On the face of it, the staffing industry model may appear simple, with firms playing matchmaker between employers and workers. But appearances are deceiving: Only 140 out of 19,000 staffing firms in the US have exceeded the $100 million mark; the rest struggle to grow effectively. Advance Partners, a wholly owned subsidiary of Paychex, provides an integrated solution of working capital, human resource support, compliance and payroll solutions, exclusively for the staffing industry. Celebrating its 20th anniversary this year, Advance Partners has roughly 500 staffing firms as clients that will collectively bill $3 billion this year. Adam Stern, senior director and general manager of Advance Partners, shares his insights into the growth challenges facing staffing firms and how to overcome them to achieve success.

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Adam Stern, Senior Director and General Manager, Advance Partners

Q: What trends are you hearing from your fast-growing staffing firm clients?

Competitive pressure would be high on the list. The need to present high-caliber candidates really quickly — and to do it at a lower and lower margin — is incredible. It’s a relentless march forward. If you are trying to grow your business, you have to differentiate yourself in a meaningful way and provide a high level of customer service to your clients but also your temporary workers so they have job satisfaction and choose to work for you.

Q: And what are you hearing from them about the gig economy?

The gig economy is definitely changing the industry for our clients. Freelancing is not a new phenomenon, and we don’t believe the traditional staffing industry is going away. The gig economy is driven by discrete projects more than ongoing supplemental workforce needs. Getting an Uber driver to come and pick you up once is not the same as getting someone to drive you for six hours per day every day. Our fast-growing, agile clients realize that and push their value forward to their clients, so there is a clear difference in what they provide compared to the gig economy.

But there will be some changes due to the gig economy, especially for the higher-end professional services. The gig economy is putting more power in the hands of these employees: They can choose what assignments they want to take. In the past, companies needed an agency to find workers, and contingent workers needed the agencies to know where the jobs were. Technology has taken over the role of intermediary in terms of matching jobs with skill sets.

Q: What are limiting factors and challenges to staffing firms in highgrowth mode?

There are two key challenges. One is that if a firm is growing, it may be receiving payment on invoices for 10 temporary workers, but now it has 20 of them that need to be paid (and thus, sending out more money than is due to come in). The more you grow, the bigger that gap becomes, thus, the larger your need for working capital. The second challenge is that traditional sources of working capital typically don’t understand the staffing industry well and are not comfortable lending money to a company that doesn’t have hard assets like inventory or real estate. The main asset a staffing firm has is its accounts receivable, and that tends to fluctuate based on vertical or seasonal needs. There isn’t always the consistency that a bank is going to want to see.

Access to working capital doesn’t have to be a limiting factor, and the right working capital program can help staffing firms grow. That’s why our mission is to help staffing firms grow, and more importantly, we provide a true partnership. We have a deep understanding of the staffing industry and its complexities, which means we can offer a flexible solution as staffing firms continue to grow. This is really a different model than other working capital solutions in the market and we believe makes sense to grow without limitations.

Q: How quickly are staffing firms’ customers paying these days, and how does that affect their profitability and, subsequently, their growth?

Traditionally, companies in our portfolio are paid 40 to 45 days after invoicing. We are seeing that stretch out: Many of the largest companies — Fortune 500 and household names — are paying very slowly because they can command that. If you are using a flexible, staffing-focused working capital program, the payment stretching will not affect your business as much. Otherwise, your ability to growth is hindered significantly.

Our clients have reached out to us for crucial back-office support to help with credit decisions, making sure their invoices are accurate, and supplementing resources dedicated to collection. That can bring down the number of days it takes to get paid and provides that safety net they need to keep growing without worrying about payments as a primary focus.

Q: What trends do you see from the fastest-growing staffing firms in terms of how they run their businesses?

There is increasing complexity in compliance, insurance and HR, so we’ve seen owners consider outsourcing more of those activities than in the past, as well as related to onboarding and payroll, for example. That packs quite a punch in terms of freeing time to run the business because these activities require a hefty investment of time, particularly as a firm grows and enters different states. Smart owners have been outsourcing invoicing and other back-office accounting tasks. These are not revenue-producing activities and they are aware of putting their time where it counts the most.

We also find that many of the fastest-growing staffing firms were founded by people who started on the sales or recruiting side. Their strength is not in the back-office functions. Sticking with the recruiting and client relationships is where their focus should be. That’s where the ability to grow comes in a big way.

Q: What have you learned from owners who have been able to grow their businesses and break through some barriers to success?

Most owners are very involved with the sales and business development efforts. That’s what really drives their business, their client satisfaction and their growth.

A piece of advice: If you get savings from outsourcing, don’t pocket it. Figure out how you want to invest it — perhaps in training or in hiring more recruiters or technology. It’s a better play for long-term growth, to invest back in your business. You have to commit to your business wholeheartedly to succeed; that’s not always easy, but it’s a key factor to growing quickly.

What have you seen from your clients in terms of understanding the bottom line and increasing their profitability?

The most important issue is for staffing firms of all sizes to really understand the true metrics and drivers of their business from an operational and financial perspective. Some kinds of work also require you to invest more, in insurance or recruiting, for example. Firms need to really understand where their net margin is coming from — different lines of business or regions.

We’ve seen our clients go into the red and not really understand why they have negative cash flow. Overall, it’s been related to how they price their business without understanding all the true costs that are involved in working with clients. That’s why we developed a profitability calculator on our website for any staffing firm to utilize when pricing out a deal on the spot or back in the office. Once you understand your true costs and burdens, you can price your services appropriately and grow your business with all the facts.

Q: What resources would you recommend staffing firms consider as they grow?

When it comes to both working capital and back-office and technology support, it’s important to choose vendors and partners that really understand and are focused on the staffing industry. Compliance, HR and payment terms are all complex, so going with companies that really understand the business is important.