Headhunters Face a Double-Edged Sword

At the same time that companies have cut back on hiring, free networking services are gaining steam

Companies aren't hiring much, and headhunters feel the pain. Their situation, however, is even more dire than circumstances suggest.

L. Kevin Kelly, chief executive officer of executive search giant Heidrick & Struggles International (HSII), says his industry's business model "is broken." Beyond the economic downturn, high-cost headhunters are losing assignments as client companies take advantage of free online networking services.

Kelly, 43, says he has an answer, although it involves a huge gamble. He announced on Jan. 15 that the $620 million firm, which has placed top executives at such companies as Citigroup (C), Yahoo! (YHOO), and Merck (MRK), will drastically shift toward consulting on executive retention and related topics. Over the next five years, Chicago-based Heidrick will shrink executive search from more than 95% of its business to only 50%. It will let go of 200 employees, or about 12% of its workforce, resulting in a savings of some $31 million a year. Kelly also vows to slash real estate costs by 30%. He will shut offices, consolidate others and find new ways to capitalize on the fact that these days consultants are as likely to meet clients in a Starbucks or airport lounge as the corporate boardroom.

In the final three months of 2008, executive hiring contracted radically. The financial-services industry—typically one of the biggest profit generators for search firms—shed nearly 150,000 jobs, according to outplacement firm Challenger, Gray & Christmas. About 30% of Heidrick's revenue comes from financial-services clients. Korn/Ferry International (KFY), the other publicly traded search titan, saw a 40% drop in new searches in November.

"If companies are cutting people, they're much less likely to hire senior executives," says Timothy McHugh, a senior analyst at William Blair & Company. "The environment has frozen a lot of decision making."

In an effort to boost Heidrick's revenue per consultant from $1.6 million to north of $2 million, Kelly says the firm will train its people in new areas, such as advising clients on succession management. This shift will put the firm in competition with such management consultant powerhouses as Accenture (ACN) and McKinsey.

As Heidrick branches out, the firm could face questions about conflicts of interest. Consultants can learn client secrets, such as restlessness on the parts of key executives whom rivals might wish to recruit.

Kelly says his firm has "off-limits" agreements under which it promises not to poach talent in this fashion. "If a client is opening up the kimono and we know all of this confidential information about a firm, the last thing we can do is use that for new business," he says.

Heidrick's database of executives has been a closely guarded crown jewel for half a century. Now Web sites like LinkedIn, a social-networking service for professionals, are chipping away at that business. To fend off these competitors, Kelly is developing closed sites accessible only to clients looking for high-level executives. In September it invested in Board Recruiting, a service offered through the NASDAQ OMX Group that matches companies with a database of 3000 potential board directors.

Like its clients, Heidrick competes for the best talent. Kelly's new strategy has already drawn some top headhunters from rival firms. John Wood, formerly a partner at Spencer Stuart where he did 85 CEO searches in the last 10 years and helped place the current CEOs at Campbell Soup, Liz Claiborne and Hertz, just moved to Heidrick. "Kevin's vision of how this business model will evolve is evolving is pretty exciting," says Wood.

Simply cutting costs is not enough, argues the CEO. "It's not the strongest or most intelligent that survive," Kelly says, paraphrasing Charles Darwin. "It's those that are willing and able to adapt and change."

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