When you decide to hire a search firm and offer to pay them a fee only if you hire someone, you’re working with a contingent search firm. Most entrepreneurs and business managers are familiar with this contingent search model, and many of us have employed a search firm at least once over our careers.
I’m going to challenge you over the course of the next 1500 words or so to unlearn everything you think you know about headhunters and search firms - forget every experience you’ve ever had dealing with them, good and bad - and consider what I’m about to tell you.
The contingent search model is dead.
I’ll even go one step further - in five years, the traditional contingent search model will be gone. Vanished. Blown up. Totally absent from the recruitment landscape.
My prediction isn’t based on voodoo science and guesswork, folks. It’s based on a combination of well-known facts and some simple analysis of what drives the need for recruitment services. While I believe that mom-and-pop contingent search firms will weather the storm based on the power of personal relationships, I think the big firms are in big trouble if they don’t get their act together. I offer up three arguments to support my theory:
1. Recruiting is no longer about who you know. It’s about throughput. The Internet turned the recruiting world on its head, but we’re only now seeing the impact of the Internet on the traditional contingent search model. Three game-changing innovations arrived on the scene over the course of the last 15 years that have forever altered the recruitment landscape, and have changed the balance of power from a few search firms with their padlocked Rolodexes to Joe and Jane HR Generalist, who can now access anyone at anytime with the click of a button.
The first innovation came with job boards like Monster.com. Before job boards, a recruiter’s tools were a phone, a company directory (obtained by any means necessary!), and chutzpah. Candidate research was tough, tedious work - cold call after cold call, often requiring incredible acting ability (”Hi, I’m an employee with a computer problem , can you transfer me to someone at the help desk?”). With job boards, recruiters simply logged in to find everyone who was actively looking for work. Blue-blooded search firms scoffed at the idea. The rest of the recruiting world dove in head-first. Today, we have 1000’s of job boards containing over 30 million active job-seekers by some estimates.
Social networking was the second major innovation, and came roaring into recruiter’s lives in the early 2000’s. Now recruiters could replicate a corporate directory in about ten minutes by simply browsing sites like LinkedIn for people working at their target company. LinkedIn now has almost 20 million registered users, growing geometrically. Pop quiz: over the next five years, will it become easier or harder to find people using sites like LinkedIn?
The third major innovation is just hitting us now, and that’s the arrival of data aggregation tools like TalentFilter and ZoomInfo. Job boards, social networking sites, and the explosion of Internet content such as corporate blogs have served to create a massive amount of information that must be found, sorted, and delivered to the right eyeballs. This is where the aggregator tools come in to play. Aggregators mine the Internet for relevant data - like resumes - and return the results back to the user in seconds. Right now we have two kinds of aggregators floating around cyberspace, available for your use: job board aggregators and content aggregators. TalentFilter is a job board aggregator that enables a user to simultaneously search over 10,000 fee-based and free job boards (including Craig’s List and LinkedIn), and will return results that are scored and ranked. ZoomInfo is a well-known content aggregator that will search the entire Internet (excluding job boards) and return relevant information about candidates who may be a fit for your position. Both of these types of technologies can replicate a recruiter’s Rolodex in about 5 seconds.
Which brings me to the issue at hand - the massive change going on in the recruitment business model. Pre-Internet, search firms would charge you 30% of their candidate’s base salary to access their network of potential candidates…and it was worth it. Back then. Now, those Rolodexes have substantially decreased in value. These recruiting technology innovations have served to greatly increase the amount of candidate information available to a corporate HR team, and HR departments across the country are now dealing with a huge influx of data. Their problem is no longer “how do I find someone for this job,” it’s now “who can help me sort through these 250 resumes?” That, my friends, is a throughput issue, not a recruiting issue. And throughput issues are solved with efficient and low-cost operating models.
“But what about the value of personal relationships?” They still have value, and will be the chief reason why mom-and-pop contingent search firms will probably survive into the future. But the big mega-firms like Robert Half are going to have a hard time justifying the fees when everyone in the world knows that all they do to generate candidate data is to search the job boards 90% of the time. Someone can, and is, offering that service for a lot less money.
2. The contingent search model does not have its clients best interests in mind.
The contingent search model stipulates that you, the client, will pay a fee only if you hire a candidate from the search firm. If they don’t send you anyone, you don’t pay a fee. Sounds too good to be true, doesn’t it? It is.
To find out why, let’s look at the underlying economic incentives that drive the contingent search model. If I’m a recruiter at a search firm, and I only get paid if you hire someone, then I have a strong incentive to send you good people. That’s good for you, the client, right? Well, yes and no. Yes, if you’re willing to pay my top fee of 30%. No, if you’ve negotiated a reduced fee of anything less than that. You see, the amount of the fee drives which candidates that I, the recruiter, send to you.
Let’s say I’m a recruiter, and I have two enterprise software sales candidates who are on the market for a new job. Candidate A is a verifiable superstar - W2′d at over $250,000 each of the last 3 years, and has exceeded quota every year for the past seven years. This candidate is any VP of Sales’ dream. Candidate B is a good candidate, but isn’t quite as good as Candidate A. They’ve W2′d in the $150’s for the past two years, but had a few below-quota years in the last five years. This candidate is a solid B-Player.
I (the recruiter, in this example) have two clients, each of whom has given me an order for an Enterprise Software Sales executive. Client A has told me that they’ll pay a fee of 30% for a successful hire. Client B negotiated me fee down to 20% for a successful hire. Ask yourself this question: what incentive do I have to send my superstar candidate to Client B? If you answered “absolutely none,” you’re well on your way to realizing why the contingent search model doesn’t have your best interests in mind. Negotiating a lower fee with your search firm all but guarantees that you’ll see the B-level candidates. Do you use a lot of search firms? Do you negotiate fees? Are you frustrated with the lack of quality candidate flow? Are you wondering why you haven’t heard squat from your search vendor since you placed the order? It’s because someone out there is paying more than you are for the same work.
No business model that has a has baked-in performance bias as its cornerstone will survive over the long run, unless the companies touting the business model work only with premium clients. And there are less and less of those clients every year.
3. There’s too much recruiting capacity in the marketplace. The costs of delivering high-quality recruitment services have dropped substantially over the past five years, but pricing from the mega-firms to their customers has remained relatively flat. Recruiters today are awash in tools and resources that make their jobs more efficient, but the mega-firms haven’t kept up by improving the efficiency of their operations. A quick glance at the largest publicly traded search companies out there (Robert Half, etc) paint a picture of rising revenue and costs rising at the same rate. Overall earnings remain steady in the 10-11% range.
A whole new generation of recruiting firms are arriving on the scene, and these firms are able to make the same 10-11% EBIT on approximately 1/3 the revenue on a per-unit basis. Yes, you read that right. Next-gen search providers are generating the same earnings percentages for the same work, and are charging 1/3 to 1/2 as much as their mega-firm predecessors. It doesn’t take a Harvard-trained MBA to figure out that a company that charges twice as much for the same work as the new entrants into the marketplace is in for a nasty period of restructuring. Just ask United Airlines how low-cost fares have impacted their business model.
Comparing the traditional contingent search firms to the old guard of the airline industry isn’t much of a stretch. In the airline industry, travellers realized that they could get from Point A to Point B at a third of the price. In the recruiting industry, clients are realizing that low-cost search firms like Chicago-based illuma can deliver outstanding candidates for a third of the cost, and without the implicit conflict of interest that we discussed above. The large search firms are already seeing their clients begin the migration to low-cost search providers, and they’re in denial if they think that this trend will do anything but accelerate.
It’s basic business theory that large profits attract competitors, and the low-cost search space is in the first stages of that very dynamic. Entrants are flocking to the market, including RPO firms and offshore sourcing companies. There are thousands of new firms competing with thousands of existing contingent search firms for the same work, and one side is twice the price. Whom do you think will emerge the victor?
The recruiting industry is also similar to the airline industry in that there are now too many providers in a marketplace that’s experiencing falling prices. Anyone not convinced that this situation is problematic should open their history books to the chapter titled “Telecom Companies: 2001-2003″.
The Future of Paid Search
The future of the recruitment industry is predictable: lower prices per search, excess capacity being squeezed out of the system, weaker players existing the market due to falling margins. The mega-firms will buy up the new entrants when they realize that they’re on the wrong side of the bet. The RPO model won’t be the winning one, because clients won’t pay for the amount of work required to deliver results. Job boards will proliferate. Retained search firms who are focused on C-level searches will emerge relatively unscathed. Offshore recruiting firms will fix the communication issues and give their US-based competitors a run for their money.
What will be absent from the future of paid search is the traditional contingent search model that dominated yesterday’s landscape. You heard it here first, folks:
Contingent search is dead.
Hi. I am a long time reader. I wanted to say that I like your blog and the layout.
Peter Quinn
September 10th, 2008 at
Thanks for reading! I checked out your blog and liked the layout, as well! Great minds think alike.
September 11th, 2008 at
[...] The Death of Contingent Search [...]
October 10th, 2008 at
Good thought provoking article.
How do you see the demand for contract in house
recruiters to do the searches, screening and interview
setting for employers? I know it is all about “cost per
hire” and contracting specialist in house may be the
best at that.
-RKO
October 12th, 2008 at
Ray - thanks for reading. I believe that the demand for talented, relationship-driven recruiting professionals will only increase over time. I’ve been seeing many larger organizations segment their contract recruiting force into two funtions - recruiting and candidate coordination. Contract recruiters, being the higher-paid of the two roles, are being focused on the candidate development side, while the coordinators manage the screening and interview setting functions.
The problem with using contract recruiters is scalability. A US-based contract recruiter with 5-7 years of experience will run you $50-60/hr. Let’s call it $50/hr, which equates to about $8000/mo. If an organization has fewer than 10 concurrent roles open at any one time, then one contractor might suffice. However, if they have 10, 20, or 50+ concurrent roles open (and that’s not most of us here who read this publication!) then scaling a recruiting operation with contractors can be prohibitively expensive.
–Adam
October 13th, 2008 at
Adam,
I think some of your observations are very valid, but I believe there will still be a place for the contingent model, that model will simply change slightly. Your article even alludes to this point by pointing out that under certain circumstances contingent businesses will prevail. So “Death” is perhaps a strong word. I am with you regarding large firms. The low skilled, high call volume based recruiters offer me no value and I won’t be sorry to see the back of them. The interesting thing is that more search firms are offering headhunting on a contingent basis, allowing companies to tap in to a very targeted community without the traditional costs of retaining a search firm.
Over 90% of Job Boards advertising is currently posted by contingent recruiters. Without them the business model the Job Boards are following would be unsustainable and the cost of employers using these service to drive direct interest in their roles would spiral to a point where it would become less viable. Besides this, the use of the Internet by candidates is changing. ALL of the big job boards are currently spending millions in TV & Radio advertising to address the issue of falling subscription rates amongst the candidate communities. Many of the incentives for employers using the Internet to attract prospective employees have been in place for the last decade and the take up has not had a significant impact on search businesses. In addition all of these online businesses face their own challenges, which will have an impact on the recruitment landscape in the future.
Your comment about throughput is in part a valid one. But it is not just about bandwidth it is about knowledge as well. Your suggestion that low cost (and by implication low skilled) operating models can solve this problem ignores the fact that there is a requirement for knowledge to pick good from bad candidates. Recruiters are being paid to provide a service to businesses by offering this knowledge. Granted many of them don’t add a great deal of value and it is here that I see the largest changes taking place in the contingent model. I see the market knowledge and technical skills of recruiters improving and recruitment businesses that are encouraging this will thrive. Competition in the market and the ability to tap in to a direct source of information helps drive more competitive commercials with agencies and will increase the number of non-agency hires both contributing to significantly reduced costs. But I believe the market will continue to have a need to rely on contingent firms for certain types of critical hires (not just executive) and during certain phases of their growth.
Finally fewer candidates are working exclusively with one firm to assist them with their search for work. In addition more companies are working with fewer and fewer recruiters, so the idea that a search firm wouldn’t send you there best candidates because they can earn more money by placing them elsewhere will only work in a situation where a candidate and the prospective target companies for that candidate are working together under exclusive arrangements.
A great, thought provoking article though.
November 4th, 2008 at