Strategy
Best people
‘Best people’ acknowledges the importance of our people in maintaining and building on our success and position in the market. The true value of any business is in its people and we are very proud of our employees. It therefore goes without saying that at all times, even the difficult ones, we continue to invest in them and create the circumstances in which they can provide their best performance.
Progress in 2008
Talent management In light of the integration activities and the relevance of talent, extra attention was paid in 2008 to expanding existing talent retention programs. The need for a local and global approach to the flow of staff and talent management is all the greater given our continued ambition to fill 80% of management positions from within, and we achieved this target in 2008 (71% in 2007). Talent management initiatives also include global management reviews, enabling us to track the management pipeline from a Group perspective and to address possible issues early on. To retain and develop specialized talent, 2008 saw the launch of the finance fast track program, a dedicated set of initiatives to grow financial talent from within.
Randstad Institute Over 300 top managers from around the world participated in 15 different talent development programs at the Randstad Institute, our internal business school, throughout the year. The new programs are created in cooperation with leading business schools such as INSEAD in France and TiasNimbas in the Netherlands. The number of senior executive Randstad Institute programs will be expanded next year to accommodate for the growth of the Group, to share the wealth of knowledge we have within it and to ensure we retain senior talent. These global programs are new for many of the senior Vedior executives.
Career development We encourage employees to take charge of their own career development. Tools include regular individual development planning meetings and the intranet is used to communicate training and development opportunities to staff at all levels. A global internal vacancy database was introduced in 2008, enabling employees to quickly learn about local and international career opportunities.
Employee engagement We hold a global employee engagement survey each year to support retention. The survey measures key engagement drivers such as satisfaction, pride, intention to stay and likelihood to recommend. The outcomes help management determine which factors will most effectively raise engagement levels in each employee group. In 2008 the survey showed that, while there is room for improvement, engagement is high, scoring a 7.5 on a scale of 10. Employees also indicate that they are proud to work at Randstad, with 41% giving pride a score of 9 or higher. Survey reports are treated as an opportunity for further dialogue about engagement at all levels within the organization. Engagement was further stimulated in 2008 with the extension of the share purchase plan to all employees and the performance share plan to a larger group of senior managers.
Employee integration A key factor behind the unique success of the first phase of the integration were the specially-designed ‘get to know you’ sessions held around the world to introduce the Randstad and Vedior employees to each other. They focused on building trust between them and helping them understand both the professional and personal side of the integration.
Candidate selection ‘Best people’ also means attracting, selecting and providing the best candidates. Randstad needs to be top-of-mind when a potential candidate or client thinks about work in general. The Internet has become an increasingly important channel for attracting candidates and communicating vacancies. We took a major step forward in maximizing its potential in 2008 with the launch of an advanced online job network codenamed ‘Blue 2’. Incorporating ‘DOVA’, the innovative proprietary database application developed by Vedior, the new network has already been implemented in some countries and will be rolled out across all Randstad’s major markets in 2009. Blue 2 will generate more traffic by leveraging search engine optimization techniques developed in cooperation with Google, via Randstad-branded applications on third-party sites and by its integration with complementary social networks. More candidates will be attracted for selection through the use of intuitive search and application processes, the prominent use of client names and logos, rich media and an increasingly personalized experience. It will also provide multiple opportunities for our consultants to interact with prospective clients who, when approved, will be offered a complimentary job posting service.
Excellent execution
All of our activities are supported by standardized work processes, based on best practices, that enable us to spend more time with clients and candidates, provide clients with market-leading services, and thus gain market share. The excellent execution of our consultants is measured by the productivity of the unique units they work in, described
here. The unit steering model we employ is designed to optimize productivity as measured by employees working and/or gross profit per unit. Productivity measurement is key to generating strong conversion of gross profit growth into EBITA growth. Due to the slowing market, the conversion ratio declined to 24%, which is still a solid level. Receivables management is standardized, which has enabled a reduction in DSO (days sales outstanding) of more than 10% over the period 2002-2007. Realizing the Randstad DSO over the Vedior mix could reduce overall working capital by € 50-70 million. We also strive for one back office per country as this helps to streamline the back office processes. Excellent execution has also played a key role in 2008 in capturing synergies beyond the savings. Our integrated risk and opportunity management processes, detailed
here, represent another component of this building block.
Superior brands
Our superior brands are our guarantee to our clients that they will receive the highest quality service and the best employees worldwide. They help us ensure that we attract the best candidates and corporate employees. Our superior brands give us better pricing options and the spontaneous awareness that facilitates selling, prospecting and the introduction of new products and services. They make it easier for us to recruit and retain the right people. They enhance our visibility and credibility with regulators and legislators. They provide us with more supportive investors and additional financing options.
A new family of excellent specialist and professionals brands joined us in 2008, but although they have given Randstad a leading position in the global professionals market, they lack the clear brand awareness and recognition that Randstad has developed in the staffing market. In order to preserve the value of these businesses, we decided not to make radical changes, and to re-brand only where opportune. A new professionals house style was developed before year-end however, in consultation with the major operating companies. By the end of 2009, all professionals businesses will have the look and feel of this new Randstad Professionals brand family and the existing brands will be endorsed with the tagline ‘a Randstad company’. As a result, we expect considerable efficiencies on marketing. Combined with the re-branding of the acquired staffing businesses in the UK, the Netherlands, Belgium and Switzerland already achieved in 2008 and being extended to France and elsewhere at the beginning of 2009, more than 95% of revenue will be within the Randstad brand family by the end of 2009.
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Strategic growth drivers
Structural growth One of the most important factors driving the long-term structural growth in our markets is our clients’ need for flexibility. A more flexible workforce helps them improve productivity and be more competitive. Structural labor shortages, made particularly acute by an aging population together with declining – and often negative – population growth in Europe and elsewhere, increase this need over the long term. Average penetration rates (the percentage of staffing employees in the total working population) therefore generally increase with each cycle. Yet only in the most developed staffing markets, such as the UK, the Netherlands and France, have these rates exceeded 2%, so the potential structural growth over the longer term is enormous. However, the structural growth element will sometimes be more than offset by economic developments, causing temporary declines, as there is a clear cyclical element as well. If gross domestic product growth is high, the labor market needs more of the skilled people we provide. In times of slowing economic activity however, demand grows more slowly, as it did in the first half of 2008, or declines, as it did for the rest of the year.
Deregulation
Another driver of market growth is deregulation, a factor we try to influence as much as possible. While deregulation is a well-known and accepted term, we stress that we are not looking for a system without rules. In fact, we strive on the one hand for the lifting of unjustified restrictions in overregulated markets, and on the other for a fair and effective regulatory environment in markets where this has yet to be introduced. New opportunities continue to open up as governments increasingly recognize the need for flexibility in their labor market. In terms of the countries that together contribute a large portion of Randstad’s revenue, a major step forward was taken on October 22, when the European Parliament adopted the Agency Work Directive. It recognizes the positive role of agency work, provides more flexibility, and must be implemented by all EU member states in their national legislation by 2012. A very positive aspect of the Directive is the obligatory revision of all restrictions on temporary agency staffing in the coming three years, and the subsequent lifting of those that are unjustified or disproportionate, such as the bans on the use of temporary agency workers in the public sector in France, Belgium and Spain. The removal of restrictions in terms of contracts and sectors we can serve will significantly accelerate growth in many of our key European markets. We discuss the legislative environment in which we operate in more detail
here.
Clients looking for a total offering
The third factor that is becoming increasingly important in driving growth in our markets is the trend for clients to be looking for and to use a broader range of HR services, from staffing through recruitment to outsourcing. Randstad’s comprehensive portfolio of services was already unique in our industry. The combination with Vedior has further enhanced and balanced our offering and given us a strong presence in almost all major markets. More clients are looking for global solutions, establishing international staff procurement organizations. Our international account management team coordinates collaborative efforts across all our country operations to offer cross-border service agreements based on quality and cost efficiency, making an increasingly significant contribution to total revenues. We are participating in many more international tenders, and received twice as many tender requests in 2008 than we had the year before.
The overall financial goal is an average EBITA margin of 5 - 6% through the cycle. This bracket can be exceeded in very good years, while the EBITA margin should not be below 4% during normal downturns. We have tested many scenarios and believe this 4% can be maintained if we face a revenue decline of 10% for two consecutive years, followed by a 5% decline in a further year. If revenues decline at a steeper rate for several quarters, the annualized margin can fall below 4% as it takes time to adjust the cost base. We believe the average 5 - 6% range ensures the Group’s financial position and enables us to keep investing in growth. The 4% minimum should reduce volatility but still allow us to invest. Maintaining a sound financial position – a leverage ratio, or net debt divided by EBITDA, of between 0 and 2 – is commensurate with an investment grade rating and important for continuity. We have a policy of using floating rates on the debt as this provides a natural hedge. In addition to the through-the-cycle Group targets, we have also developed mid-term EBITA margin targets for our different segments. These are 4 - 5% for inhouse services, 5 - 7% for staffing and 10 - 15% for professionals.
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.