Recruitment sector outlook 2024 and beyond: is a corner being turned?

Neil Thomas, head of RSM’s recruitment sector, comments on the outlook and key themes for 2024 and beyond, including the use of AI and data, talent attraction and retention, increased contracted out services, international expansion and M&A activity.

It's clear that the back end of 2022 and 2023 was a challenging period for most recruitment businesses, whether domestically or globally. Some sectors fared better than others, each with their own issues, but in general economic factors, including inflationary pressures and interest rates, took a toll on confidence, and hiring levels fell as a result pretty much across the piece. This was particularly true for permanent positions, with the contract and temporary market reflecting more resilience but not without its difficulties.

However, compared to that backdrop, there appears to be some increased positivity so far this year, with a number of our clients reporting more encouraging results for the first quarter of 2024 when compared with the second half of 2023, particularly those with some international diversification. This is partly through cost management measures but also increased activity, despite continued challenges in the domestic labour market. It's a bit of a cliché that staffing sector performance is a barometer for what lies ahead within the economy, but there is general anticipation of a recovery getting under way in the second half of this year and hopefully this feedback represents an early indicator of that.

Key themes for recruitment in 2024 and beyond

AI and data in recruitment

There are some key themes that will impact most recruiters in 2024 and beyond, not least the use of technology, including AI and data.

As you’d expect, AI is becoming increasingly prevalent within the sector, whether conceptually or in reality. It’s already being used to achieve efficiencies and/or boost production, including automation, data mining, use of chatbots, candidate screening or predictive analytics and its use will expand. It can and will support every step of the future recruitment cycle, as well as talent retention, but will never replace the importance of the personal relationships recruiters hold with their clients.

Effective use of AI goes hand in hand with data strategy and we’ve seen this become a key focus across the sector. Data-centric recruitment and performance management, along with effective technology platforms, are now firmly at or around the top of the strategic agenda. We’re increasingly helping our clients achieve that transition to data and digitally-led businesses.

Talent attraction and retention

As we hopefully head towards a more buoyant market, the age-old challenge of talent attraction and retention will escalate for many businesses. This is especially relevant as we expect a general and continued decrease in hybrid working and a shortage of experienced recruitment skills. Therefore, investment in early careers hiring will be key, together with employee engagement and wellness.

On the other hand, holding onto quality, experienced people may require more than just salary and benefits. Some form of equity participation may come into play, particularly with valuations currently depressed ahead of what may be better times. This is especially important as we’ve found that incentive planning, such as the use of option schemes, increases early into a recovery.

We expect to see increasing use of contracted out services to enhance margin and potentially circumvent what may otherwise present risks around IR35. There is also an appetite for investment into international expansion, particularly in the US, which we’ve helped many clients with. Compliance will also continue to be as important as ever, especially now that HMRC’s ‘light-touch’ approach appears to be over with respect to off-payroll legislation and supply chain management.

Mergers and acquisition

Finally, I can’t discuss sector trends within recruitment without touching on M&A. Transaction levels remained relatively and perhaps surprisingly robust last year considering the difficult economic backdrop. This was largely underpinned by buyer focus on key sectors such as technology, healthcare and education, together with continued private equity interest in the sector, mainly with respect to well-run businesses with recurring revenues and/or international diversification.

We expect to see these themes to continue looking forward with an uplift in deal volumes in the next year, specifically with private equity having plenty of funds to deploy. Acquirer caution about potentially buying at the top of the cycle will have largely dissipated and businesses that have proven their resilience to market conditions in 2023 will stand out as higher quality assets. While a number of businesses will focus on rebuilding organic growth and EBITDA this year and through to 2025, buyers will see opportunities for value.

It's worth noting that due diligence by buyers will continue to increase, focusing on data and KPIs, as well as traditional financial and compliance matters. Therefore, effective preparation for sale by sellers has never been more important for achieving value.

To discuss how we can support your recruitment business, please contact Neil Thomas.