Hungrier Times for Headhunters
It would be hard to find an industry that benefited more from the past decade's booming economy than the executive-search business. Unprecedented demand for executive talent, stimulated by the creation of countless dot-com companies plus a historically low unemployment rate, boosted revenues at U.S. search firms nearly 20% last year, to $8.3 billion, reports researcher Hunt-Scanlon Advisors. By the end of 2000, in fact, an estimated 5,000 search firms were operating in North America, according to industry researcher Kennedy Information Services, up from 1,859 only 11 years earlier.
Just as the peak of the business cycle took headhunters to new heights, however, so an economic trough can lay them low. And while some firms will fare better than others in the tepid economy of 2001, even the strongest aren't exempt from pain. Exhibit A: Korn/Ferry International, the nation's second-largest search firm, announced on Feb. 6 that it was lowering its earnings and revenue forecasts for this year, and that it would eliminate 10% of its positions to reduce costs. In a statement, the company attributed the cutbacks to a "rapid slowdown" in the economy.
BURST IN SUPPLY.
Among the forces affecting the industry, venture-capital funding is rapidly receding to more normal levels, reducing the number of startups that are shopping for marquee CEOs. Mergers in the dot-com and financial-services sectors could take a bite out of recruiting activity -- and at the same time put "a lot more resumes on the street," says Thatcher Thompson, who covers the industry for Merrill Lynch.
And a burst in supply may lead to moderation in compensation, thus affecting revenues of recruiters, who typically earn a fee equal to 33% of a new placement's first-year salary. Add it up, and Thompson is maintaining a neutral position on the stocks of both Korn/Ferry International and Heidrick & Struggles, the two largest search firms. (Heidrick & Struggles is a partner of BusinessWeek Online's Careers channel.)
Not everyone agrees with Thompson, of course. Barry Hollingsworth, director of investor relations at Heidrick & Struggles, says the firm hasn't felt the downturn so far: Its revenues climbed 36%, to $594 million, in 2000, up from $166 million in 1995. Other headhunters say they're also doing business as usual. "We haven't seen any major effects of the slowdown, but we don't do business with JP Morgan, Chase, or Honeywell," says Russell Reynolds, founder of executive-search firm Russell Reynolds Associates and current chairman of the search firm Directorship Search Group. "It's not crazy demand like it was before, but we still have growth," says Dale Winston, chairwoman and CEO of New York-based search firm Battalia Winston. "The dot-com bubble has burst," she adds, "but there will always be a need for talented executives."
PROMOTING FROM WITHIN.
Still, if economic conditions continue to worsen, even these firms won't go untouched. For instance, more corporations may look for seasoned talent within their own walls rather than fork over headhunting fees. "A retained firm's bread and butter is its long-standing clients who have executives leave and need somebody to replace them," says George Atkeson, a former partner at search firm Ward Howell International. "But as corporate profits start to go down, clients start combining departments or promoting people from inside."
Contingency firms, which generally focus on middle-management searches and get paid only after a candidate is hired, could also get hit this year. "Employers can do middle-level recruiting and are trying to because it's cheaper," says Thompson at Merrill Lynch.
To find qualified people on their own, more businesses are beefing up employee-referral programs -- paying for leads from insiders -- and going online to reach passive candidates. According to a survey last year of human resources professionals by jobs site CareerPath.com, 46% are using the Web to look for middle-management candidates. "The Internet will really squeeze contingency recruiters," says John Delpino, director of executive search at PepsiCo. E-recruiting will likely become an even more important tool for companies in the future. Forrester Research predicts that employer spending on online recruiting will grow from $105 million in 1998 to $1.7 billion in 2003.
In fact, Corporate America may be better prepared to handle its own hiring than ever before. During the past few years as the war for talent escalated, many large companies reorganized their hiring strategies to rein in executive-recruiting costs, according to David Lord, president of Executive Search Information Services, a Harrisville (N.H.) company that helps major corporations manage human resources. "Many Fortune 500 companies spend as much as $5 million to $10 million a year on fees to retained recruiters," he says. With bills like that, it's no wonder that such companies are trying to internalize as much hiring as possible.
Hewlett-Packard (HP), for instance, created its Americas Talent Acquisition Program (ATAP) last year to coordinate between its human resources departments around the country and stimulate internal hiring. According to program manager Michael Matteucci, the company now uses search firms to fill 10% of its available positions, down from 30% before ATAP was implemented. Coordinating recruiting across many offices also helps HP when it does deal with headhunters. "We expect them to offer discounts on commissions because we are a national company, [and] if they do business with us, they can do 20 searches as opposed to just one," Matteucci says. The company regularly pays fees as low as 20% of a position's first-year salary to retained search firms. Contingency firms often conduct searches for commissions that run as low as 12%, he says.
PepsiCo has looked within for leaders for roughly 20 years -- and today its talent-acquisition department fills more than 75% of its executive positions from inside the company. "We've done a good job of cross-functionally filling positions," Delpino says. PepsiCo can compete pretty effectively with executive-search firms, he says, but headhunters are still more efficient at finding top-level outside executives. Of the management slots filled by outside candidates, 35% are handled by PepsiCo directly and the remaining 65% by various search firms, he says.
Similarly, America Online hasn't used any retained search firms in the U.S. in the past nine months, says Michele James, the company's vice-president for talent acquisition. "We believe that no one can do executive search better than we can internally," says James, who was plucked out of Korn/Ferry to become AOL's talent guru last year. "AOL has the same brand recognition as Korn/Ferry, so we can contact outside candidates just as easily."
Combined with uncertain business conditions, empowered clients could prove quite a challenge this year for an industry that has enjoyed an unprecedented expansion. While he doesn't believe that search firms face a recession yet, longtime recruiter Russell Reynolds knows what to expect if one bears down on the industry. "The psychological effect is worse than the direct economic effect," Reynolds says. "You hear clients say, 'We don't think we ought to hire anybody right now because we're not sure what next quarter's gonna look like.'"
Korn/Ferry seems to have heard that message already. And if an economic slowdown lingers, more recruiters may join their axed colleagues from that firm and peddle a different kind of resume: their own.
By Edward Popper in New York