When Roy Krause took over as Spherion’s president in July 2003, he knew he had to reverse the company’s downward trend.
Spherion, a $2 billion staffing company, had posted essentially no revenue growth in 2002 and 2003, and posted net losses of $903 million and $13.9 million respectively in a tough economy for the industry.
Krause knew he needed to make some changes to make the company profitable again, and his first step was to sell Spherion’s profitable international operations in order to focus on the North American market.
“We made a decision to divest of those international businesses and some local businesses that really weren’t related to staffing and recruiting,” says Krause.
That allowed the company to pay down debt and refocus attention on its 700-plus North American offices.
With the contraction completed, Krause established four financial targets designed to reignite the company’s overall growth: Grow revenue at or above industry levels, expand gross profit, reduce selling expenses and decrease the time it takes for customers to pay.
The effects were almost immediate as the business went from struggling to profitable, outgrowing the market in 2004 when it posted net earnings of $35.8 million to reverse two consecutive years of losses.
“We got our confidence back into our ability to close a deal,” Krause says. “We tracked performance. We rewarded victory. We analyzed where we made mistakes and didn’t win, and then made changes.
“People started seeing it work and believing in the process, and if we do these kinds of things, we have a better shot of winning [more customers].”
To help grow revenue, Krause brought in someone to oversee the company’s sales processes. Krause knew he had good individual salespeople, but it wasn’t properly managing the sales process and there was no consistency across the company.
Was the company predictable and could its processes be replicated? If someone left the organization, could that salesperson be easily replaced or was institutional knowledge lost?
Krause hired Byrne Mulrooney, a veteran of IBM and EDS, as president of staffing services and tasked him with answering those questions and giving the sales process a jumpstart. Part of his solution was deciding that growth simply for growth’s sake was a poor long-term strategy.
“We found out that we also needed to target where we grow within the industry,” Krause says. “We ratcheted back on the growth in ’05 so that we could point it and target it to the kinds of clients that we really wanted to develop, that we could make more money on and that we could contribute more value to in the future. While I want to grow at the market [rate], I will give up growth to get and maintain quality customers. In the long run, that is the right answer.”
And Krause fired some of his customers as part of the company’s turnaround.
“We had some serious conversations with customers and said, ‘At this price point, we don’t think we can deliver the value that we need to deliver. We think we ought to adjust pricing or we ought to adjust services,’” he says.
As a result, Spherion had fewer customers in 2005 but still increased overall revenue, posting an increase of 17.2 percent in 2004 over 2003. Through the third quarter of 2005, revenue from continuing operations was $10.1 million compared to $2.4 million the same period in 2004.
And the company posted a modest gain in revenue of 1 percent despite losing a $75 million contract early last year.
Expanding gross profit
To succeed, a company must take advantage of every opportunity, and that includes getting as much business as possible with every customer to maximize profits.
“Our focus for ’06 is expanding the relationship with our existing customers selling them other skills that we can provide,” says Krause.
The overall profitability goal is to increase gross profit margins by 50 basis points each year.
“It’s very important for me to try to increase gross profit not just in absolute dollars but also as a percent of revenues so that I can bring more to the bottom line,” he says.
The first step is disciplined pricing, making sure the company’s services are priced competitively without sacrificing profits. The second and more effective step for Spherion is a better mix of placing permanent workers versus flexible workers.
Permanent placement provides a higher gross profit for Spherion, but less than 4 percent of its business is permanent hiring. Krause’s goal is to increase that at least half a percentage point each year, a target he has hit since the process began in early 2004 when permanent placement accounted for 2.7 percent of placements. At the end of 2005, that number had increased to about 3.8 percent.
“It’s a very good, profitable business for us,” Krause says. “It also supplies a service to our clients when they increase their core staff. When they’re employing people they want to keep long-term, we’re providing those people.”
To increase the number of permanent placements, Spherion went on a major hiring effort last year to increase the company’s number of permanent-employee recruiters.
“The goal in 2005 was to increase our headcount in our professional services area about 20 [percent] to 25 percent,” Krause says. “A good chunk of those people were permanent recruiters. We increased our recruiter headcount by about 120 people.”
And there is still plenty of room for growth in the permanent placement section.
“We could at least double it and it wouldn’t bother me,” he says. “Permanent hiring tends to be more cyclical than temporary hiring. I don’t want to become a permanent placement firm [with] 90 percent of our business in permanent placement. How long we keep doing it is really a factor of the market.”
Reducing selling expenses
Growing at industry levels or better and expanding gross profit margin are two important goals, but both deal with external factors. Krause’s third financial target focuses on internal processes.
He wants to reduce selling expenses, and general and administrative expenses to 80 percent of gross profit. That number currently sits at more than 90 percent.
“That’s an internal target we use to benchmark where we want to go,” Krause says. “We know we have to be efficient, and as much as I’d like to say we can increase gross margins at will, it’s really very difficult to do that. Our customers are smart. They want to pay as little as they can for the best service they can get. So it behooves us to be the most efficient producers that we can possibly be.”
The first step toward that goal was installing an enterprisewide computer system.
“Putting in a fully integrated system was key to attaining this goal,” Krause says. “The reason we spent the money and put the system in was to leverage our unit capital base. The past problems were [a function of] 20 or 30 different subsystems. As we grew, I had to add additional headcount in areas because I had four payroll systems and three billing systems and all the other stuff. Now I have one, and I do that across all skill sets.
“It doesn’t really matter if you’re looking at one of my offices where we do mostly accountants or we do industrial workers. They still use the same system and do the same processes to get a paycheck out.”
A more efficient computer system will take you partway, but efficient employees are vital to reducing overall expenses. Krause added a chief marketing and corporate development officer to focus the organization on tasks that add the most value.
“One of his tasks is to review our operational processes with a goal of doing only the things that are really, really important that add value not only to the client and add value to us get payroll done, get sales reports out and get receivables collected,” says Krause. “Over time, you tend to add tasks, which adds people.
“Part of our goal is to streamline our processes so that we can take our current employee base and be able to grow significantly with it. It’s not about cutting heads, necessarily. It’s about moving forward and getting more leverage and productivity out of our systems with the existing employee base that we have.”
While there has been progress, the goal of reducing expenses to 80 percent of gross profit has yet to be reached.
“I didn’t expect to reach that number [in 2005],” Krause says. “We have made progress. We will continue to make progress. That number is a little dependent on how fast the market grows. Right now, the market has slowed down a little bit, although it is still a reasonably robust temp market.”
Getting faster payment
The computer system that’s added to the organization’s efficiency is also helping Krause reach his final financial goal of reducing the time it takes customers to pay. The goal is to better manage working capital by reducing days sales outstanding (DSO) by one day per quarter.
“Our biggest asset is receivables,” Krause says. “That’s where we use working capital. The good news is that as the economy increases, sales go up, but also receivables go up. Because we pay people on a weekly basis and collect from clients on a little longer [period] than that, our terms may be net 10, but our average days outstanding at the end of last year was something like 60 days. So I’ve made eight paychecks to an individual before I get paid from my customer. It’s critical for us to bring that down.”
This is important because each day approximates the use of about $6 million in working capital, money the company could be using for other purposes.
With the completion and implementation of the computer system, the DSO is decreasing.
“We’ve reduced four days in the first six months of (2005), which generated a lot of good cash flow for us, and we use that in a program to actually buy back stock,” Krause says. “It’s been a real healthy exercise for us.”
A new computer system was only half the solution.
“The second part was to engage the branches and the back office operations together with the customers get out there and collect these receivables and talk about the value we really add to customers,” Krause says.
“We can talk to customers about, ‘With this markup, I need to be paid in this many days in order to provide real value services. Now, if you’re going to pay me in 80 days instead of 40 days, then either I have to get more of a markup or maybe I should remove some of these other services because I have a bigger interest to carry.’”
That extra effort to reach customers has made a difference.
“When we have those discussions with a client, generally, we get straight on our terms,” Krause says.
By focusing on the four key financial goals, Krause has successfully reversed Spherion’s direction from negative to positive. Its balance sheet continues to strengthen, giving the company the financial flexibility to take advantage of changing market conditions.
“We’re well-positioned in the country,” he says. “We want to create value for our customers. It has been a challenge during the recessionary time, but we’ve come out pretty strong.
“We don’t owe any money; we have an extremely strong balance sheet. We’re really poised to grow now, and we’re growing in the right sectors.”
HOW TO REACH: Spherion, (954) 308-7600 or www.spherion.com