Invasion Of The Body Snatchers

Headhunters can be costly, but in the war for talent, they are an invaluable weapon

David Bowie wanted in. Fellow rock legends Todd Rundgren and Brian Eno were ready to record, too. No wonder high-tech entrepreneur Ty Roberts believed Ion Inc., his Berkeley (Calif.) startup, had arrived. Having pioneered a way to add multimedia to audio CD-ROMs, the future looked bright back in 1995. Time to staff up, Roberts figured. "We basically hit the street to pull in as many people as we knew," Roberts recalls. "Well, that maxed out at five people." So tiny Ion did what other hard-pressed small companies are doing: It called in the headhunters.

The company has been using them ever since. Although Ion's interactive CD-ROMs bombed and the company was bought out, the recruiters, now working for Ion's successor, continue to comb the Bay Area for database engineers and Web developers. How come? Because conventional methods just don't cut it in this tight labor market. "There's a war for talent going on in the economy," says James M. Citrin, a communications recruiter for Spencer Stuart in Stamford, Conn. Small companies feel its effects most intensely, and headhunters, once used mainly by big corporations, increasingly get called in to supply reinforcements.

Like any sophisticated logistics system, they're not cheap. Search consultants work either on a contingency or retainer basis. Contingency fees are the economy-class seats of headhunting: A search typically costs 20% to 30% of the annual pay of the person being sought, which is paid once the search is successfully completed. Some firms will take on searches for people making as little as $40,000 to $50,000 annually, so it's not unusual for a business to engage two or more firms in a quest for the best candidate. Retained searches, by contrast, cost a standard 33 1/3% of the placement's pay package and focus on top-level jobs. A third of that fee must be paid up front, before you even know who the headhunters will come up with. That's why clients engage one retainer firm at a time and--if they're smart--monitor the recruiter's out-of-pocket expenses and progress closely.

What's the arc of small-business activity in either category? Contingency searches have always played a role at small companies because they often lack a human-resources staff. But there has been a sharp surge in retainer work, say industry insiders like Peter M. Felix, president of the Association of Executive Search Consultants, and recruitment consultant Christopher W. Hunt of Hunt-Scanlon Advisors in Stamford, Conn. Much of the new business comes from high-tech startups awash in venture capital and also able to offer headhunters stock options in lieu of cash. Fully a quarter of Spencer Stuart's 4,000 annual searches are vc-backed startups, Citrin says. Adds Theodore B. Martin Jr., CEO of Martin Partners in Chicago: "The criteria isn't really `small vs. big business.' It's market cap."

To be sure, the rising use of search firms by small companies is due to more than just the tight labor market. Recruiters cite time pressure, especially at high-tech companies. "Headhunters are taking on more functions of human resources," says Roberts, now chief technology officer at Ion's parent, CDDB Inc. "The most valuable commodity we have here is time." Habit plays a role, too. When corporate types jump from big companies into tech startups, they're calling recruiters simply because that's what they've always done.

Of course, your business may have no corporate types on board. You may not be in the high-tech fast lane. And you may not have $100 million in revenue. But that doesn't mean you're priced out of the market. Take Barry A. Rosenberg, CEO of Econoco Corp., in Hicksville, N.Y. He recently hired three contingency firms to fill an operations manager slot for his $40 million, 100-employee company, which makes retail store fixtures. Rosenberg says his search firms aren't "Spencer Stuart stuff," just "a woman and a telephone." The winner: Corporate Search Inc., of Syosset, N.Y., which took three months to come up with the right person. The cost: $16,000, far less than a national firm might charge.

Some of these boutique firms will even bargain, a little-acknowledged fact in the search industry, confides Citrin of Spencer Stuart. Hunt says some firms charge 25% fees in return for a guaranteed block of four or five assignments. Citrin suggests using a "hybrid retainer" firm, which for a $150,000 search, might ask $15,000 down and $35,000 later. And specialized recruiters are simply going on the clock. In Roswell, Ga., an Atlanta suburb, Smith James Group Inc. has discarded its 33 1/3 fee in favor of a $125 hourly rate, with nothing extra for multiple hires. "It gives small companies an option to have quality work," says CEO R. Michael Smith, who adds that caps on fees can also be negotiated.

Jack Dayan, who runs a local telecom exchange carrier, Plan B Communications in Shrewsbury, N.J., found another way. In the days before his company had investors, CEO Dayan was so strapped for living expenses that he worked at a flea market on weekends. Yet he still managed to hire a retainer firm. How? By making his deal contingent on his first round of financing. Accounting and legal help came via the same route.

However you pay for a search, it's expensive enough to make you stop and ask whether you need help at all. Beverly Lieberman, president of Halbrecht Lieberman Associates Inc. in Stamford, Conn., describes her typical search client as one "ready to invest in some bench strength around the management team." Judy B. Homer, president of J.B. Homer Associates Inc. in New York, explains that growth often prompts the need to upgrade accounting and marketing systems, and to add e-commerce, which might require a chief technology officer. That's when you discover that maybe your great hands-on tech guy can't even spell "CTO," let alone act like one.

So you start your search with some do-it-yourself strategies, like newspaper ads and Internet services. Prepare for an earful from recruiters listing all the pitfalls. Much of it is self-serving, but they get your attention with their argument that your ideal candidate might not be job-hunting at all. That's where recruiters can help; the best ones are plugged into the industry and can network their way toward candidates you had never heard of or might not be able to reach--including people working for your rivals. Homer adds that a good recruiter not only knows how to locate talent but also how to interview it. If you think a router is a very big drill bit, you probably wouldn't pick the best chief technology officer on your own.

Recruiters can also act as buffers during compensation negotiations. This is often the touchiest part of hiring. The fact is, chief executives at the average company might have no idea what some specialists are worth--and they're in for a shock. "To get a chief technology officer of any class, they're going to have to pay almost as much as they're paying the president," Lieberman says.

What can go wrong? The obvious fear is that your fabulous new hire will be re-recruited. It could happen, but not by the same headhunter. The profession has a rule that forbids re-recruitment from client firms. A more realistic concern is that your recruit turns out to be a dud. Retainer firms' contracts guarantee another placement if anything goes wrong the first year; contingency recruiters will usually refund your money.

An even worse problem: The search firm itself is a dud. In fact, anywhere from 20 to 25% of all searches don't result in a hire, Hunt says. Mark Willner, CEO of Colorado MicroDisplay Inc., a 40-employee Boulder-based maker of displays for viewfinders and digital cameras, says he's one of the horror stories. The two retained search firms he has used in his odyssey for a sales vice-president "just haven't delivered," he says. The first search firm took his $50,000 up-front payment, then "pushed a lot of paper our way, gave us a lot of resumes," but "didn't take the time to come in here and understand our needs, our culture." A second, which ended up keeping half the fee, wasn't much better. Micro-Display ultimately filled the job itself.

When problems crop up, recruiters say they aren't always at fault--and some point to the client. "He may not have provided a clear strategy to the search firms; that's common with entrepreneurs with a lot of money," Hunt says. Nevertheless, AESC President Felix says recruiters ought to push clients to restructure a slot when it's not working out and tell them bluntly: "The best people wouldn't touch this job as currently described." But sometimes, the chemistry or family circumstances or the personal preferences don't work out. "One thing a search firm does is increase the odds of hiring good people; it doesn't guarantee it," says Michael J. Eckert, CEO of Video Networks in Roswell, Ga., a 70-employee company that digitizes video. He should know. Eckert is using a headhunter right now, and is himself the product of an executive recruiter. In his case, at least, headhunting has turned out to be a heads-up tactic.

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