Investing in Part Time Employment Agencies - Part Two - Context

Contextual Framework

It is always useful to be mindful of high level "drivers" when one is investigating potential investments in a given sector.  I have learned that they contribute to an operating environment within which companies can either thrive, founder, or just get by.

Here are a few key variables which, in my view, will affect the performance of the sector:

1.    State of the Economy

As noted in Part One, the level of activity in the sector is correlated directly to fluctuations in GDP.  When times are good, the companies prosper.  Is it now timely to invest in these companies (when times are good) or does it make sense to invest following a major correction and when valuations are low?  This is definitely one instance where it makes sense to time the market - something which seasoned investors as Herr Buffet would discourage.  I would contest his view.  In fact, his practice of "waiting for the fat pitch" is just another way of timing the market i.e. he makes his purchases when valuations are low and there is a wide margin of safety.

2.    Long-Term Trends in Human Resources Management

It would appear that there is a well-established trend to the increased use of temporary/contract employment.  The advent of the Internet has facilitated this trend and increasing the size of the talent pool that companies can access.  Further, in some areas such as the EU, treaties have increased worker mobility, thus enlarging to pool of potential workers.

3.    Disposition of the Work Force

People are adapting to the world of contract work.  It has always been a feature of the non-unionized, low skill work force, something which has been addressed by government in social assistance programs such as unemployment insurance schemes.

Times have changed.  No longer do people associate with a company for their working life.  Nor do they work within one occupation given the pace of technological and social change.  For a variety of reasons, people have accepted that they must be more adaptable to survive.  The same applies to companies who must be more nimble in the face of increased globalization.  "Temporary" work is the new normal.

4.     State of the Part Time Employment Industry

Evidence would suggest that the sector has room to penetrate further the world of HR management.  It also suggests that models for HR management are changing in that some in-house functions are being outsourced to an increased degree.  In my opinion, there is room for considerable growth in the sector.

The industry is fragmented in the US, less so in Canada, and very much less so in several European countries.  I have not yet investigated this in South America and Asia.

In the last decade, the Internet has expanded the pool of talent and several companies have done well by making connections between service providers and companies.  The market has room to grow, especially given that high level services are being outsourced on a more routine basis.  It is generally not recognized that this would not have been possible without much improved education levels throughout the world.

A Few Observations About Investing in the Sector

1. The market in Canada and the US appears to be fairly flat over the past few years.  I plan to review the market in other jurisdictions.
2. The market is very cyclical and is tied directly to the performance of the economy.  Many regard temporary employment indices as leading indicators of economic performance. 
3. Labour laws are an important consideration.  
4. The "pool" of available workers may be shrinking due to lower birth rates and a more "mature" population profile in Europe and North America.