Every week, we will seek out expert advice to help a small or medium-sized company overcome a key issue it is facing in its business.
It’s Jonathan Prothero’s job to land work for contractors, but these days the founder and chief executive officer of Toronto-based information technology staffing firm Tundra Technical is having trouble finding work of his own.
Over the past five years, Mr. Prothero has watched the staffing industry consolidate; according to Staffing Industry Analysts, an organization that follows the sector, there have been 441 mergers and acquisitions since 2006. Much of that’s involved multinationals eating up companies in the range of $100-million in revenue, making Tundra, a $30-million operation, one of the few smaller players left in the Canadian market.
All of that M&A activity has put Tundra at a disadvantage, says Mr. Prothero, who’s been in the business for almost 14 years. It’s been difficult to compete against bigger players that can charge less than Tundra can for staffing services.
Many bigger companies mark up their services by as little as 12.5 per cent; Tundra can’t afford to go lower than 16 per cent, which is six percentage points less than what he charged in 2006, Mr. Prothero says.
Because of the industry’s low margins, large, lucrative clients now base their decisions solely on price, rather than connections, he says. “Relationships are much less relevant.”
If he wants to survive, he believes he needs to make a choice: cut his own costs and compete on price, or woo clients with extra services that larger companies don’t offer.
He’s trying both. Mr. Prothero offers clients exclusive deals, whereby the company promises not to work with another client in the same industry. Some customers want exclusivity to prevent a recruitment firm from staffing numerous companies from one talent pool, he says.
Tundra has one such exclusive arrangement with one of the big banks. It landed the firm one big client but means it can’t find growth with other similar ones.
When it comes to cost-cutting moves, he’s opened a recruitment firm in India, which sources Canadian workers for clients. Recruitment efforts run similarly to Canada, finding potential workers via Google and LinkedIn, conducting background checks and handling face-to-face interviews over Skype, but an India-based staff member costs $50,000 less than a Canadian employee, he says.
That’s saving him money, but it’s not an ideal arrangement. “Offsite is offsite,” he says. “That’s never as good.”
Mr. Prothero would rather add value than cut costs, but potential clients seem to be caring more about the numbers, he says. “We’ve always offered a lot of value to clients but it doesn’t seem to be making any difference these days.”
The challenge: How can Tundra best compete with the bigger staffing firms – on price or with added value?
THE EXPERTS WEIGH IN
Eric Rawlinson, partner and advisory services leader with Ernst & Young,Toronto
A lot of times, lower cost means larger scale, so he may be at a disadvantage if everyone around him is consolidating. He needs to understand his customers. Hold focus groups or go talk to them one on one. Go to the best relationship and say, “This is what will happen if I cut costs and this is what will happen if I add more value.” If he finds out reaching the masses isn’t going to work, he’ll have to offer higher value. There are ways to add value for no extra cost. Develop client roundtables or workshops. Get customers in a room and have sessions on things like the future of IT departments, or hiring offshore employees versus local. He can bring in a guest speaker to talk about emerging trends. There would be good take-up on that and it builds relationships.
Les Rubenovitch, president of Toronto-based Winning Edge Consultants
If they want to show that they add value, they need to promote themselves better. On their website, it says they find great people and “check and recheck” to make sure they’re the right candidate. Do they actually have a process they validate to find out if the person is the optimal candidate? Promote that process. Competitors won’t have the same process and clients may challenge their staffing firm to find how they’re making sure the right people are being hired.
Another sector that has been commoditized is the rock crushing industry. Every one’s rock is identical. But one company, Granite Rock, has a growth rate that dwarfs everyone else and has a 6-per-cent margin premium over the competition. What they did is offer customers a quality promise: If the deliverable doesn’t meet expectations, then they tell clients to pay them what they think is appropriate. It’s very clever, because companies stopped worrying that they wouldn’t get what they asked for. If Tundra shows they’re prepared to take that kind of hit, then companies will trust them.
Lukas Szczurowski, chief executive officer of Luxor CRM, Toronto
We had to compete with Salesforce.com, a huge company with lots of money. They kept undercutting us on every level and it was very frustrating. As a smaller company, we could never catch up. We had the choice to undercut price but, the minute we’d go lower, they would slash their price.
After six years of competing, we decided to narrow our market. We created a couple of features that were specific to the construction and restoration industry – few clients in that sector were using CRM products. We marketed directly to them and we stole the market.
Once we defined our customer – and stopped chasing everyone – we were able to add value to a specific industry. Now anyone looking for CRM in that sector will find us. We became the Salesforce.com of the construction and restoration industry.
Three things Tundra Technical should do now:
Narrow its focus: It might be time to stop competing with the largest companies. Market to a specific industry or customer base that doesn’t get much attention from the big players.
Clearly explain its value: Don’t wait to get in front of the customer to explain how you add value. Spell it on your website and marketing material. Be clear on how you’re different than the competition.
Find cost-efficient ways to add value: Added value doesn’t have to be expensive. Offer seminars and roundtables to potential clients. It builds relationships and lets them learn more about their industry.
Special to The Globe and Mail
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