Why Direct Sourcing Makes Sense

With the 2024 presidential election fast approaching, the geopolitical situations in the Middle East and Ukraine don't seem to be abating.? Interest rates are on the rise, oil prices (and the petro-dollar) are in free fall, demand for precious metals and Bitcoin is nearing record levels, and inflation is on the radar of anyone who has eyes to see. ?So, you may be wondering…. What does this have to do with the Staffing industry?

Well.... the short answer is that labor remains the biggest cost on most organizations’ balance sheets.? CFOs realize that when revenue shrinks, they must reduce expenses to maintain margins. ?Labor is among the first savings opportunities they target.? The Staffing industry was founded on helping companies reduce labor costs.

In theory, flexible staffing should be an effective strategy during times of economic uncertainty. Unfortunately, the Staffing industry has become hopelessly bogged down by its own human capital and commercial real estate costs.? Moreover, the MSP industry (which emerged from Staffing) has added another layer of cost and complexity.

An unintended consequence of MSPs has been compressed margins across the Staffing industry (due to bill rate management).? Staffing companies tried to shrug off margin hits by increasing their requisition volume; but vendor-neutrality made it very difficult for Staffing companies to increase their requisition volume. To operate profitably, staffing companies were forced offshore in search of low cost labor.

The offshore solution turned out to be short-sighted.? Rapidly increasing demand for cheap STEM labor, coupled with generous US work visa programs, opened the door to hordes of offshore staffing companies.? This further eroded margins and market share for domestic staffing companies while it increased cost and complexity for their MSP subsidiaries.??

US staffing companies soon realized they couldn’t compete against offshore wages and cost models (currency arbitrage).? With little government protection from offshore competition, domestic staffing companies began to look for ways to remain profitable (and relevant). After half-heartedly embracing trends such as near-shoring, up-skilling, gig marketplaces, and total talent, staffing companies remained plagued by diminishing revenue, shrinking market share, and collapsing margins.?

Today, Staffing may be facing an existential crisis.? The question is, will legacy staffing organizations reinvent themselves or will they double-down on their 75-year old playbook…. i.e. reduce cost, compress margins, lower quality, and hope for a turn-around?

Unfortunately, hope won’t change the fundamentals of the Staffing model. The Staffing industry may survive for a while on personal relationships and MSP protectionism; but at the end of the day, the Staffing/MSP model will always add layers of cost and complexity.?

Perhaps it’s time to seriously consider Direct Sourcing?

In case you haven't heard, Direct Sourcing refers to using a company's brand to attract talent, leveraging AI to match that talent to open jobs, and cultivating the talent community as a long term asset. ?Compared to traditional Staffing, Direct Sourcing is not encumbered by real estate costs, human capital costs, and bureaucracy.? It’s simply a smarter way to engage talent.

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