HR Magazine, January 2001: Working With An Outside Recruiter? Get It In Writing

By Michelle Neely Martinez Jan 1, 2001

Avoid impleasant - and expensive - surprises by crafting contracts that spell out exactly what you and your recruituing firm expect from each other.

With unemployment at record lows, HR professionals increasingly turn to outside recruiters to help fill their staffing needs, usually with mutually satisfying results. But unless you’ve taken the time to ask all the right questions up front, and then reduced the terms to writing, you risk an unpleasant, perhaps expensive, surprise down the line.

magine learning that a search firm helping you fill a key company position is simultaneously wooing your other staffers—for one of your top competitors. How’s that for a migraine? But can you stop it? Only if you have a contract and it contains a “non-compete” clause.

Or: Weeks after hiring your search firm, several bills already are on your desk though you still haven’t seen a qualified prospect. You fear you’ve made a mistake, but can you cancel the recruiting contract without paying for services that haven’t been rendered? Only if it contains specific performance measurements.

So says Lynn Nemser, SPHR, president of Partners in Performance Inc., a Pittsburgh, Pa.-based human resource and organizational development consulting firm.

“One of the biggest mistakes employers make is getting involved with third-party recruiters without a contract,” says Nemser. “Everyone is under pressure to fill every job quickly, but really, you have to stop and think through what is needed and put it in a contract.”

How much pressure is out there? The Association of Executive Search Consultants (AESC) reports a 25 percent increase in retained executive searches from the second quarter of 1999 to the second quarter of 2000. For some jobs, the increase is even more dramatic. Searches for chief financial officers were up 74 percent, while those for chief information officers more than doubled to 149 percent.

Contingency search firms also are busier than ever. While most retainer searches are for executive-level positions, contingency searches—where a recruitment firm is paid only if the position is filled by a candidate it selects—commonly are used to fill mid-level management and professional positions.

AESC president Peter Felix says, “Despite the dramatic decline of e-commerce appointments—which have been the hot executive recruiting area of the past 24 months—other sectors of the economy have demonstrated significant and sustained growth.” Financial services, public relations and advertising are prominent examples of growing fields in the booming service sector, he adds.

With the increased use of outside recruiters, it’s more important than ever that, as an HR professional, you think through what you want from an outside recruiter, ask every possible question and then put it all down in a comprehensive and clearly written contract. While search firms often present clients with the contract, many employers are developing their own agreements to ensure that their particular concerns are covered.

You also need to educate your senior executives and line managers about the importance of having a written agreement with an outside recruiter. Regardless of the level of the position to be recruited, HR needs to be involved in the process, and, of course, the legal department should review every contract.

No Quick-Buck Bozos

Not only do contracts help keep a recruiting relationship from going sour, they also help weed out the quick-buck bozos who enter recruiting just because the field is lucrative right now.

Contracts also help minimize the greed factor that HR professionals say exists today—even when dealing with some established recruiting firms. One recruiting firm in the Southeast incorporated itself under 20 different names in order to capture the area market. Another recruiting firm “buried” language in a long contract requiring the client to pay nontraditional additional fees once the search passed the 90-day mark.

Discussing the fee structure at the outset and then writing it into the contract can prevent an expensive surprise later. “By doing due diligence, you can avoid the potential to waste tens of thousands of dollars on outsourced recruiting,” says Sacramento-based Keith Vencel, product manager for employment at Sutter Health, a nonprofit healthcare system with 26 hospitals and medical centers in Northern California.

The most common problem Vencel sees in agreements between employers and third-party recruiters is that small employers accept excessive fees. “They [small employers] assume that’s the going price because they haven’t done their research because they feel they lack the time.”

Small employers typically can’t offer outside recruiters the potential future business that big employers can, so small employers may end up saying yes to whatever fees the recruiters propose. But Alison Brody, corporate manager for executive recruiting for Omni Hotels in Irving, Texas, says you can get around these problems with a little creativity: “Small companies need to have a carrot to dangle.” For example, a small employer might negotiate a reduced fee by offering to refer the recruiter to another organization that may be hiring.

Smaller employers also can seek help from a larger employer, says Brody, who recommended a small hotel to the recruiter with whom she works. As a result, the small hotel was able to get the same 20 percent rate that Brody paid. Otherwise, the rate could have been as high as 33 percent.

However, Merryl Rees, director of staffing at Lincoln Financial Group, a Hartford, Conn., financial services firm, says she routinely hires contract recruiters on an hourly basis, while Omni Hotel’s Brody uses what she calls an “in between” tactic. She contacts two contingency-based recruiters and gives them five to 10 business days to show her their initial results. The better performer earns a $5,000 bonus. The rest of the arrangement is just like a traditional contingency search; the recruiter who finds the hired candidate gets a percentage of first-year base salary.

Another approach: Link a modest fee to a bonus plan based on the recruiter meeting goals you set, such as producing a certain number of qualified candidates within a specified timeframe or filling a position by a certain date.

A well-written contract also should help you keep tabs on your recruiter by requiring regular activity reports. Rees says she arranges to receive a weekly summary of how many calls her outside recruiter made, how many leads it gained and where candidates were coming from.

“If you don’t have this type of information, there’s lots of room for misinterpretation,” she says. “It’s a great way for a contract recruiter to show how successful they are.” In fact, Rees believes the good contract recruiters would embrace the concept; one who is hesitant about supplying such progress reports may not be one you want to use.

A Handshake Is No Substitute

While the concerns and needs of each employer will differ, recruiters, staffing directors and HR generalists agree that the following points should be included, or at least considered, in any third-party recruitment contract:

Confidentiality.Put recruiters on notice that they cannot share any “inside” information they obtain while on the assignment. This would include employee telephone directories, e-mail addresses, organizational charts—any information that is not public knowledge.

Off-limits agreement. Protect yourself against “poaching” of your employees by the recruiter for a specified time period. While the standard period is one year, you need to specify when the clock starts ticking. Many use the date the recruiter signs the contract.

Representation. Clarify the recruiter’s responsibility to represent your company and the position accurately. Whether it’s an honest mistake or a tactic to motivate potential candidates, recruiters have been known to give potential hires wrong information that leaves both candidate and company unhappy. For example, Omni Hotels’ Brody says she was embarrassed when a recruiter over-represented a salary by $10,000. A letter or e-mail from the recruiter confirming his understanding of the position and its salary, before any candidates were seen, could have avoided that, she notes.

Diversity and Equal Employment Opportunity. Ensure that the recruiter follows company policies and procedures as they relate to recruiting and hiring from a diverse pool of candidates.

Cancellation. Spell out your right to terminate the search at any point, for any reason, including unforeseen developments such as reorganization, budget cuts, being acquired by another company, failure to meet specified benchmarks, etc. Also, state how payment to the recruiter will be handled if a search is cancelled. For example, a recent recruiting contract signed by Lincoln Financial Group contained this statement: “The client is free to cancel the search at any point. If the search is cancelled, the client is obligated to pay the search agent only for those monthly installments and expenses actually billed, and for out-of-pocket expenses incurred.”

Guarantee. Establish how long a recruiter will “guarantee” a position it has filled, meaning that if the new hire leaves before the guarantee expires, the recruiter is obligated to refill the job at no additional charge. With the labor market so volatile, third-party recruiters have shortened the length of time they will “guarantee” a position. For retainer-fee searches, a six-month guarantee is common, yet many firms will want to limit it to 90 days. Contingency searches typically have a 60- or 90-day guarantee, though you may find recruiters just starting out who will negotiate longer guarantee periods.

Communication. Set out how you want the recruiter to provide information to you. Specify whether the recruiter reports to HR, hiring managers or other officials. Set deadlines for filling jobs. Tell the recruiter how you want to receive resumes—by mail, hand delivery, in specific electronic formats compatible with your computer systems, etc.

Performance measurements. Specify how, and how often, the recruiter reports to you, and what activities are in the report, such as phone calls made, leads obtained, interviews conducted, etc. You want to tie payment to your performance expectations. á

Payment structure. Determine the basis for the fee and when and how it is payable and, if any bonuses are involved, specify the size and terms of payment. While historically the fee has been based on a percentage of the new employee’s base salary, some contingency and retained search firms ask instead for a percentage of the first year’s projected bonus. They may also try to negotiate a percentage of a professional’s entire first-year compensation package, not just base salary.

Fair Credit Reporting Act. Ensure your recruiter understands and follows the law’s requirements, thus protecting you against claims of negligent hiring. It’s important to include at least a short statement, such as: “Take action to comply with the Fair Credit Reporting Act (FCRA) as it relates to employment.”

Build a Relationship

The contract is a vital part of a larger relationship with the recruiter, a relationship that should include giving the recruiter a clear picture of your company’s needs and culture, HR practitioners say.

“Relationship building is everything,” says Sutter Health’s Vencel, who uses third-party recruiters primarily for hard-to-fill IT jobs.

Vencel urges HR professionals to listen carefully to conversations with recruiters to see if they want to build a long-term relationship or are just in it for the quick buck. “You want to feel as if the recruiter is finding a solution to a business problem, not selling people.”

Vencel notes that a recruiter often is a candidate’s initial exposure to the company’s image. “I’ve selected outside vendors who understand this, and can mirror Sutter Health’s culture from the get-go.”

Executive recruiter Kathy Brown of K.E. Brown Inc. in Bridgeville, Pa., agrees that a recruiter needs to have a good overview of your organization’s corporate culture, not just a job description to fill. She suggests giving recruiters a list of personal characteristics you want in a candidate as well as the required job skills. “You want to make sure that one missing piece of the candidate profile doesn’t break the deal,” she explains. As a recruiter, Brown says she also wants information about the hiring manager because she likes to give her candidates a realistic picture of the person to whom they could be reporting.

Michelle Neely Martinez is a contributing editor of HR Magazine . Reach her by e-mail at:

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