Roll your own risk report

FDM is the top-scoring company in Richard’s watchlist. Still doggedly trying to find things wrong with the business, he examines what has made it so successful, and what, if anything, could stop it in its tracks.

The presence of FDM at the top of my first tranche of Five Stocks and You’re Out Shares, has prompted me to take a look at a recruiter.

Recruitment is not a sector I have ever invested in. Periods when unemployment is high might impact profitability, and from the outside, one recruitment company looks much like another.

The numbers, though, sent me a different message, and due to FDM’s specialisation in IT and its status as the pioneer of the recruit, train and deploy business model, perhaps FDM is cut from a different cloth.

I will not talk about the financials much in this article. SharePad says FDM has been a very profitable cash-rich business. I did not find anything in the recent annual report to contradict that, although if you are doing your own analysis I would factor substantial share-based payback into adjusted profit and operating cash flow (see: “The dark side of share-based pay”).

Sources of Profitability

My attention is turning briefly to the sources of FDM’s profitability, and more extensively to what could stop FDM earning good returns and growing in future.

Being a pioneer in a market can be an advantage in itself if, as seems likely, FDM has developed enduring relationships with big customers who rely on its consultants.

The company was founded in the early 1990s by chief executive Rod Flavell (his wife Sheila is chief operating officer). Founders remember it was virtues like simplicity and customer focus that made them successful and tend to resist the tendency for big businesses to lose focus as they grow.

In a 2018 blog post, Mr Flavell said:

“Technologies and in-demand skill sets change with the times, but one thing remains constant: our clients want promising people with talent, a willingness to learn and those who go the extra mile.”

That sentiment chimes with the words of another famous founder, Jeff Bezos, the founder of Amazon, who in 2007 told Harvard Business Review

“…I very rarely get asked, “What’s not going to change in the next five to ten years?” At Amazon, we’re always trying to figure that out, because you can really spin up flywheels around those things…”

Bezos focused Amazon’s strategy on what he thought would remain constant, insights into what customers want: low prices, a big selection, and rapid delivery. The rest is history.

Evidently, FDM is still focused on what customers want, so this may explain the company’s growth and profitability.

With such a solid foundation, what could stop FDM growing?

For every potential investment, I imagine what the three biggest risks might be, and whether or not I can live with them for ten years or more.

The search invariably starts with the Principal Risks section of the annual report, although these documents can be as revealing for what they do not say, as what they do say.

This is what I imagine for FDM:


The number one risk in the company’s risk report is “Changes in the macro-economic environment”, recession to you and me, which could reduce the demand for consultants.

Since the majority of FDM’s revenue comes from banks and other financial services companies, the worst kind of recession might be provoked by a financial crisis.

Last week, the company reported that customers are delaying projects requiring consultants because of the uncertainty created by the bank failures we have witnessed this year.

FDM had so much cash at the year-end that it was equivalent in value to all the company’s liabilities, suggesting that it could survive downturns even if profit were severely reduced.

The key to profitability, when there is less demand for consultants, is FDM’s ability to control the number of unemployed consultants it is paying.

In the early days of the pandemic, the number of “beached” (unemployed) consultants doubled. FDM avoided redundancies by reducing recruitment, however, this still resulted in a “utilisation rate” for the year of 94.8%, the lowest for many years.

Costs increased relative to revenue and profit fell, but FDM still achieved an impressive 40% Return on Capital Employed according to SharePad.

Drawing lessons from history is tricky. The pandemic impact was atypical, and during the last financial crisis, FDM was a much more youthful business. It was not listed then, so the accounts available to us at Companies House are less detailed.

In the year to December 2008, the headline results were less impressive than the prior year, but FDM nevertheless achieved a 5% increase in revenue and a 23% increase in pre-tax profit. It confidently asserted it was outpacing a growth market. In 2009, a tough market, the company achieved very modest revenue and profit growth.

FDM believes downturns do not necessarily lead to a contraction in revenue. It says customers are more reluctant to take on permanent staff when times are tough and prefer to recruit consultants, creating “the potential for an increase in demand”.

It is safest to assume a future recession would impact profitability, but for long-term investors, this is an attractive quality because FDM has been a financially strong and competitive business

In difficult times it ought to gain market share at the expense of rivals and emerge even stronger.

Employee dissatisfaction

People are FDM’s product, so to my mind employee engagement should be a matter of great concern to the business.

FDM’s risk report acknowledges the importance of the calibre of consultants, and the role pay, recruitment programmes, and training programmes have.

Employee satisfaction is also a small factor in determining executive pay, but there is something missing. FDM’s annual report does not tell shareholders how it measures employee satisfaction, what the score is, or whether it believes it is high enough.

External scores from recruitment websites Glassdoor and Indeed are decidedly middling.

I am in two minds about how to interpret these scores.

For many recruits, the relationship is temporary. FDM recruits remain in its employment for two years, after which they may choose to stay, to become employees of the company they were placed with, or go their own way.

Their experience is also determined by the company they are placed with, so low scores may not be wholly FDM’s fault.

Our young friend AI

My final worry is not mentioned in the risk report at all.

FDM recruits and trains entry-level people. No prior experience is required, and its biggest sources of recruits are graduates, people returning to work after a career break, and former members of the armed forces. They receive six to fourteen weeks of training.

One of the ways Chat GPT has wowed us with its machine intelligence is by coding. It has helped me write macros for my spreadsheets. Maybe it and other AIs are going to put coders out of work.

Mr Flavell sees entry-level coding as a constant, but the headlines are imagining a future in which swathes of such jobs are at risk.

It is disappointing the company does not address this issue in its annual report, but perhaps that is because the threat is not yet palpable. It is a result of our feverish imaginations.

In a February blog post, one of FDM’s senior consultant says that in the short term, AI will become a productivity tool and learning aid, but:

“The job market will likely remain largely unchanged for the foreseeable future, and any impact which it does have will only be felt many years from now, in a way which is currently very difficult to predict.”

I believe that. IT systems are expensive and often so interconnected with the ways companies operate they are not easily replaced. Neither is AI in its current incarnation trustworthy. It is a black box that can often give us a serviceable result but sometimes produces an outrageous one.

These thoughts come with a big wealth warning though. AI seems to have woken from an almost dormant state, into a fast-moving and potentially disruptive technology. To my mind, FDM is a riskier share than it was a few years ago.


Contact Richard Beddard by email: or on Twitter: @RichardBeddard

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