Adecco Group –
Operating and financial review and prospects
in millions, except share and per share information

1. Introduction

The information in this discussion and analysis should be read in conjunction with the Company’s consolidated financial statements and the notes thereto that are prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) and are included elsewhere in this Annual Report and with the disclosure concerning forward-looking statements at the end of this section.

Statements throughout this discussion and analysis using the term “the Company” refer to the Adecco Group, which comprises Adecco S.A., a Swiss corporation, its consolidated subsidiaries, as well as variable interest entities for which Adecco is considered the primary beneficiary (for further details, refer to section “Principles of consolidation” in Note 1 to the consolidated financial statements).

1.1 Business and industry background

The Company is the world’s leading provider of human resource solutions including temporary staffing, permanent placement, outsourcing, outplacement, and consulting services. The Company had a network of over 5,500 branches and over 32,000 full-time equivalent (“FTE”) employees in over 60 countries and territories at the end of 2010. In 2010, the Company connected on average on a daily basis over 650,000 associates with over 100,000 clients. Registered in Switzerland and managed by a multinational team with expertise in markets worldwide, the Company delivers a broad range of human resource services to meet the needs of small and large business clients as well as those of associates.

The staffing industry is fragmented and highly competitive. Customer demand is dependent upon the overall strength of the labour market as well as an established trend towards greater workforce flexibility. More liberal labour market laws, particularly for temporary staffing, are beneficial for the industry and have been a driver for greater workforce flexibility. The business is also strongly influenced by the macroeconomic cycle, which typically results in growing demand for employment services during periods of economic expansion, and conversely, contraction of demand during periods of economic downturn. Due to the sensitivity to the economic cycle and the low visibility in the temporary staffing sector, forecasting demand for staffing and human resource services is difficult. Typically, customers are not able to provide much advance notice of changes in their staffing needs. Responding to the customer’s fluctuating staffing requirements in a flexible way is a key element of the Company’s strategy, which it addresses through its diverse staffing and human resource services network.

Anticipating trends in demand is also important in managing the Company’s internal cost structure. This coupled with the ability to maximise overall resources and to enhance competitive advantage through the Company’s wide variety of services and locations while maintaining standards of quality to both clients and associates are key components to achieving profitability targets during any part of the economic cycle.

1.2 Organisational structure

In 2010, the Company was organised in a geographical structure complemented by business lines. The geographies consist of France, North America, UK & Ireland, Japan, Germany & Austria, Benelux, Italy, Iberia, Nordics, Australia & New Zealand, Switzerland, and Emerging Markets. The business lines consist of Office, Industrial, Information Technology, Engineering & Technical, Finance & Legal, Medical & Science, Sales, Marketing & Events, and Human Capital Solutions. The classification of a specific branch into a business line is determined by the business line generating the largest revenue share in that specific branch. Since January 2011, the Company is organised in a geographical structure plus the global business Lee Hecht Harrison (“LHH”). This structure is complemented by business lines.

1.3 Service lines

Revenues and gross profit derived from temporary staffing totalled 92% and 77% in 2010 and 92% and 75% in 2009 of the respective consolidated totals. Temporary staffing billings are generally negotiated and invoiced on an hourly basis. Temporary associates record the hours they have worked and these hours, at the rate agreed with the customer, are then accumulated and billed according to the agreed terms. Temporary staffing service revenues are recognised upon rendering the services. The temporary associate is paid the net hourly amount after statutory deductions on a daily, weekly, or monthly basis. Certain other employer payroll-related costs are incurred and the net difference between the amounts billed and payroll costs incurred is reported as gross profit.

Revenues and gross profit derived from permanent placement, outsourcing, outplacement, and consulting services totalled 8% and 23% in 2010 and 8% and 25% in 2009 of the respective consolidated totals. The terms of outsourcing, consulting, and outplacement services are negotiated with the client on a project basis and revenues are recognised upon rendering the services. For permanent placement services, the placement fee is directly negotiated with the client and revenues are recognised at the time the candidate begins full-time employment, or as the fee is earned. Allowance provisions are established based on historical information for any non-fulfilment of permanent placement obligations. Outplacement and permanent placement services provide significantly higher gross margins.

1.4 Key performance indicators

The Company monitors operational results through a number of additional key performance indicators besides revenues, gross profit, selling, general and administrative expenses, and operating income before amortisation and impairment of goodwill and intangible assets and uses these measures of operational performance along with qualitative information and economic trend data to direct the Company’s strategic focus.

These indicators include the following:

  • Business mix – the revenue split between temporary staffing, permanent placement, and other services.
  • Bill rate – an average hourly billing rate for temporary staffing services indicating current price levels.
  • Pay rate – an average hourly payroll rate including social charges for temporary staffing services indicating current costs.
  • Temporary hours sold – the volume of temporary staffing services sold.
  • Temporary associates – the number of temporary associates at work.
  • Clients – the number of active clients.
  • Permanent placements – the number of candidates placed in permanent job positions.
  • Average fee per placement – the average amount received for job placement services.
  • Days sales outstanding (“DSO”) – accounts receivable turnover.
  • Full-time equivalent (“FTE”) employees.
  • Retention rate of employees, associates, and clients.
  • Branches – the number of locations from which the Company offers human resource services.
  • Economic Value Added – residual income after cost of capital.

1.5 Seasonality

The Company’s quarterly operating results are affected by the seasonality of the Company’s customers’ businesses. Demand for temporary staffing services historically has been lowest during the first quarter of the year.

1.6 Currency

The financial results of the Company are presented in Euro, which the Company has selected as its reporting currency in recognition of the significance of the Euro to the Company’s operations. In 2010, 50% of total revenues were generated in the Euro zone. Amounts shown in the consolidated statements of operations and consolidated statements of cash flows are translated using average exchange rates for the period or at transaction exchange rates. In 2010, the average exchange rate for the US Dollar, British Pound, Japanese Yen, Norwegian Krone, Swiss Franc, Australian Dollar and the Canadian Dollar which comprised 17%, 9%, 7%, 2%, 2%, 2% and 2% of total revenues, respectively, strengthened against the Euro when compared to 2009. The Company’s consolidated balance sheets are translated using the year end exchange rates. At year end 2010, the US Dollar, British Pound, Japanese Yen, Norwegian Krone, Swiss Franc, Australian Dollar and the Canadian Dollar, all strengthened against the Euro when compared to 2009.