NEWS ANALYSIS

Headhunters' New Search: For Clients

With hiring frozen by the slow economy, many recruiting firms are trimming fees, diversifying, and downsizing to ensure survival

These are humbling times for executive recruiters. During the late 1990s hiring boom, many headhunting firms began to demand stock options from clients, on top of the already rich fees they collected every time they delivered a senior manager. Today, they would settle for an assignment that came with no haggling over their price. With the job market in shambles, even the fee that executive-search outfits once considered sacrosanct -- one-third of the placed exec's first-year compensation -- is now open to negotiation.

Sixty-three percent of headhunters say their firms have become more willing to cut a deal, according to a recent survey of 195 recruiters by ExecuNet.com, a Norwalk (Conn.) career network for execs and recruiters. "Search firms, like everybody else, are having to find ways to make it more economical to use their services in a tough market," says Mark Anderson, ExecuNet.com's president.

DELAYED RECOVERY.  And to make up for the slump in their core business of finding executives for key corporate posts, many recruiters are trying to diversify. Anderson says 52% of respondents in his poll reported that they're now offering new services that deviate from their traditional search business, including career coaching, executive assessment, and human-resources consulting.

Such strategies have become more necessary as recruiters realize that the rebound in demand for headhunters that was supposed to show up by now still hasn't. That's because companies aren't adding to their payrolls, what with the stock market in decline, the economy in a rut, and the country possibly headed for war in Iraq.

The only bit of good news is that the search industry appears to have stabilized since its meltdown in 2001, when revenues for the top 25 U.S. recruiting firms plunged 29%, to $1.2 billion, as the dot-com bubble burst and the economy cooled. Thanks to deep cost-cutting, profits are starting to reappear for search firms that are publicly traded. The bummer is: No one is sure when business will get much better. "I don't think we'll see business get back to [boom] levels for at least several years," says Arnie Ursaner, a CJS Securities managing director who covers the industry from White Plains, N.Y.

BAD CHOICES?  Still, recruiters are hoping that demand will pick up in 2003, says Peter Felix, head of the Association of Executive Search Consultants, a trade group in New York that represents 160 headhunting firms worldwide. "Companies can't hold off on critical appointments for too long," he says. Felix concedes, though, that too much uncertainty exists to be overly optimistic. "If there's another serious downturn, all bets are off," he says. Not to mention the fact that companies have begun to check out other sources for new hires, including the Web.

Amid such doubts, headhunters have also been forced to do some soul-searching. In particular, they're concluding that their industry bears some of the blame -- along with boards of directors and others -- for placing CEOs and other executives who turned out to be duds. Recruiter Randall Neal says he has used the slack time of the last year or so to reexamine how his outfit evaluates and screens executives.

"Our research indicates that the charismatic, exciting leader may not be the best hire," says Neal, managing director of Broadmoor Group in Dallas. "Oftentimes, they may give you flash-in-the-pan results that aren't really the best thing in the long run for your company." Nowadays, Neal says, his firm is spending at least 50% more time interviewing potential candidates. And Broadmoor now insists that clients perform thorough background checks on prospective hires. Before, such checks were less routine, he says.

NO BARGAINING.  At the top of the food chain, the two largest publicly traded search firms, Heidrick & Struggles and Korn/Ferry International, are fighting their way back into the black. Analysts expect both to post profits for their current fiscal years after reporting losses last year. The turnaround stems nearly as much from massive cost-cutting as it does from any improvement in these businesses' top lines, analysts say. In the last year or so, Chicago-based Heidrick laid off 22% of its recruiters, while Los Angeles-based Korn/Ferry cut about 34% of headhunters, administrative staff, and other employees over roughly the same period. "They're now equally well positioned to benefit whenever the economy recovers," Ursaner says.

Both Heidrick and Korn/Ferry say they haven't tinkered with their fees. "We don't want to go down that path," says Eric Sodorff, a Heidrick spokesman. Like many outfits, however, these two are branching out. In the U.S., they've beefed up their nonsearch offerings in the past 18 months, adding such services as executive assessment and coaching.

The recruiters say these new offerings aren't yet adding significantly to their bottom lines. But Charles King, a Korn/Ferry managing director in New York, says his firm expects them to become "a meaningful part of overall revenue" in the future. And Wes Richards, senior managing partner for Heidrick's leadership-services business in Menlo Park, Calif., says the new areas could represent as much as one-third of the firm's business in three to four years. "There's an amazing hunger for these services," Richards says.

STUCK IN THE MIDDLE.  Some segments of the search business are holding up better than others. Surprisingly resilient for Heidrick, Korn/Ferry, and other firms is the lucrative "C-Level" practice, or the business of placing CEOs and other top executives, such as chief financial officers. Demand has also remained strong for corporate directors. "In challenging times, companies want to upgrade management or look for board members who are more independent," says Brian Lee, chief market strategist for Hunt-Scanlon, a search-industry research outfit.

What has all but dried up, however, is the once-thriving business of recruiting middle managers -- the corporate colonels that companies were hiring by the boatloads just a few years ago to help execute their growth strategies. At the economy's peak, middle-management placements represented about 50% of recruiters' business, analysts say. "This sweet spot is no longer there," adds Lee. "A lot of the layoffs have hit the middle-management ranks."

Some skeptics doubt that demand for recruiters will bounce back entirely, at least anytime soon. Companies, they say, are learning to rely on Web job sites, employee referrals, and in-house recruiters, among other sources, to find new staff. "I'm hearing more and more from clients in a position to hire that they feel they don't want to pay recruiting fees anymore," says Paul Bernard, an executive coach in New York.

DEMOGRAPHIC BOUNCE?  Still, if NCR, a technology company with 30,000 employees, is any indication, executive search is hardly an industry lacking a raison d'être. Rick Schultz, a vice-president at Teradata, NCR's data-warehousing division, plans to hire in 2003 -- and intends to call headhunters for help. "I like to have a situation where recruiters bring the two or three best candidates in," Schultz says. "I'm not interested in having to talk to 12 people to fill one job."

Beyond that, argues CJS Securities' Ursaner, simple demographics will help foster a rebound for headhunters. Baby boomers are just starting to retire, leaving a much smaller group -- Gen Xers -- the task of filling their cubicles. "There'll be a shortage of middle managers who will be tomorrow's leaders," says Ursaner. That could mean more business for headhunters -- not to mention better job prospects for everyone else. It may just take awhile for that golden day to show up.

By Eric Wahlgren in New York

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