Managing through the cycle

Strategy through economic cycles

Underlying our EBITA targets is full awareness of the challenges and opportunities presented by economic cycles. Downturns are challenging but, if well managed, also offer opportunities as, for instance, market share can be gained. Lessons learned from the previous downturn have influenced both our approach to the business and how the Group manages healthy EBITA performance through the cycle. As from 2006 onwards, we have started to prepare for managing through the cycle, which is paying off today. We now have a strong focus on execution throughout the organization. We have implemented the successful unit steering model throughout a large part of our staffing network and we have implemented standardized selected key work processes based on best practice. Furthermore, our cost awareness is greater and our planning, reporting and review processes are stronger. Randstad is well equipped to manage a downturn. Three factors are of major importance: revenue, direct costs and operating expenses.

Revenue

Maintaining profitability starts at the revenue line. Our geographic spread has now greatly expanded and our business mix is much more diversified, both helping us to manage the risk of revenue volatility. In general, revenue from new services such as permanent placement is more volatile than staffing revenue, but at the same time less cyclical services, such as payrolling and HR administration, have been added. Other additional services, such as outplacement, are even counter-cyclical, and vertical market segments such as healthcare and education, now more prominent in our business mix, move in different cycles.

Direct costs

Direct costs consist largely of salaries we pay to our candidates and social security charges. Due to internal policy changes and new opportunities arising from revised collective labor agreements in the Netherlands and Germany, we have significantly fewer staffing employees on permanent contracts than in the last downturn, while idle time management possibilities have increased. This makes us more flexible and reduces idle time risk.

Operating expenses

In general, the more flexible the indirect cost base, the lower the risk. Personnel costs are the largest contributor to indirect costs. Through the use of our unit steering model, we know when and where we have to reduce corporate staff numbers. Controlled contraction of corporate staff levels is supported by regular staff turnover, and bonus schemes are equally flexible. Especially in the US and the UK professionals businesses, bonus schemes form a far larger proportion of total compensation than in our traditional staffing business. Another substantial indirect cost is represented by accommodation costs, which have been made more flexible by divesting real estate and restricting rental contracts. In principle, these should have a maximum duration of five years. The far denser network resulting from the merger with Vedior has also greatly facilitated accommodation cost management. IT costs have also been made flexible by outsourcing several functions so that costs partly reflect processed volume, and one national IT platform is used where possible to lower fixed costs. We have also standardized our marketing tools, leading to lower fixed costs, while marketing support costs vary with volume. Successful cost control depends on reaction time, and our improved reporting and review process enables us to react faster than in previous cycles. We demonstrated this in 2008 by being able to reduce our operating expenses as soon as revenue began to decline in the third quarter.

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