What Do Executive Search Firms Charge?

Most of the people in my neighborhood have never used an executive search firm, they are doctors, teachers, dentists, college professors, and government workers. They work in organizations where it’s incredibly uncommon to use executive search firms.

Even in Washington’s huge nonprofit and association market, where the use of search firms is prevalent, some organizations choose to engage search firms very rarely. We regularly work with people who have never engaged the services of an executive search firm before. So naturally people have questions about who pays (the employer always pays), when the fee is due (it depends on the search firm), how much the fee will be (it depends on the search firm), what services are delivered (it depends on the search firm) and what replacement guarantee is in place if the placement does not work out (it depend on the search firm).

Let’s start with fees. Search fees vary widely depending on the business model the firm uses.

Retained executive search firms typically charge 25 – 33% of the estimated total annual compensation a candidate is expected to receive in their first year in the position. (Many search firms include first year commissions and bonuses in the estimated total compensation figure, but not the cost of benefits.) Some portion of the fee is always due when the search commences, but the final fee is often dependent on what salary the candidate accepts. So if a search firm charges 30% of annual salary and places someone earning $100k, their search fee will be $30k. But if that same candidate negotiates for a starting salary of $110k, or a salary of $100k with a sign-on bonus of $10k, the search fee would rise to $33k.  Additionally, some firms charge back their expenses to the client, so the total fee can easily rise to 35% of total annual compensation. Staffing Advisors is a retained search firm, but instead of tying our fee to the candidate compensation, we prefer to charge a simple flat fee with no charge back for expenses. We set our fee in advance of the search based on the level of effort we anticipate, and our fees are typically 15% of less of total compensation. Like many retained search firms, Staffing Advisors handles executive searches in a wide variety of functional areas (and not just Accounting, or IT, or HR). Consistent with most retained search firms, we offer a replacement guarantee of a full year if a placement does not work out for any reason.

Contingency search firms do not guarantee to fill positions, but if they do, their fees are often between 20 and 25% of annual compensation. Contingency fees are usually due only after the candidate starts work, so if nobody is hired, no fee is due. Some contingency search firms are even willing to negotiate placement fees, but negotiating lower fees can sometimes result in a lower level of effort being spent on your search and a lower chance of filling it. Contingency based firms tend to specialize in one functional area (like accounting). If a placement does not work out, contingency search firms typically offer replacement guarantees from 30 days up to six months.

Some firms take a hybrid approach of requiring some portion of the fee in advance, and making the remainder contingent upon the placement. They key for you as the buyer is to understand which business model best suits your needs. For more insight into the differences between retained firms and contingency firms, read Contingency vs. Retained Search, Common Fallacies.

Want Better Hiring Results? Shift Your Perspective

“If we’re paying a search fee, then I expect to find someone who can really ‘wow’ me,” the Director told me in my morning meeting. “I’m not going to settle.”

Later than day I met with another client to discuss their new search. The COO was explaining her expectations, “I want to see qualified candidates from a variety of backgrounds, so we can compare them.” She outlined how her very stable team would benefit by including new people with diverse perspectives.

The simple act of paying a search fee dramatically raised the expectations of both hiring managers.

Think about that for a moment.

When you post an ad on a job board, you hope to get someone good.  That’s your hope, but you’ve learned not to expect much. When you “industrialize the hiring process” (like posting ads, letting HR process the responses, and only interviewing the people who happened to notice the ad, and who took the trouble to apply) your hiring managers know they should lower their expectations. And when you lower the caliber of people you hire, you are forced to spend more time managing average people.

Alternatively, when you invest more effort in your hiring process (either by investing in your internal recruiting process, or by engaging a search firm), you come to expect more .. so you end up hiring more exceptional people, and getting higher productivity with less management effort.  (Managing high performers is not easy, but it’s far less exhausting than managing low performers).

When you pay a search fee, you feel like your money would be wasted if you only saw people who were good–you want someone great. In fact, you don’t just want someone great, you want to know you hired the best possible person, so you expect to interview people from a variety of backgrounds. This diverse outside perspective helps prevent the kind of stale, insular mediocrity that follows the phrase “5-10 years of experience in our industry.”

So if you want better hires and more productivity with less management effort, shift your perspective. Invest in your hiring process. Trust in the fact that organizational commitment follows money–when you invest more money in recruiting, your managers will invest more energy getting the hiring exactly right.

What High Performing Organizations Do Differently

Imagine a problem has just occurred that will cause your company to lose $15,000 per month in revenue, and might soon cause a string of similar problems. Which solution to the problem would you choose?

Solution A) This solution has no upfront costs, but it diverts your internal resources away from their current work, takes 4 months to implement (costing $60,000 in revenue) and is projected to lose an additional $24,000 during year one, with the likelihood of continuing losses of $36,000 per year thereafter. This solution has a 50% chance of failing completely and if it does fail, it might trigger a cascade of similar problems.

Solution B) This solution has an upfront cost of $15,000 (which was not in your budget). It requires no diversion of internal resources, and takes 2 months to implement (2 months faster than Solution A). By the end of year one, Solution B will recoup the $30,000 revenue lost during its two month implementation, and is likely to generate an additional $36,000 in annual revenue thereafter. Solution B has a performance guarantee, and significantly reduces your risk of this problem cascading into other areas.

If Solution B seems like the obvious choice, let’s review what happened the last time a vital person with hard-to-find skills resigned from your firm.  Did you consider using a search firm to fill the job?  If so, did the conversation sound like this? “I hoped our HR department might be able to find someone to fill this job. We thought if we could handle the search internally, we might save money on search fees. And if HR failed, we could always hire a search firm later.” Or, perhaps your internal deliberations sounded like this? “We did not budget for any search fees, so we had to do it on our own.” Both conversations probably sound familiar, and on the surface they might even sound reasonable. But when you look carefully, you realize that that both conversations make the same four assumptions. They assume:

1. There is no cost to leaving a position vacant. There is zero cost to the lost productivity of both the employee and the team.
2. There is no risk to leaving a position vacant. Under-staffing and over-working the current team will not result in any turnover risk. Zero.
3. Any hiring process that results in a hire is just as good as any other. A hiring decision will be just as good whether you have only one candidate to consider, or a full slate of 6 qualified people.
4. Any person hired in this job will deliver equivalent results. There is no difference in productivity or performance between an “A player” and a “C player.” Zero difference.

So if all four assumptions are laughably wrong, how did you ignore them in your decision making? Research shows exactly why it happens. Recruiting costs are very easy to calculate, but it is far harder to calculate the cost of not hiring, and harder still to calculate the cost of hiring badly. When faced with that kind of complexity, busy executives look at what they do understand (recruiting costs), and ignore what they don’t understand (the cost of hiring slowly and badly). The snap decision becomes: “We can’t afford to pay a search fee.”

High performing organizations are different. Because they have specific performance targets to meet for every position, the cost of not hiring (or hiring badly) is far more obvious. So they have an easier time balancing their recruiting costs against the return on investment of making a good hire quickly.

This is exactly what our Solution A and Solution B example did for you above. With good information, the trade-offs were easy to make. It was the gathering of the information that was complex. (Which is precisely why so many people will skip the next section of this post and just read the conclusion).

Dealing with a Work Avalanche

Are you feeling overworked and understaffed right now? You’re not alone. Under-staffing is common during this stage of the business cycle. Some people think it is a long-term trend–calling it the “Job Squeeze.” Perhaps it is. I do know that work pressure has been building quietly for years in many organizations–like snow falling on mountaintops. And when something small triggers it, you are suddenly faced with a “work avalanche.”

Here is how work avalanches are created: When confidence is low, your organization responds to good news differently. You try to grow without corresponding staff growth. Headcount starts to trail revenue growth, and then falls further and further behind. Good news for the organization actually becomes bad news for the team. They were overworked before, and “good news” just makes it worse. Every new contract, new client, and new project just makes it harder to keep up.

How do you know you waited too long to add staff? Your best people are getting sick more often. You are seeing more preventable mistakes being made. Small issues cause tempers to flare, people are less tolerant of each other. They take things personally. Work just seems less fun. And eventually your best people burn out, give up, or quit–triggering an avalanche of work on the remaining team members.

Here’s the thing. Often, when you force your team to “do more with less” they are not doing more. They are making trades. They are trading long-term thinking for short term thinking. They trade planning time for reaction time. They stop making deposits into the relationship bank, and start making withdrawals–using up the goodwill they’ve built over many years. And the cost of that short term focus builds up… like snow building up on a mountain. Eventually the bill comes due in a work avalanche.

Here is what to do about it: When your hiring fails to keep pace with your growth, you can no longer afford to drag out the hiring process. But when confidence is low, that is exactly what happens. “Let’s try it first on our own, before we put it out to a search firm.”  Three months later the team is exhausted, frustrated, and at wit’s end. In your cautious desire to save money, you not only lost time and focus, you created even more risk–from people quitting.

Newsflash: When you are chronically understaffed, nobody on your team has the time or energy to do hiring on their own. When you are running from a work avalanche, you don’t want to make your backpack heavier.

If your business strategy requires you to keep staffing levels lean, you must be prepared to hire very quickly when you get good news. Either beef up your internal recruiting capabilities, have qualified contract workers on speed dial, or be ready to call in search firms the instant you know you need help.

Because standing still is not a good strategy when an avalanche  is bearing down on you.

An Executive Search Firm Leaving Money on the Table? Huh?

Let’s play a word association game.  I’ll say a phrase and you think of the first thing that comes to mind … Ready? 

“Retained Executive Search Firm”

Hey, by any chance did the words  “bargain” or  “great value for the money” come to mind?  No?

The Economist recently published a jaunty little analysis comparing the societal benefit generated by IBM during their first 100 years of existence, vs. the benefits generated by that “flagship of American philanthropy” – the Carnegie Corporation.  And while it was an odd pairing,  it was a fascinating perspective on how corporations can potentially make a larger positive impact on society than even a major philanthropy.   (Key word: Potentially)

In gauging the impact of IBM, the article used a term I had not heard before - ”consumer surplus.” 

“… companies create what is known as “consumer surplus”—the difference between the market price and what a consumer would be willing to pay. This surplus benefits society, not shareholders.”

Southwest Airlines and Costco regularly create a consumer surplus.  Lots of organizations are organized to generate a consumer surplus.  You recognize it as a customer when you get that thrill of feeling smart – knowing you are getting more than what you paid for.    But to create it, a company has to “leave money on the table” and not harvest every last nickel from every last transaction.   Companies must design their process to leave money on the table … on purpose.

Creating consumer surplus is definitely not something that most retained executive search firms are good at.   (If you want to understand why executive search remains so stubbornly expensive, read my post in Fistful of Talent about the two biggest myths in executive search).

How Corporate Recruiting Budgets Are Wasted

A big chunk of corporate recruiting budgets are wasted … but not by HR.  It’s the hiring managers who lay flame to it with actions like starting the recruiting process without a clear job definition, stacks of resumes going un-reviewed, and indecision with scheduling interviews.  

But does HR get any credit for allowing hiring managers to be so reckless? Heck no.  The Corporate Executive Board is reporting that fully two thirds of hiring managers are dissatisfied with the influence recruiting has on their organizations.    

If you work as a recruiter in a large organization, you work at a massive disadvantage.  If your hiring managers are unresponsive, unrealistic, or indecisive, you still have a responsibility to fill their job openings.   Sure, over time, smart recruiters can build influence with hiring managers … but they rarely have the clout to say “Sorry Jim, your search is not workable until we resolve these issues.”

As the owner of a retained search firm, I have recruiting advantages that most corporate recruiters would kill for.  First I can improve a process, introduce a new productivity tool, or allocate more recruiting resources whenever I want to. But more importantly, I can choose what searches we accept.  Before a client engages us, and before we accept a search, we spend two hours with all the hiring stakeholders:

• We have time to discuss the year one performance expectations, challenges, and what a top performer would find attractive about the job.
• We can review ideal candidate profiles with the hiring manager, so we know how they will evaluate resumes.
• We can put time on everyone’s calendar for interviews, and everything else we need to move the hiring process along.    That’s right, we pre-schedule interview time, so we don’t have to beg for hiring manager time later in the search. 
• We can align salary expectations with market realities, and make the necessary trade-offs that happen in every hire – but we make them before we start recruiting.

We require the ability to make these critical trade-offs before we start recruiting because we know that faster hiring speed cuts the total cost of recruiting in half.

Why is Executive Search so Expensive?

Once upon a time, twenty years ago, in a backwards country called telephone-land, all your news came from a thing called a newspaper.  And all your mail was delivered by the postal service.  And the telephone (land line of course) was the fastest way to reach someone.   Yes, twenty years ago, finding candidates and presenting job opportunities over the phone was a pretty expensive thing to do - so executive search services had to be expensive.  

But now, if you live in a place I call “the world,” your news comes to you on your computer, most of your mail comes to you on … your computer (or your phone), and, if you still have a land line, your telephone calls disappear into a place called voicemail.

So if all the technology to find and reach candidates has changed, why is executive search still so expensive?

There are two big myths that have prevented executive search firms from using technology to lower the price of executive search.   But you’ll have to read my guest post on Fistful of Talent to find out what they are.

Who’s That Driving Around in Your Employment Brand?

Hiring managers, who is that behind the wheel of your employment brand?  You’ve had 5 internal meetings to discuss the language on your new website, but then you hired a contingent recruiter to work on your job opening after talking to them on the phone for what, half an hour?  

What exactly are they telling people about you, your company, and your open job?

When you engage a search firm, you hand over your reputation as an employer.  They are authorized to represent you (for the duration of their engagement).  It’s like handing over the keys to your car … with your company name emblazoned on the side of it.  They ARE your employment brand while they are behind the wheel.   And remember, they are talking to a lot of people about your company.

So how much control do you have over what they say?  In most cases, none at all.  So yeah, you probably want to know who you are dealing with, what their reputation is, and precisely what they will say about your job opportunity.

At Staffing Advisors, we craft a written marketing message for you, and give you a chance to look it over before we use it.  (You told us that you offer great work/life balance, but really don’t want to want to over-promise that?  Ok, no problem, we’ll delete that sentence…).  We want to be sure the message sets the right tone for skills, performance expectations, cultural fit … everything.  

Then, when we deliver the message, someone with real credibility reaches out.  Kelly Dingee, our Strategic Recruiting Manager has real digital credibility.  She writes well enough to meet Jessica Lee’s demanding standards at Fistful of Talent (no easy feat), she was named one of the Top HR Digital Influencers by John Sumser over at The HR Examiner, and then publicly praised this week by both Kris Dunn and Glenn Cathey - that’s doing pretty well with HR’s digital royalty I’d say. 

So yeah, Kelly looks legit when she reaches out to someone.  And that is reflected in how people respond to her.  (Test this for yourself.  Google the name of whoever you are trusting with your brand.  That’s what smart candidates do before they respond.  So how does it look?) 

We’ve connected with over 25,000 candidates this year (people who were referred to us, or people we reached out to).   I hear about every single person who has had a complaint with the service.  This year, I talked to less than a dozen disappointed people – that’s less than one in two thousand who had a complaint - and remember, 24,900 of those people ended their experience with us by getting a rejection letter.   

I’m not saying you need to hire us to protect preserve and defend your employment brand (although that is an excellent idea), and I’m not bashing how other search firms do business (Relax third-party recruiters, I’ve said for years that the contingency search model is perfectly valid).

 I’m just saying you need to think harder about who you let drive your reputation around.  Because it matters more than you may realize.

3 Year Retention: The Hardest Measure of Search Firm Performance

Some people say the real measure of a search firm is their repeat business rate. How many times do their clients hire them again?   I really like that measure -  75% of our work comes from clients who have engaged us for 3 or more searches.   That’s an easy, fun measure.  But repeat business is not the hard measure. 

No, the measure I really sweat over is retention.  How many of our placements work out long term?

Most search firms can tell you their placement retention rates.  If you ask, they will tell you how many of their placements lasted through the guarantee period (often 3 or 6 months), or how many placements lasted a full year.    But we place most of our candidates at the Manager, Director and VP level, and at that level you rarely get fired within a year.   People might quit for a variety of reasons, but except for egregious circumstances, most employers will not fire an executive during their first year – it just takes more time to see the results of their work.   So for an executive,  the one year retention rate is really only a measure of hiring disasters, not productivity.  

Eighteen months is when I see executives really being held accountable.  (Incidentally, when looking at resumes, if I see a pattern of 18 month jobs, I become concerned that the executive is leaving organizations just when they are supposed to be delivering results – it’s a huge red flag for me).   So eighteen months is still not quite long enough to track retention.

We track our retention numbers for three full years (and not just for executives, we do this for every position).    Three years gives us a much better understanding of whether a new hire was a good cultural fit and whether they stuck around long enough to make a significant contribution to business results. 

And just to make it harder on ourselves, we don’t just track the numbers, we publicly share them.  In December of 2009, I committed to share our retention statistics on this blog every year when we compile them.   (It takes us some time to assemble the numbers -  we’ve placed well over 200 people over the past 4 years).  

In the midst of a recession, I was sorely tempted to exclude layoffs from the statistics, but layoffs often mask performance concerns, so excluding layoffs just seemed like a way to boost the numbers.  So we count layoffs against our statistics (and yes, it drops our results by 2 full percentage points).

So, as promised, here it is.  As of December 2010, our retention stats are:

• 92% of the people we’ve placed are still on the job at 12 months  
• 90% of our placements are still working where we placed them 18 months later 
• 84% of our placements have lasted 3 years or longer 

84% retention at the 3 year mark is astonishingly high by industry standards.  But last year our 3 year retention rate was even higher – 85% – so we’ve slipped a full percentage point this year.   People tell me that’s pretty good for a recession … but my real concern is 2011 – while there will be fewer layoffs, it’s going to be a huge year for employee turnover.   And although we continued to improve the accuracy of our hiring process, we’ll be hard pressed to improve our overall retention rates in the face of all the economic forces driving turnover next year. 

You can look at this blog next December to find out how we did.

What Exactly Does A Search Firm Really Do For You?

Hiring managers are often disappointed with search firms.  

Not coincidentally, search firms are often disappointed with hiring managers.    

The root cause of this mutual disappointment is often a simple matter of unmet expectations.  And it starts with a (big) unexamined assumption about what the search firm is expected to do for you once you engage them.  So what, exactly, are your expectations when you hire a search firm?

If you are like 9 out of 10 hiring managers, you will say you expect them to ”find the best candidates for the job” – end of story. 

If they do that, you are happy, right?  

Except quite often you are not happy when all they do is find the best candidates.  Like when the “best candidate” turns down a second interview with you, or takes another job, or when all the best people have salary expectations 30% more than you budgeted.   Yeah, if only hiring were so simple (Step 1:  Find good people  Step 2:  Hire them).

So, while “finding the best candidates” is undeniably important, it’s really just a fraction of the value a good search firm should bring to the table.  The reality is that finding great people and getting them to take an interview is, at best, a fourth of what you should be expecting from your search firm.    If you want to break the cycle of disappointment and make better hires, you need to expect more.

So here is what to look for in a search firm (or internal recruiter) beyond raw recruiting ability:

• Market Knowledge:  A great recruiter should be able to share job market information – so your expectations are in line with market realities.   (HINT: You may not like it, but if they always agree with you, or if you never learn anything in talking with them, that is a sure sign that you are not talking to the right recruiter.  A recruiter who “goes along” with a hiring manager’s unrealistic market expectations is doomed to waste precious time on a long, protracted search failure. )
• Candidate Assessment: A great recruiter should not only help you clarify what you are looking for in a candidate, they should also help you understand how to assess each candidate, and work with you to develop a rigorous screening process to evaluate each person on their merits.  They should challenge your unconscious biases so you consider “out of the box” candidates, play devil’s advocate when you “fall in love” with one candidate at the expense of considering others, and help you carefully look at each candidate from all angles.  (They should not be “selling you” on any one candidate, but rather challenging your thinking.  They need to encourage you to look beyond the superficial, easy answers and dig into whether the person is truly a good fit for the organization. In short, you want someone who treats executive search like a process, not a “sale.” )
• Decision Support:  A great recruiter should be brilliant at managing the hiring decision process, gathering the key players, forging a consensus and getting to the hire/don’t hire decision in an orderly, methodical fashion.   (They should not sit back and hope that you get around to making a decision in a reasonable timeframe.  They need to be a catalyst for action – to ensure that the hiring project runs on a predictable schedule and does not get sidelined by other matters.  If they don’t appear “pushy” from time to time, they are being too passive.)

A great recruiter should be a full business partner – contributing  business acumen and executive judgment on a par with the hiring manager.  If they cannot contribute at this level, find another recruiter.  Similarly, if you do not trust your recruiter to play at this level, find another recruiter.  

Now here is the real question, once you find a great recruiter (or executive search firm) who provides all this value, are you actually willing to listen to them?

Whose Problem is That?

It is said that “success has many fathers, but failure is an orphan.”  When you make a great hire, everyone takes some credit.  But when you fail, well, there is always plenty of blame to go around -  nobody ever takes full responsibility for the bad hire. 

Because hiring involves so many people, no one person ever seems to “own” it in a small firm.  The rogue hiring manager gets away with bad behavior, the HR department can often avoid responsibility for lackluster recruiting, and nobody corrects the CEO when they are out of touch with job market realities.

If you want to end the blame game and instead bring real predictability to your hiring, you need to decide who is responsible for solving the thorny problems that usually lead to hiring failure.  Problems like these:

• When a hiring manager has not thought very deeply about the position they want to fill, whose problem is that to solve?
• When your job description does not square with market realities (10 years executive experience and willing to do entry-level work for low pay) – whose problem is that to solve?
• When your recruiting and outreach efforts fail to find at least 6 qualified and interested people in your price range - whose problem is that to solve?
• When your hiring process drags on for months - whose problem is that to solve?
• When a hiring manager repeatedly selects the wrong kind of  candidates – whose problem is that to solve?

You get the idea.  Someone has to “own” these kinds of problems, or they will persist for years, sapping the strength from all your recruiting efforts.     

Oh, and one more thing?  Before you engage a search firm, ask them who they think is responsible for solving these kinds of problems.   

While many search firms (like ours) actually enjoy resolving these complex issues, many others limit their role to candidate recruiting and would not dream of ”intervening” in your hiring process.   While there are valid arguments to be made on both sides of that debate,  you – the buyer – need to understand what to expect in exchange for your search fee.  Confusion often leads to disappointment, and a continuation of the blame cycle.   (You might also want to read our previous post on the differences between contingency vs. retained search)

Why Pay a Search Fee When You Can Do it Yourself?

My new clients are often referred to me when they are at their wit’s end.  When they have looked and looked everywhere to find that one great employee and have been disappointed.  

They come to me when they are frustrated by their own search process dragging on month after month without success.  Only then, do they reluctantly consider paying an agency fee to get some assistance. 

“Well of course!” you say.   ”Search firm fees are so expensive!  Why pay someone else to do what you can on your own and save all that money?” 

Let’s examine the logic there.  

• First, is a search firm really just doing the same thing you would do?  Are they just saving you some work -  or is their approach to recruiting fundamentally different than your approach?  If they are just doing the same work you are doing … with all due respect, you are using the wrong search firm.   Your search firm needs to know a heck of a lot more about hiring than you do.   Not just recruiting – because great recruiting is not enough.  No, a search firm needs to fully support your entire hiring process  (your hiring managers are stressed and understaffed, remember?)
• Second, are you really saving any money filling your most critical positions  by yourself?  Leaving a critical position vacant for 4 to 6 months – producing no results, inflicting barely qualified candidates on your understaffed hiring managers,  forcing your already understaffed HR team to spend days plowing through a numbing mile-high stack of bad resumes instead of doing productive work, creating ill will among hundreds of job seekers who did not even receive an acknowledgement of their job application … only to end up hiring some ”best of the worst” mediocre candidate.   Yeah, that sounds like the pinnacle of fiscal prudence right there.  Hey, just because your hiring problems are not visible on your profit and loss statements does not mean that poor hiring practices aren’t costing you a fortune.

So if “saving money” isn’t really the issue, what is the real problem with paying search fees?   (Don’t tell me about your budget.  Of course you can afford the fees – once a position has been vacant a little while, all the money you saved not paying a salary can easily pay the agency fee.  In our case, once the position is vacant for about a month you can afford our fee – and our searches typically complete in just about a month - see how nicely that all works out?  But I digress, now let’s get back to the point of this blog post.)

I think the real problem is not the amount of the fee, but rather the perceived value of the service relative to the price.  Many search firms just do not appear to be a good value to hiring mangers.   “You present me a guy who has been lying around in your database for 3 years and then you charge me 30% of annual salary for it?  What did it take you?  A couple of hours?  That just does not feel like a good deal!”   

It’s true.  That kind of recruiting fee does not feel like a very good deal.   It might get a great outcome, it might be the only way to find a top candidate, but it does not feel very good to the manager paying the fee.

Now let’s look at what our existing clients do:  They don’t beat their head against the wall trying things on their own month after month.   When they invite us to help them with a search, it’s almost invariably at the beginning of a search, not after they tried it on their own.  So what’s the difference?  The difference is that they know the value of all the services they will get, know what the caliber of candidates will be, know how much faster our hiring process will be and they know they will not feel like they overpaid.  

So let’s agree, it’s not about the money – it’s about your perception of value.  The next time you have a critical position to fill, would you pay a search fee if you were absolutely certain that you would end up with a significantly better person hired than you could possibly have attracted on your own?  What if you could get that great person hired far faster than you normally do, spend less time on the hiring process and never have to look at a stack of resumes?  Further, what if your new hire was guaranteed to get results for at least a year or you could replace them at no cost to you?   You’d probably feel pretty good about paying that search fee wouldn’t you?  

So if you are feeling uneasy about paying a search fee, maybe it’s not the fee.  Maybe you are just talking to the wrong search firms.

Great Recruiting is Useless …

Many people think the reason to engage a search firm is to get help with recruiting.  Well, maybe that approach works in big companies, but in small firms great recruiting is nearly useless by itself. 

Hiring smart internal recruiters, engaging search firms, and even turning the recruiting process over to a Recruitment Process Outsourcing firm is usually a really bad idea for small organizations.  Recruiting support is absolutely useless to you …  if it is not integrated within a cohesive hiring and performance management process.  (NOTE: By cohesive, I do not mean expensive).

Do you ever wonder why so many companies are frustrated and disappointed by contingency search firms?  It’s because most contingency search firms do not see it as their “place” to suggest how organizations should run their internal hiring process.  So contingent search firms focus their efforts on recruiting.  But great hiring involves a lot more than recruiting.  And you can’t improve the whole until all the parts work together:

• Simply writing up a typical job description is useless … unless you first understand what performance is expected from the new hire and what competencies are necessary to drive that performance.
• Developing an interesting and complete job description and ideal candidate profile is useless … unless you reconcile your target hiring profile with market realities.  (You might find you have champagne tastes on a beer budget and may need to revise your performance expectations to fit the budget).
• Simply posting a job description on job boards is useless … unless you employ additional strategies to recruit less active job seekers.  You can’t make an intelligent hiring decision selecting from only those people who happened to see your ad.  Conversely, you should not avoid ads, they can be a good way to diversify and expand your candidate pool.  If you want great hires, it’s important not to limit your candidate pool to people found using any single recruiting method (including employee referrals).
• Simply recruiting more candidates (or paying an agency to recruit) is useless  … unless your hiring managers know how to interview and how to distinguish top performers from other candidates.  Research shows that most hiring managers do not use the best strategies to select top candidates.
• Simply doing a better job of selecting resumes and interviewing candidates is useless … unless you structure your interview sequence to provide a great experience for the candidates.   You can do more harm than good when your disorganized interview sequence reveals internal organizational conflict and indecision.
• Simply making the occasional good hire is nearly useless  … unless your managers have confidence that your hiring process can reliably produce great people “on demand.”   Until the hiring process is considered reliable, managers will always be reluctant to manage poor performers.  (When managers are confident they can “trade up” then performance management becomes much more effective.)
• Improving your hiring process is a fine start, but you will not be able to keep improving your process … until you follow-up on every hire to ensure that they achieved the business results you expected.   After all, getting business results is the whole point of hiring isn’t it? 

A great hiring process is a “force multiplier” for a great performance management process, and vice versa – both processes support and multiply the effectiveness of the other.  

But recruiting?  Don’t even think about spending money on recruiting until the rest of your hiring process warrants the investment – you will just be pouring fine champagne in a dirty, leaky, plastic cup.

Executive Search Hiring Mistakes

Hiring is expensive.  Mis-hires are even more expensive, as we recently discussed in the staggering cost of an executive mis-hire.   We all know hiring mistakes happen occasionally, but just exactly how often is acceptable?

In a recent interview with Financial Times, Kevin Kelly, the CEO of global executive search powerhouse Heidrick & Struggles, revealed the results of an internal study of  20,000 executive searches performed by his firm:

“We’ve found that 40 per cent of executives hired at the senior level are pushed out, fail or quit within 18 months”

Astonishing.   He’s describing a 40% failure rate by one of the most trusted and reputable brands in the executive search business.  (If that statistic is true, I’m glad they didn’t build my house or service the brakes on my car).

Mr. Kelly concluded from this research that more follow-up was called for.  The article noted that Heidrick ”now offers companies everything from initial training and early feedback for their new recruits to regular assessments of current executives and succession planning and staff development programs.”

I applaud Mr. Kelly’s candor - he had no obligation to share this internal information.  I presume he did so as part of his ongoing effort to spur much needed change and innovation within the executive search industry. 

Hey, I did not see the details of his research, so perhaps his conclusion is correct.  But a 40% failure rate?   I’m not sure what that says to you, but to me, it screams “perhaps we have a problem in our process.”   Surely some of those mis-hires could be avoided by using a better hiring process.  As quality guru W. Edwards Deming famously observed  ”If you can’t describe what you are doing as a process, you don’t know what you’re doing.”

So, if you want to outperform those elite search professionals and keep your executive hire failure rate below 40%, here are a few aspects of your hiring process you might want to improve: 

• The most common hiring mistakes small companies make
• How to talk candidly about the job during the interview
• How to write better jobs ads
• What to look for in resumes
• Who should interview candidates  
• How to best assess skills
• How to determine cultural fit 
• How to check references
• How to determine a fair salary
• How to make the job offer

Contingency vs. Retained Search – Common Fallacies

In selecting a search firm, it’s wise to look first at their track record and their understanding of your business needs.   But then, when you start comparing search firms, you will see a broad array of business models, involving when you pay (retainer, contingency, or hybrid pricing); how much you pay (flat fees,  fees as a percent of annual compensation, or contract recruiting by the hour);  what you pay for (interview questions, reference checking, education verification, etc.);  what performance is guaranteed by the search firm; and how long placements are guaranteed (3 to 12 months typically).    The recession has only spurred more innovation, and all kinds of new business models are sprouting up.  With all these variations in search firm terms and conditions, it is perhaps no wonder that so many buyers are confused about which firm to engage, and on what basis. 

Unfortunately, some employers try to simplify their decision making by implementing a search firm policy, as in ”we will only work with search firms on these terms and at this price.”   These policies essentially put the cart before the horse, selecting pricing terms over search firm competencies – as if search services were all interchangeable.  And while these policies may appear to make things simpler and perhaps even more cost effective, all too often they backfire in expensive and unpredictable ways.   I recently spoke to someone who inherited such a policy, and it cost them dearly.

But first some background.  I’ve worked in executive search for over 20 years.   When I was just getting started in the search business (3 recessions ago), I worked for a large contingency placement firm.  We charged a fee equal to a percentage of each candidates’ first year salary (25%) and we were paid only after the candidate started work.   While that business model is still quite common, it lends itself to functional specialization (such as working exclusively on HR searches, or just  IT or accounting searches) and therefore was not the right model for Staffing Advisors.  We set out to make staffing easy for our clients – handling all their staffing needs across the functional areas – so we chose to work on a flat-fee retained basis, meaning our search fees are not indexed to candidate salary and our retainer is paid at the start of the search.  A third of my current clients do not have the budget to afford a traditional search firm and another third have NEVER used a search firm before. (You can read more about our business model here.)  OK, so that’s the background you need.  Now back to the story of the policy that backfired.

 A few weeks ago, I was referred to a company who had struggled for months to fill a $100k position.  We offered to do the search on a retained basis for $10k (yes astute mathematicians, that particular search fee amounted to only 10% of annual salary – our normal fee is about 12.5%).  But, because that company had been “burned” in the past by a poor outcome on a retained search, they implemented a “policy” of only using contingency search firms – so they could not even consider our offer.  Everyone in the meeting knew that a typical contingency search firm would charge tens of thousands of dollars more for the same search (20 or 30% of annual salary).   Most contingency firms have a 3 month guarantee, ours is 12 months.  Typically a contingency search firm will produce 3-4 qualified candidates, we usually produce 6-8.   And finally, most of our searches complete in just 4-5 weeks – considered blazing fast by any standard.   None of these facts were lost on the buyer, but they had a “policy.”   End of conversation. 

Their well-intentioned, but misguided HR policy had boxed them into spending twice as much for a search that will take longer, produce half the number of qualified candidates, and be secured by a guarantee less than half as long . . .  probably not the result they intended when putting that policy in place.

Just like your employee handbook, many HR policies are created to avoid repeating a bad experience in the past.  Did we need to fire a past employee for bad behavior?  Well let’s add a policy about that particular bad behavior into the employee handbook.   Did a search go wrong in the past?  Well let’s add a policy to deal with that.  But rigid ”policy” is a poor substitute for good judgment. 

I find that most search policy decisions are based on misconceptions and outdated information – fallacies.  For example, many HR professionals think retained search firms always cost more than contingency search firms.  Many people think contingency search firms are faster, and retained search firms are more thorough but slower.  Some people think retained search firms are better for senior level hires and contingency search firms are better for mid-level hires.  Some people think retainer firms are more ethical than contingency search firms.  

And of course, many people are wrong.  

Retained versus contingent search is simply a choice of business models.  Neither one is inherently more thorough, or expensive, or faster, or more ethical.  While these misconceptions are common, they are not facts you should make business decisions with, or worse, base policy decisions on.

If you work on a retained basis, you are essentially paid by the employer to research and find great candidates – and it is presumed that any candidates you uncover from that research are “owned” by the employer until they are removed from consideration.  The entire candidate pool “belongs” to whoever paid for the research.  The retainer firm wants the employer to hire the most qualified, compelling candidate from any source – either in the pool or drawn from an employee referral.  It’s all the same to them.  

In a contingency basis, the search firm takes on the risk and expense of developing relationships with lots of candidates (which is why they often specialize in just one functional area).  They did the work and took the risk, so essentially, they ”own” the candidate pool.   To ensure they get a return on their candidate research investment, they must present those great candidates to lots of employers.  The employer committed nothing, and therefore has no right to the pool of candidates, so the search firm is wise to present the best people to multiple employers.  If you hire a contingent search firm, you are essentially in a race with other employers to see who makes an offer first.  This is why some employers feel their interests are better represented by a retained search firm and some job seekers feel like they are better represented by a contingency search firm.   The contingency search firm wants ANY employer to make a compelling  job offer to their candidate, while the retained firm wants the employer to make an offer to ANY compelling candidate, regardless of source.

With all the innovation occurring in the search business,  it pays to be flexible with your search firm policy, re-examine your assumptions, and understand the implications of the new and innovative business models that are emerging.