The New Old Face of Recruitment Process Outsourcing (RPO)

by Lamees Abourahma

The RightThing, Kenexa and Pinstripe….Gone. 

Well, not really gone, but absorbed. 

In the case of The RightThing and Kenexa, they were obliterated through strategic acquisition by Big Box firms, ADP and IBM respectively. Pinstripe simply sold out to Private Equity, and we all know the new owners will want more from Pinstripe than the old owners in terms of Return on Investment.

Less than a year ago, these three firms were leaders in the RPO space.  They were firms many of us admired, as they grew rapidly, secured funding, sold lots of deals, attracted suitors, and are now.... well, gone!  It could happen to anyone.

It should come as no surprise that they are gone as that is what they were built to do:  Go.    Go as is in realize that long anticipated liquidity event for the principles, shareholders and investors. The American Dream.

Before I go off and make myself a hypocrite, let me state that capitalism works and we all want a return on our investment as our just rewards.

The question, at least for me, is why did we start this industry, and these firms, in the first place?

These three firms, and many before them, were built to flip. That is simply a fact. The way they capitalized from the onset insured that an exit strategy was baked into the business strategy.  I have always wondered about this and have been somewhat troubled by it. It is not easy to make the following observation, but I think it is important to buyers and potential employees as we enter the next phase of the RPO industry maturation.

Serving Multiple Masters

Serving multiple masters means someone doesn’t get served.

So whose interests does the firm serve?

Having the money guys at the table from inception insures that they assume pole position in terms of priority. They have an agenda. They should have an agenda. It is their job to have an agenda: to make money on their investment.

They make money when the multiples work in their favor. Top line revenue and bottom line EBIDTA drive valuation. Valuation drives ROI at liquidity. Hence, the money guys are, in turn, driven to drive sales and net profit. 

Quickly. And there is the rub.

The faster the money guys can drive valuation, the faster they get out with their money and a healthy return.  The founder of the firm knows this from the onset or learns it shortly thereafter at a board meeting when reporting financials.

This approach drives behavior. There is simply no avoiding it. Now many such firms are well run by people with honorable intentions so please don’t take this as some kind of character assassination of well funded RPO firms and their founders.  Quite the contrary.  The funded company simply must serve the interests of constituencies in rank order and the money guys are number one.

The need for growth and profit becomes the end in itself. 

Impossible, at the end of the day, to fully reconcile so “tough decisions” are made.

The pricing on a deal may be affected. The number of resources put on a deal may driven by the need for more profit.  The investment and commitment to a project are evaluated in the light of ROI. Calculations are made. Risks are mitigated. Lawyers are floating around.

On the other side of the equation, employees are discussed. Can we do without this group or that group of people and what would eliminating them do to EBIDTA?

Is this what we started the company to do? The founders themselves can get really cynical really fast. That is not good as that person may be the strongest and last true advocate for the people he/she set out to serve:  Clients and Employees.

It is no surprise that as the liquidity event approaches things get really dicey. Costs are being jettisoned. Gag orders and blackout periods are ordered. NDAs are flying around. Golden handcuffs appear out of nowhere. More Lawyers.

Every existing contract and project is scrutinized for maximum profit. Remember, Valuation drives the size of the liquidity event and profits/EBIDTA drives Valuation. Accountants join the Lawyers in the room. What the heck happened here?

Meanwhile customers may be noticing sliding Return on their Investment in the RPO program that showed so much promise at the outset. The metrics and SLAs are slipping.  Recruiters are dropping off projects suddenly. What the heck happened here?

RPO provider employees are laid off. Worse, the good ones who are wise to what is happening start looking.  If they are not tied down with the cuffs then they are gone. The place they used to love has changed. What the heck happened here?

The money is what happened here.  Back to the future. At inception the money guys became the 800-pound gorilla in the CEO’s office. They grew from there and really got big in the last several quarters before selling the company. Not their fault. They did their job.

Wake Up Call

Okay.  So what?

Well, perhaps buyers of RPO services should take a look at the capital structures of an RPO provider.  Every company needs working capital, good banking relations and the advisory team to make sound business decisions.  But, if the company is heavily leveraged at an early stage, you have to ask a few questions about the purpose of the firm.

The RFP processes that I have been a part of often get wrapped around the whole “Financial Stability” thing as procurement folks ask for balance sheets and income statements, size of the firm, Dun and Bradstreet ratings, etc., etc.

Maybe those are the wrong questions or the questions are slanted the wrong way. 

Maybe it is more important to interview the CEO and ask about his shareholder structure?  Is the CEO majority shareholder in his own firm?  Are there investors on the Board than can over-rule the CEO?  What is the CEOs exit strategy?   How will that exit strategy affect the RPO contract?

I have never heard these questions asked at the front end of an RPO deal.  But, we have all seen deals go way south in the year before the RPO provider is sold.  Hm?

Perhaps potential employees of an RPO provider should ask some of the same questions.   They are making an investment in the RPO firm as well.  Their name is on Linked In associated with the provider.  They are representing the firm in the market.  Have they fully vetted the firm on these grounds?  Maybe they should.

As the RPO players, TalentFusion included, examine capital options in anticipation of looming economic growth, we must be mindful of our customers and employees.  What is in it for them must be consistent with what is in it for the company.  Reasonable levels of profitability are important.  Proper capital structures are important.  Balance is best.  Investments in the Customer and Employees are the most important ones we can make and through those investments we create great sustainable careers for our Recruiters and ourselves.

david pollardAbout the Author: David Pollard is President and founder of TalentFusion, leading the firm from inception through its current trend of rapid growth. TalentFusion has become a thought leading firm helping organizations optimize how they deploy their recruiting resources to take full advantage of the outsourcing option to create scalable, flexible recruiting capability


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