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The web allows more rapid access to prospects. It also fosters the development of more intimate relationships with prospects in advance of the sales process. It creates the possibility of improving the quality of the credentials of a group of prospects. Free training, in advance of a placement, is becoming a standard component of the Recruiter's toolkit.

Understood correctly, the move to include training in Recruiting is just like any other pre-relationship incentive. Like coupons or trial issues of a magazine, outreach programs can be orchestrated to give a potential recruit real benefit and a taste of company culture. As labor shortages expand and we learn how to dig deeper into the candidate pool, providing incentives prior to the employment contract is a natural consequence.

- John Sumser, © TwoColorHat. All Rights Reserved.


Scared? Who's Scared? (From the Vault)

All things considered, wouldn't you expect Recruitment advertising Revenues to be exploding? After all, there's a labor shortage going on. Classified advertising income is down almost 2% for the year. This, in spite of rate increases that cover up an even more astonishing decline in real advertising volume (lineage).

Until now, the old media has been able to avoid clearly addressing the impact of the web. Employees of big companies are often quite good at spinning the worst news into a soft landing. The problem with that standard "What, me worry?" thinking is that the newspapers are at risk. There appears to be no viable strategy. The change is so extraordinary that revenue forecasts (the heart of good relationships with Wall Street) appear to be at risk in the 4th quarter.

As we've often noted, traditional media companies don't die from a bad quarter (or bad year or decade for that matter). But, the heat should be on at this point. Expect a slew of high dollar investment activity from the big old boys on the corner. When scared, they really spend.

This year, we're expecting to see Revenues in the job board sector swell beyond $1.5B for the first time (last year, we counted $450M or half of all reported Internet advertising). It's not that big a stretch, really. We see more than 1,000 companies operating profitably and another 2,500 closing in on profitability. For the most part, they've just started growing.

Big newspaper classified advertising revenues will continue to decline (Duh). Of course they won't go away entirely. Not everyone is on the web and you still can't reach the train commuters electronically. But, 1999 will be remembered as the year that the newspapers were somehow caught off guard by a five-year old trend.

The impact of large investments will have two phases. At first, (because the public companies are all so new), newspaper investments will modestly depress stock prices. Then, the market will realize that newspapers are confirming the value of the newly minted companies. Even the dogs should experience explosive growth by year's end. Older, less agile firms in the traditional staffing industry (and other related areas) should be prepared. The newspapers will do unto others what was done unto them by the job boards.

We're not saying, by the way, that the newspapers are doomed. Far from it. However, waiting for the obvious to become apparent has raised their price of entry by at least two orders of magnitude (100 times). They've backed themselves into a corner that will require reinvention rather than incremental change.

- John Sumser, © TwoColorHat. All Rights Reserved.


The Surpluses (From the Vault)

The real players (Vendors) in the industry are sitting on huge piles of underoptimized capital. IPOs and acquisitions have dramatically altered the value of the industry. We think that it's fair to value all of the companies in the space in the $20B to $30B range (not including traditional staffing firms or old school Applicant Tracking operations). The number is rising rapidly. A maximum of 5% of that value is currently being used by the folks who hold it.

Think About It.

One job board player (pick one) is in the position to acquire All of the existing applicant tracking companies and have plenty of money left. A small group of large customers could easily buy one of the major job services. The traditional players (agencies, staffing firms, newspapers), strapped for cash, capital, or will are being rapidly squeezed out.

Ignoring the old school for a moment, the market is now composed of buyers with excess resources and sellers with the ability to invest in new services. How often does that happen? It's a rare circumstance that will propel values of existing properties into the stratosphere. It's an intersection that has enough flexibility to drive an astonishing level of innovation. The stage is set for an uptick in the levels of chaos, dramatic growth in stock prices and the introduction of new services.

Easy to predict are free computers, cell phones and handheld devices for potential candidates who meet certain requirements. Harder to believe (but economically realistic) are free cars (job ads over the GPS), secured loans, vacations and high dollar luxury items (for the options on just the right candidate). Already underway are training giveaways, professional development coaching and tons of career management services.

The hardest thing for the old school to grasp is that the economics of the business have inverted. The traditional staffing industry is built around a 60 day lag in cash flow. The new industry is built on steep investments upfront. The old industry sells candidates that they get for free and collects a bounty after the invoice. The new industry buys candidates (at increasing premiums) in advance of the sale. The old fogies can't imagine investing in candidates. The young Turks can't imagine not doing it.

That means that the transition is not a battle for market share (as we've heard many a staffing firm describe the problem). It's an economic war rooted in two differing views of warfare. The old guys still have bows and arrows. The new guys use rifles. The outcome is obvious.

Meanwhile, the macro answer to the surplus question is that the money will be invested in candidates, their options and futures. Software that can evaluate a candidate's potential value and offer an investment parameter (how much is it worth to stay in touch with this particular candidate given our forecast needs) is just around the corner. The interesting thing about the equation is that a particular candidate will be worth a lot to several interested parties and should be able to reap benefits from multiple sources.

Over the coming weeks and months, we expect to see very large inflows of capital into the business. While the surplus festers, it will grow at unimaginable rates. While it grows, the current market will transform rapidly. As the market transforms, the new order will begin to emerge in a more permanent way.

- John Sumser, © TwoColorHat. All Rights Reserved.


Joe and Sony Style (From the Vault)

Both companies are at the leading edge of the changing definition of branding and advertising. Both companies are producing a new kind of magazine. Both companies are using the specialty publishing division at Time Life to accomplish their investigation of the magazine business. Both companies advertise in each other's new venture.

For Starbucks, the new magazine is called Joe, a (you might have guessed) glossy coffee table thing that is high on pretty fluff, low on content. For Sony, the magazine is called Sony Style, a large format, picture laden offering that includes highlights from the Sony Catalog and stories of creative people who (oh by the way) use Sony stuff.

Both magazines take advertising from companies who have a tenuous connection at best. The business model includes profitability as a significant goal. The search for profit forces the editorial/advertising team to consider a broad range of alliances and customer relationships that wouldn't be a normal part of the parent company's core business.

The endeavors are important to our industry for the following reasons:

• Increasingly, recruiting will involve targeting demographics. It's the only way you can reliably find "passive candidates" in a shortage market and continue to minimize time per placement.
• Targeting niche demographics will always involve a game of tiny statistics. The costs will be beyond the reach of most companies and small Recruiters. Business models that combine targeting and profitability will become a part of some Recruiting shops.
• Delivering content that is relevant to a target demographic is outside of the core expertise of most Recruiting shops. More than anything else, these ventures demonstrate the importance of content as a vehicle for reaching potential candidates.
• Understanding how new style partnerships are working is critical for making the right strategic moves.
• The essence of both magazines is to use the parent company's brand recognition as an umbrella. Allied companies who are competing for the same discretionary income are invited underneath the umbrella and treated like customers. This is co-opetition at its finest.

- John Sumser, © TwoColorHat. All Rights Reserved.


Smithies (From the Vault)

Imagine trying to explain to a smithy in 1925, that by 1928 only 50% of the shops would exist and by 1935, the survivors would be running gasoline stations (at best).

It happened that quickly. The new technology (assembly lines) performed the smithy's function in an entirely different way. Smithies, who were responsible for the whole job, could only gain employment if they specialized in a very narrow piece of their old trade. Not only did the profession die, the role these practitioners played shifted. No longer were smithies the gatekeepers, mayors and councilmen. Their families suffered deeply from the loss of status and income.

For the most part, no one noticed. They were too busy enjoying the thrill of their new automobiles.

We are reminded of smithies every time we talk to a successful recruiter who works a solid local niche. We think about it every time we survey the dismal offerings from third party firms. The answer is obvious but the credit lines are weak.

It's a tough time to gather verifiable statistics. What we know for sure is that the flood of venture capital is artificially lowering the cost per hire. Key new entrants are buying market share at the direct expense of the traditional industry.

The third party industry segregates just as you'd imagine. 20% of the offices and small companies generate most of the revenue and profitability. The remainder struggle to stay afloat. The large franchise firms operate on the same principle. Unfortunately, the weak offices can not survive the intense financial pressure. The top 20% will survive a while if they invest wisely in candidate acquisition.

The answer lies only partly in web technology. A new model that favors the role of the candidate is emerging. It takes a deep recognition of the realities of the labor shortage to make the shift. Enough money to survive a "rainy day" doesn't hurt.

- John Sumser, © TwoColorHat. All Rights Reserved.