Pre Employment Screening and Employee Screening Industry Trends

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Screening Industry - Trends

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As the demand for screening increases and the market matures, opportunities for employee screening companies will continue to evolve. These opportunities will vary depending on the profile of the company-whether it is a leading industry player, a mid-sized platform, or a small company trying to build a business. Understanding the key industry dynamics and their impact on the business will be essential to effectively evaluating strategic alternatives and securing the company's position in the market.

Continued Growth in Demand
Recent growth in pre employment screening has been driven primarily by factors including: Heightened safety, security, and legal concerns; a better awareness of the importance of screening and testing; and a general trend toward greater turnover (both of employees and customers). These factors have resulted in stable or growing revenues for many screening companies despite an overall challenging business climate. Over the next few quarters, the industry will also benefit from cyclical factors, including the developing economic recovery. Growth in demand, fueled by the factors cited above, should offset any increase in competitive pressures and result in continued strong growth prospects over the near term. However, both growth and margins are likely to moderate over the longer term as the industry matures.

Continued M&A Activity
Opportunities for strong growth and margins, a highly fragmented marketplace, and advantages of size and diversification should continue to fuel M&A activity over the near term. Acquired incremental revenue can be highly profitable for companies that have the capacity to leverage their existing infrastructure investments. In addition to the large employee screening companies, many of which are well capitalized and committed to growth through acquisitions, there are a number of strategic and financial parties without an existing presence in the market that are seeking platform investments.

Increased Competition
The background screening market has been characterized by significant growth rates, attractive margins, and relatively low barriers to entry. As a result, investment capital and new participants have been drawn to the industry. In addition to large strategic players, there are a number of private equity backed mid-sized firms that are focused on growth and becoming major players in the industry. Recently, the market has become more competitive due to the impact of the weak economy on employment, the increasing number of competitors, and efforts by the larger players to aggressively build market share, especially among larger customers. Many existing players are taking actions to secure or advance their position in the market, including broadening service offerings, completing acquisitions, expanding geographic coverage, establishing alliances, and investing in infrastructure. In addition, a number of companies not currently in the market are evaluating the industry and assessing whether and how to enter the growing pre employment screening market.

Increased Focus on Legal Compliance Consulting
Compliance with the constantly evolving maze of state and federal regulations covering consumer information and employee background checks is challenging. Many employers and pre employment screening companies are not focused on the issue, cannot afford the investment required to stay compliant, or choose not to make the investment as a calculated risk of doing business. The increased visibility of background screening and the sensitivity of the information involved are likely to lead to increased litigation and scrutiny of the process. The burden of compliance will continue to emerge as an important barrier to entry for the industry, as well as an important differentiating factor for companies offering compliance consulting.

Continued Focus on Differentiation
With many firms offering the same basic services and pricing, there will be an increased emphasis on differentiators such as breadth of services, key alliances, vertical or geographic expertise, and market positioning. For example, a boutique provider focused on customer service and compliance will price and market its services differently than a low-end provider focused primarily on driving volume. Differentiating a business can help to drive growth and profits, and the extent of differentiation can have a direct impact on how a business is valued.

Sources :

RW Baird M&A Report: HRO Gaining Traction Fast.

KPMG background Screening Report - Fall 2003