Porters Five Forces In The Temping Industry

Published by MBA Skool Team, Published on October 23, 2012

Temping is defined as hiring workers for a specified duration or on a project basis, rather than recruiting them on a permanent basis. A 'temp' works for a client company, but is on the pay roll of the staffing company.

Many big multinational companies are attracted to this solution because it reduces the worry of candidate recruitment, cost of training, perks, high salaries and retirement benefits. This kind of a scenario is especially advantageous to the company if they have short term requirement for a particular group of skilled people. Also this situations saves them from the paying salaries to staff that is currently on the bench especially.

From an employee's perspective this industry is favourable since it allows the unemployed to find the apt job for them, also it allows freshers to avoid resume gaps and make a little money. Moreover a large percentage of the temp's finally get recruited by their client company on the basis of their work. The positive manner in which the temps view this option can be seen from the fact that Bangalore based TeamLease Services, one of the major players in the temping industry are right now doing  about 130-200 jobs per month per center.(As of June 2012). And if some HR gurus are to be believed they predict that this trend which can be traced back to the US is here to stay!

The following table shows the upwards trends of the temping industry.

(source: Ma Foi Randstad Employment Trends Survey)

In this article will throw light on the manner in which Porter's 5 forces have shaped this fast growing industry.

1. Threat of new competition

Today, the organised Indian temping industry has 6 lakh employees and it stretches across manufacturing, consumer durables, retail and the automobile sector. Favourable condition have lowered the barrier of threat for new entrants thus attracting new entrants to this industry. Reasons include :

Economies of scale is not a major differentiating factor.

Proprietary product differences is low since most of the companies give training to the students based on the industry demand.

Brand identity is high since most of the companies that recruit temps usually hire on the basis of the company name.

Switching costs are high for the MNC's since once the company has recruited temps and deployed them on the project, it would a tough decision to replace them with other temps or even newly recruited permanent employees.

Capital requirements for setting up a staffing company are low

Access to distribution is low, since the top management need to have healthy contacts with MNC's to place their temps's in that company which indirectly influences the quality of aspirants coming to the staffing agency.

Absolute cost advantages are high.

Government policies are reducing the gap between the salaries of temping staff and the permanent staff

Expected retaliation is low since the market is just present in isolated pockets while the trend soon catching up

2. Threat of substitute products or services

The temping industry was born as a substitute for the actual hiring of employees. Currently the threat of substitute products is high however with increasing economic down trend and frequent market fluctuations, the threat of substitute products/ services is decreasing but at a very slow pace. Reasons are:

Relative price performance of staffing agencies with respect to its substitutes i.e the actual recruitment of permanent employees is high.

The cost of Switching is high as explained earlier.

As per the current trend the Company's propensity to hire an employee on an average is higher. The temping industry cannot completely wipe out the organised sector. However it is a trend that is catching up slowly and steadily.

3. Bargaining power of customers (buyers)

In this case the customers are the large MNC's who opt for services from staffing companies. For example IT giant TCS recorded an incremental growth of 45.5% in the total  expense of sub contracting in 2011 compared to 2010. TCS spend a staggering 1,836.55 crore rupees on sub contracting jobs. However it was Infosys who recorded the highest incremental growth of 62% in sub contracting. These companies do have the upper hand in case of the bargaining power of customers.  Reasons include :

The Buyer concentration is high

Buyer volume is also high, since majority of the companies recruit temps in large batches depending on the size of the project.

Buyer switching costs are high as explained earlier.

Buyer information is high, since the sheer size and and spread over a number of metropolitan cities.

The Substitute products in this case is a situation where the Companies resorts to hiring permanent employees

Ability to integrate backward is also high, companies will find it more convenient to hire permanent employees if the nature of job profile being offered is permanent.

The Product differences are low

The Brand identity is high as discussed earlier.

Buyer profits in this case are high since the employers save on cost of recruiting and other employee benefits.

4. Bargaining power of suppliers

The suppliers in this case are the people that are hired by the staffing agency. Unlike regular staffers who take the same monotonous route to work every day, meet the same people and deal with the same problems day after day, temps have a different job every six to eight months. They change offices, meet new co-workers, even have a new boss ever so often. However they receive few or no worker benefits and job security is contra temping. Temps are the first to be dumped in a recession/slowdown even though they are among the first to be hired when there is an uptick in the economy. Also it depends on the unemployment rate in the country. For a country having higher unemployment rate the bargaining power of the suppliers will be even lower. Recently by government policies the salary scale was improved for the temps, which can be viewed as a positive step in improving their status. On the whole however the suppliers can be seen to have less bargaining power with respect to the current scenario. Reasons include :

The Differentiation of inputs is low.

Switching costs are high only if the switching happens during the project.

Presence of substitute inputs is high because majority of the companies still go in for hiring of permanent employees.

Supplier concentration is high. Unemployment of the skilled youth in India stood at 2.92 crores in 2009.

Importance of volume to supplier is low since the supplier in this case are the unemployed citizens of India.

Cost relative to total purchases: High

Impact of inputs on cost or differentiation: Low

Threat of forward integration:High

5. Intensity of competitive rivalry

Since then the demand for temporary workers has been fueled by companies looking for greater workforce flexibility, faced with fast-paced market changes, including changes in consumer demands and shorter product life cycles. This has led to the growth of quite a few companies like the TeamLease, Kelly Services,Manpower, Ma Foi Randstad etc in India. As of now the intensity of competitive rivalry is low. The temporary staffing industry continued to clock double-digit growth, of up to 20 per cent year-on-year in terms of salary hikes over the last five years, the 2008-09 recession being the only aberration.The gap between average temporary and permanent salaries has narrowed and is now hardly 4 per cent. The difference nearly five years ago was more than 8 per cent.

Industry growth rate: In India the current percentage is 0.03% of the organized workforce, however it is increasing at a steady pace.

Product differences are low since all the temps before recruitment by the client organization are trained in the necessary technologies.

Brand identity is high in this industry as explained earlier..

Switching costs are high as discussed earlier.

Informational complexity is high in this case.

Diversity of competitors is low since as of now only a handful of firms have established themselves in this industry.

Corporate stakes are high

The Exit barriers are low

This article has been authored by Bryony Pereira from Goa Institute of Management.

Image: FreeDigitalPhotos.net

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