lawyer demand will increase at a rate of 5 percent and the need for legal secretaries will rise at a 4.6 percent annual rate. Those three skills make up 85 percent of the temporary legal workforce.

Most temporary legal workers will be hired in the 25 largest metropolitan areas of the country, with one in six working in either New York or Washington, according to Staffing Industry Analysts. About a third of all temporary legal help is in for merger and acquisition activity.

Dan Neuburger, president of Today’s Staffing, a Dallas-based staffing company, says one surprising recent trend is the re-emergence of domestic call center hiring, a field that historically has been a big user of contingent workers. Some companies have run into customer complaints about language difficulties when dealing with foreign-based call centers, and as a result some companies are bringing centers back to the U.S.

Neuburger agrees that the skill levels of contingent workers are rising, but he says that trend is partly a result of higher standards being set by companies using temporary and contract help. For one thing, companies need more tech-savvy workers who can function in the increasingly high-tech world of business. In addition, many companies want contingent workers screened much the way permanent hires are screened to make sure they match corporate cultures.

"If I was an HR manager, I wouldn’t be looking for someone who could get me the cheapest person," Neuburger says. "I would be looking for someone who could get me the right person."