Slow Times for Executive Recruiting

By Susan J. Wells Apr 1, 2003
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HR Magazine, April 2003Special Report on Employment and Staffing

Because the fishing hasn't been good for the executive search industry, HR is gaining leverage on fees and search results.

The ongoing slump in the executive recruiting industry is helping human resource professionals leverage lower fees and better service from outside recruiters.

Moreover, as the pace of executive recruiting has slowed in recent years along with the overall economy, HR is finding that in many instances it doesn’t have to get outside help at all to fill such jobs, that it can cut the costs and improve the results of executive searches by conducting them in-house.

Those are just a few of the ways that changes in the recruiting business are affecting the industry’s clients—the HR departments in companies looking for top-level talent. “The industry has gone from one extreme to another in a relatively short time,” says Brian Lee, chief market strategist at Hunt-Scanlon Advisors, an executive recruiting consulting and research firm in Stamford, Conn. “The result is that HR is firmly in the driver’s seat in this market.”

Indeed, the industry is hurting. Combined revenues for the 25 largest U.S. executive search firms, for example, sank 30 percent in 2001, and no significant rebound is in sight, according to research by Hunt-Scanlon. “It has been an across-the-board industry decline affecting both public and private firms, as well as generalist and boutique recruiters,” says Lee.

At its peak two years ago, Chicago-based Heidrick & Struggles International Inc., one of the nation’s largest publicly held executive search firms, employed more than 500 executive recruiters, and annual sales reached $594 million. After a recession and three rounds of layoffs, the 50-year-old company has slimmed down to 325 recruiters and an estimated $351 million in 2002 revenue, according to analysts.

And Heidrick has plenty of company. Few recruiting firms have emerged unscathed by current labor market conditions. Although publicly held search giants have been under severe pressure, it has been even worse for some privately held firms, many of which have been forced to shut their doors.

The reasons for the industry downturn are clear: Because of the flat economy and their own financial constraints, companies are doing less hiring—if they’re doing any at all. In fact, executive demand has plummeted, according to a series of surveys by ExecuNet, an Internet-based executive career management firm based in Norwalk, Conn. Demand for senior-level talent, which posted a double-digit drop in 2001 from the previous year, fell again last year, by 17 percent, from the 2001 level.

Although there were some recruiting industry gains over the past two years in a few sectors—notably health care, biotech, energy and security—they were not enough to offset the losses in other areas, especially technology, telecommunications, financial services and retail.

Now, with two of their most difficult years behind them, can executive recruiters expect an upturn this year? Apparently not. Their hopes for 2003 are tepid at best. Heidrick, for example, is forecasting little or no revenue growth this year. The Association of Executive Search Consultants (AESC), a New York-based trade group for retained executive search firms, which generally focus on executive positions paying $150,000 or more, found in a poll of its U.S. member firms in the fourth quarter of last year that 32 percent saw the market improving gradually overall, but an additional 33 percent expressed uncertainty about market recovery.

Nonetheless, executive search firms are better-positioned, both strategically and financially, to handle a no-growth revenue stream this year. “Underlying trends for quality firms are getting better,” says Peter Felix, president of the AESC. “They’re going to be in much better shape for a longer-term upturn.”

Higher Quality, Lower Fees, More Services

The recruiting industry downturn has had a major impact on HR and on staffing professionals’ search strategies. As a result of a restoration of reasonable expectations between recruiters and clients, and the lower assignment volume, recruiting firms of all sizes have had to redirect their efforts toward better quality search work and deeper client relationships, says Hunt-Scanlon’s Lee.

On top of that, the industry shakeout has reduced the ranks of inexperienced recruiters who churned out mediocre work, and it has weeded out contingency recruiters who had tried to fill positions above their usual level—junior to middle management jobs in the $50,000 to $150,000 range—during the red-hot hiring market of the late 1990s.

“The economy has squeezed out a lot of the bad stuff in the last two years, and that bodes well for the industry as a whole,” says Felix. “The basic demand for executive search is still alive; the froth is what has been skimmed.”

As the number of search assignments has fallen, recruiters’ fees have started to slip below the longtime industry standard of 33 percent of a placed executive’s first-year compensation. The sinking-fee syndrome was tracked in a survey of 42 executive search consultants and 30 HR executives conducted last August by the Chicago-based International Association of Corporate & Professional Recruitment (IACPR), a group of senior-level HR executives, search professionals and consultants. (See “Fees Turn South” graph.) In addition, sources say fees for multiple-year search contracts are dipping as low as 27 percent this year.

Also popular are fixed-fee arrangements, in which a dollar figure is established at the start of the search. According to the IACPR poll, 65 percent of HR professionals now use fixed-fee arrangements, up from 57 percent in 2001. The appeal of fixed-fee searches, some industry experts say, is that they eliminate recruiters’ incentive to negotiate heftier compensation packages that would increase their own take.

“Price cuts and fee drops are happening much more,” says Susan Roberts, executive director of the IACPR. “I tend to think firms are doing it if push comes to shove, and, in some cases, it’s certainly come to that.”

Moreover, these fee adjustments—and therefore HR’s bargaining power—may stick. Search firms that rely on such discounting now, Roberts says, will find it hard to move fee levels back up when the hiring market improves. “Clients just won’t want to accept it,” she says.

A ‘Do-It-Yourself’ Trend

In some instances, recruiters can even find themselves facing competition from their former clients. Some companies, in looking for ways to trim recruiting costs, are taking control of the search process by bringing it in-house, assuming the role of an agency by directly managing the candidate courtship experience and then closing the deal. Besides saving money, bringing recruiting in-house also can lead to faster hiring results and tighter control over the hiring process.

The “do-it-yourself” approach to recruiting took hold when the hiring market was brisk and companies wanted to rein in their hefty spending on outside searches. But it’s being driven in today’s market as well, largely because of Internet sourcing, the success of employee referral programs and automated recruiting systems that have made it easier for companies to find candidates and build databases of talent they can harvest.

“From there it’s only a short stretch to recruiting directly more often than using a search firm to do so,” says David Lord, founder of Executive Search Information Services (ESIS) in Harrisville, N.H., a consulting firm that helps companies choose and work with search firms. As companies turn more to recruiting directly, Lord says, they become much more selective when they do use external search and recruiting, typically for higher-level jobs paying $150,000 or more.

“I think a lot of companies are realizing that they can do this well themselves,” says Dan Guaglianone, vice president of global recruiting at Unisys Corp. in Blue Bell, Pa. The information technology company’s in-house search group filled 78 percent of Unisys’ executive-level openings last year, he says. “If I’m paying a $300,000 salary for an executive job and the search fee to fill that spot is a third of that, that’s $100,000 for that one hire. Quite frankly, I can hire a top-level recruiter for that money, and, even if they hire just one person for me, I’ve recouped my cost.”

In fact, the search industry downturn has created a buyer’s market in recruiters, and companies seeking to staff their in-house recruiting functions are snatching up search professionals who have become job seekers themselves. “We’ve hired some very good recruiters who worked for top search firms,” Guaglianone says.

PepsiCo Inc. has been doing in-house recruiting for three years with a lot of success, says John Delpino, director of executive staffing at the Purchase, N.Y.-based company.

Similarly, Wyndham International Inc., the Dallas-based chain of hotels and resorts, has cut back significantly on outside executive search and relies on an internal recruiting team of six full-time and contract staffers, says Diana Meisenhelter, vice president of staffing and talent acquisition. With an average of 250 management-level positions open at a time, Meisenhelter estimates that she has saved at least $150,000 a year in recruiting costs at the mid-manager level by bringing the search function for those jobs in-house.

“Creating an in-house search team has been instrumental in finding top talent,” Meisenhelter says. “It’s all about building relationships, inside and outside the organization.”

Time to Review Strategies

Companies that continue to tap outside recruiters would be wise to take stock of just how well their recruiting functions are faring. The aim? To avoid a troubling statistic: Roughly 40 percent of all external searches fail, according to ESIS consultant Lord, who bases his estimate on his tracking of the experiences of 60 major corporations. “Most companies are not satisfied with their executive search results,” he says. “And the No. 1 problem is that there’s no real way to rate it objectively and meaningfully.”

Who usually gets blamed for failures? HR professionals often take the heat—far more often than search consultants do—according to the IACPR poll. The association’s research also shows that HR executives think search consultants need to work on their pricing, overall service, understanding of the client company, research coverage and communication. Search consultants, on the other hand, say HR needs to work on responsiveness, speed, internal obstacles, realistic expectations and agreement among hiring managers.

To bring some order to the process, Lord says, companies should create basic but comprehensive oversight in the organization. Make sure someone has overall responsibility for tracking all corporate searches for cost, timing and outcome. Measure success by tracking the percentage of searches completed, longevity of the hired candidate, time to completion and the number of candidates presented.

Then, don’t repeat mistakes. Lord says that a lot of search activity “gets lost or goes unnoticed” within companies—easily falling into the cracks between multiple departments, budgets and layers of management with responsibilities for hiring. This can lead to companywide replication of poor results.

Last, monitor market trends to judge how far to play your hand when negotiating aggressively on pricing, custom guarantees, timing cycles or other terms. “The reality of the current market is that virtually every search firm is hungry right now,” Lord says. “So there’s no excuse—every search ought to be perfect. You need to be a very important client to every search firm you work with.”

Susan J. Wells is a business journalist based in the Washington, D.C., area with 18 years of experience covering business news and workforce issues.

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