The hiring spree is over – now companies have too many workers

Ever since Meta (US:META) laid off more than 11,000 staff in November last year, tech sector job cuts have been top of the wish list for some investors. The Facebook owner will also reportedly wave goodbye to thousands more workers in the coming weeks. However, social media giants are not the only ones with staffing issues.

After almost two years of pay hikes and churn, the white-collar job market is rapidly cooling down, and professional services companies are facing a possible oversupply of workers. 

The ‘battle for talent’ has become an established part of the corporate lingo. Last year, Deutsche Bank’s (DE:DBK) chief executive, Christian Sewing, spoke about an escalating war for talent in investment banking, and his words have been echoed by accountancy firms, consultancies and tech groups. IT consultancy FDM Group (FDM), for example, said last summer that recruitment was “a key area of focus” and almost doubled its investment in staff training.

The trend has also been on display in the legal services market, where four in every five law firms increased salaries by more than 5 per cent in 2022, according to research by Evelyn Partners.

Now, however, the narrative has started to reverse. Robert Half (US:RHI), a US white-collar recruiter, saw revenue fall in the first weeks of January, according to figures from Jefferies. The same month, legal services group Gateley (GTLY) said wage cost inflation “looks like it is beginning to settle”, and consultancies such as FRP Advisory Group (FRP) and XPS Pensions (XPS) have budgeted for smaller salary hikes in the 2024 financial year, according to data from Liberum. 

On one level, this is positive. Professional services companies have been forced to absorb a lot of wage inflation over the past two years, and there are some clear beneficiaries of a slower job market. Legal services group Keystone (KEYS), for example, focuses exclusively on organic growth, meaning it needs to increase its headcount in order to meaningfully increase its turnover. That wasn’t easy last year, and its share price took a beating as a result. However, sentiment has picked up since the start of 2023 and some analysts think changes in the recruitment market could prompt a re-rating. 

Some businesses could be left with too many workers 

There’s a gloomier angle, however. One of the core reasons that competition for staff was fierce in 2022, and wages were rising, was that many lawyers and consultants were working flat out. Now, however, with demand for certain services in doubt, some businesses look as though they could be left with too many workers. 

This is certainly the case for the major consulting firms. In February, the Financial Times reported that KPMG was cutting close to 2 per cent of its staff in the US after a sharp slowdown in its consulting business, while McKinsey is poised to cut as many as 2,000 back-office employees. Elsewhere, Goldman Sachs (US:GS) is making “brutal” lay-offs in a cost-saving drive, and law firms are feeling the pressure.

“I think the bigger risk is at the more transactionally weighted law firms,” said Liberum analyst James Allen. “There is a possibility that they over-recruited to meet very strong demand in 2021 and the first half of 2022, and now that demand’s going away, there’s a risk that some staff will be let go. But it will take a while to feed into the market.”

Recruiters caught out

In the listed arena, recruiters are among the first to have been caught out. In spite of record fees, Hays (HAS) reported an 8 per cent fall in operating profit last month, as a result of high staff costs. The group entered the financial year with headcount up 26 per cent, and demand did not live up to supply. PageGroup (PAGE) and Robert Walters (RWA) are due to report later this month. Analysts see improvement in both companies’ 2022 operating profit before a contraction in 2023. 

Cracks are starting to emerge elsewhere too. One of the main ways people businesses dealt with wage inflation was by charging clients more. The top 26-50 law firms, for example, which include Gateley and Knights (KGH), boosted fee rates per chargeable hour by 15 per cent in 2022. Fee growth is now under pressure, however. Three City law firms told the Financial Times this month that clients are seeking to cut their legal bills, and this is starting to play out in the listed market as well. Knights achieved no organic growth in the six months to 31 October 2022, despite raising fees by an average of 7-8 per cent. 

High staff turnover is also causing productivity problems. In December, legal services group DWF (DWF) said “accelerated recruitment” had increased its average headcount by 11 per cent, which reduced its gross margin by 1.7 percentage points “due to the lead time in fee earners ramping up to full capacity”. 

These issues aren’t universal. Alpha Financial Markets Consulting (AFM), for instance – a specialist consultancy for asset managers – increased its headcount by 40 per cent in the six months to 30 September 2022, but simultaneously managed to increase its fees and grow organic revenue by 45 per cent.

Regardless of past performance, however, it is worth keeping a close eye on people businesses that rapidly upped their headcount – and their pay obligations – in the wake of the pandemic. Problems may not emerge straight away in reported figures, but backpedalling could ultimately prove to be expensive in a different way.