The Rottman Group, Inc.       

       Redefining an Industry One Relationship at a Time.

The Human System  Vol. 1, No. 17

  “Pulling the Curtain on the Wizard of OZ-A Behind the Curtain View of the Executive Search Industry”- Part 1

When we look at outside recruitment resources, or search firms, they quickly get lumped into two main categories:  Retained and contingency.  Most people recognize the biggest difference between the two as the fee basis.  While this variation is valid, it actually creates differences so drastic that you should rank the fee basis as one of the last vs. first factors when making a decision about using one type of firm or another. (For purposes of this article, temporary or staffing firms are not being considered.  This is a different service and dynamic, but one I believe more consumers readily can differentiate.)  The purpose of this next set of issues of “The Human System” is to let you see the internal dynamics and thus, truly understand the operational differences between the two types of firms.  As a result of this series, you should be an educated consumer of this service, knowing when and how to use it to get the greatest value for your organization.  Let me reiterate a previous comment:  there is a time and place for both retained firms and contingency firms.  Subsequent issues of T.H.S. will give thought and guidance to which type to use when and why.  Then I will follow with a guide to help evaluate and sort through recruiter rhetoric.

As I began writing this, it quickly grew from a single issue to one that has to be broken into pieces.  This specific issue will deal first with the clarification of the two different fee bases of retained and contingency search (starting easy).  Then we will begin dissecting the operational differences of each.  We will also address the division of labor, or roles in each firm.  Space and time limits covering more today, making this a multi-part topic.

Is this worth my time?  I would contend that maybe 10% of HR leaders truly understand the internal dynamics of search firms and know when to use and how, to make most effective use of these service providers.  Thus, for sake of probability, put yourself in the 90% and learn as much as possible.  I have never seen the type of open analysis that I plan to share with you.  It will absolutely change how you see and work with this service industry.  If you give this set of e-letters a fraction of the time and thought that I am putting into it, you should never have a “bad” experience with search firms of any kind again.  (That may seem like an aggressive promise.  However, I will help you to weed out the good from the bad of each type and frame your relationships in such a way that you have open understanding and accountability from your service providers.)

Though masked to be very similar, (with only surface differences), it could be said that retained and contingency search are totally different industries.  I would be among these making this contention. 

Analogy #1: Ben Matlock and  A.C. Eddie (A.C. stands for ambulance chaser) are both lawyers.  You pay Ben Matlock a retainer before they ever start your case.  However, A.C. Eddie only gets paid if he wins your case; he is paid on a contingency basis.  Easy enough, right?  OK, here’s where the rubber meets the road:  you are falsely accused of murder.  Who do you want to represent you?  Do you want a guy that is juggling 20 cases?  He has to because he is only going to win a certain number of them and has to work on many so that based on statistics and volume, he wins enough to pay the bills?  Or when the stakes are this high, do you want someone that is dedicated and focused on your case, maybe only working on 2 or 3 others concurrently?  When you look at the health of your management/leadership teams, why would you not use the same thought process?  However, having said that, there is a time and place for A.C. too.  It is of paramount importance, to have any satisfaction and valued use of outside recruiting firms, that you understand who to use, where, when, why, and how.

Analogy #2:  You have constant migraine headaches, you worry it could be something more serious.  You decide you need to see a doctor.  Any M.D. will do right?  Podiatry, Orthopedics, Gynecology, Neurology, they’re all doctors right?  NO!  One physician doesn’t cure all ailments.  Thus, when you have a recruiting need, someone to add to your human organization, realize the dynamics of each job family and organizational level has to be truly considered before you form a recruitment strategy or engage an outside resource.  Know the dynamics of each specialty so that you know who to go to.

If you think you really know the differences between retained and contingency search firms? Take this partial quiz:

  1. I can tell you the difference in typical organizational structure of both types of firms.
  2. I know the average number of searches each person is working on at any one time (in different types of firms).  Thus, how much time my assignment is given.
  3. I understand the different roles of each person in the different types of firms.
  4. I understand how differently individuals in each type of firm are compensated and incentivized and how that affects the type of service I receive.
  5. I know what each type of firm’s commitment is to me as a client, and why.
  6. I can tell you which type of firm to use when, and why.

  Due to the cost factor of search firms, I will tell you that I know people feel a great sense of accomplishment from getting the cheapest deal from a search firm or avoiding them all together.  Just like many types of services, there are industry standard fee structures and ranges for fees.  If you are getting a great deal, it may be too good of a deal and reason for concern.  Don’t be afraid to ask a firm how they justify taking a search assignment at a level below the industry norm.  They may have legitimate reasons for such.

Just as in other cases, I will speak to norms.  You can always have an exception to any rule, but in any model in from which you make decisions, you must do so based on normative information, not exceptions. Remember, you have to obey the laws of probability.

Though it is true that someone who really doesn’t understand the deeper dynamics of retained vs. contingency search firms would intonate that the differences are mostly in the way fees are paid.  The paradox is this:  To understand just how different the two are, understanding rests in truly appreciating how these differences in fees translate into undeniable, logical differences in operations.  These differences in operations mean the total difference in the service provided.  Thus, the service contracted for and expected is not always the service that is received.  What I plan to lay out for you here will give you the knowledge to understand this yourself.  I will also give light to some very big misperceptions.

Fees:

Let’s go ahead and talk about fees first as a warm up.  It is the biggest surface difference and where people tend to make decisions from most.  In looking at the fee there are two components, cost and structure.  Let me also say this:  Fees are the most flexible thing a firm has.  Setting or changing a fee can be a nanosecond decision.  Changing an organizational mindset, skill set, or operational basis is much more difficult.  Thus, again, don’t get as hung up on fees as you do the other factors of a firm.

  Retained search:

The standard retained firm works on a fee basis that ranges from 30%- 33 1/3% of the candidates first year base salary or total compensation.  The “total compensation” can include cash bonuses that are awarded during the first year of employment.  However, in the healthcare industry it is much more standard that the fee only be based on the salary of the individual.  In addition to the basic fee, there can be other monthly fees, totaling approximately 10% of the search fee.  This too is not as commonly accepted in the healthcare industry, but is standard in others.  Most retained firms receive a retainer equal to 1/3 of the estimated fee to begin the search.  The remaining balance in subsequent increments, some will do this in 1/3 payments over the first 90 days of the search, others will “back load” the remaining 2/3 until the search is complete. 

It is my recommendation that when you work with retained firms, that you work only on a negotiated flat fee, not a percentage basis.  Though I will not accuse firms of “up-charging” based on presenting higher compensated candidates or negotiating a higher offer for their own benefit, why not take that possibility out of the equation?  I also recommend you not pay any additional monthly overhead and that you get a fee program that is “back-loaded”.  These last two things take any incentive away from the search dragging on.  If you have paid the entire fee in the first 90 days of a search, if it is not completed, where is their incentive.  Also, if you are paying monthly expense fees, the longer the search the more money they make.

Are retained firms this flexible?  Most retained firms should give you these flexibilities.  However, some of the largest, multi-industry firms will not be flexible with you.  They have corporate policies that will not allow this.  You will have to make the decision about having a “brand name” firm relative to these factors.  Understand, in this case, bigger doesn’t mean better.

Do understand that with few exceptions (unless you have an agreement with certain accountabilities or exceptions) once you “pull the trigger” with a retained firm, you can’t “put the bullet back in the gun”.  Meaning, once you engage a firm, you are committing the payment for this professional service, not contingent on a specific outcome, rather an expected outcome.  Though this may seem overly committal, there must be a rational service oriented reason that this industry segment exists.  If not, the market would demand that all firms work on a contingency fee basis.

Contingency search:

Contingency fees are just that, contingent.  You don’t pay anything unless you hire someone that is sent to you via the specific recruiter.  The fees for contingency firms have a much broader range.  In that many more contingency firms are very small and home based, overhead may be minimal.  Most will try to get the same 30% of salary fees of the retained search firm, but are much quicker to negotiate a fee basis in the 20-30% range. 

There are firms that will work for less.  I have told people that with contingency firms, you can decide what you want to pay and you can usually find someone that will agree to it.  Now, don’t take that as an incentive to overly shop this service.  It is those that agree to below industry standard rates that should give you the  most concern.  If you are in a situation to engage this service, it is because good people aren’t falling off the wagon at your doorstep.  Unless using a firm is only a matter of convenience vs. strategy, be very careful of those that are willing to significantly offer discounts.  There are going to be inherent reasons for this.  We will address this in a couple of weeks in “how to choose an outside search firm”.

Operations

The irony of the operational structure of search firms is that it is the fee basis that drives the inherent, logical operational differences of search firms.  Thus, if you are looking for a certain operational process, you end up in a fee structure by default.  If you first choose a fee basis, you will end up in a specific operational process as well.  This is the thing I truly don’t believe people understand.

Division of Labor:

How firms are structured and who-does-what has a direct affect on the way service is provided to you. 

  Retained firms:

This is going to vary by size of firm.  If we look at the large, national retained firms, we would typically see a three tiered organizational process that would consist of: researchers, recruiters, and partners.  Let’s look at each role:

Researcher:  Once the search target market is defined, the research group would identify by name and organization the prospective target candidates.  They would then send this information to the recruiter who was working on the search.  They would also be updating and maintaining a database.  These people are behind the scenes and have no client interaction.  However, the success of the search starts with this group and the people they target. 

Recruiter:  This is the person that is doing most of the recruitment, direct contact of the candidates.  This person would most likely do a historical interview, but would not do the final evaluative interview.  This person would most likely be the one checking references and writing summaries.  This person may or may not have any client interaction.

Partner:  This is the person most likely to have signed up a client and sold the organization’s services.  This person is typically the key contact person in the search with the client.  This person would most likely conduct the evaluative interview and make the decision on presenting the candidate or not.

In smaller firms, you can combine any of these roles.  In many cases, the same person may do all three functions.  This isn’t a point to argue for one structure or another, just the distinctions.

Contingency firms:

In contingency firms, you have an individual that is responsible for all functions.  They are lone wolves in way of identification, sourcing, evaluation, and facilitation of all candidates.  The exception to this is when they do “splits” with other recruiters.

This concept of “splits” is very important to understand. What it means in their jargon is this:  “If you have the candidate and I have the job order, we split the fee 50/50.”  This may be ok if it were only intra-office splits.  However, more and more there are “split networks”.  Recently many of these split networks have become groups of recruiters that are hooking up via the Internet to form large split communities.  What this translates into are people recruiting for your opportunity and representing your organization whom you may have no awareness of or control over.  With this comes candidates that have been recruited by people that don’t know or really understand your organization or its unique dynamics.  Is this always bad?  No.  But you need to be aware of any such practices by those you work with.   Asking any candidate that comes through this source, “Who first contacted you about this opening?” should keep you informed as to this practice occurring or not.  This practice of splits is not done with retained firms.  They are getting paid for their work; they have no incentive to do this.  They also realize the dilution of quality that comes from this.

Compensation:

Though it may seem like an odd place to start in way of operations, I think you will agree that this is the Achilles heal of the operational differences.  Human nature is something you cannot beat, so don’t try.  Just work to best understand it.  So when we look at compensation, keep human nature in the back of your mind and understand some undeniable truisms that go with this. 

Retained firms:

Reflecting back to the division of labor, you would find that research persons almost purely work on a salaried basis.  Recruiters work on a salary plus incentive program that is usually not tied to the fee itself, rather a per project or percentage of their own salary opportunity.  Partners are the ones accountable for revenue generation and are typically on a mostly incentive driven plan.  Their income varies with billings.  There are many formulas that are used in way of salary plus commissions.  They may have salaries that have quotas attached to them.  Once they reach a certain threshold of revenue, then a commission incentive plan kicks in.

Contingency firms:

Almost all contingency recruiters work on a commission only basis.  When there are exceptions to this, they may have a draw against commissions, or a very small base salary with the expectation that it is the commissions that they rely on, not the salary.

What does this all mean to you?  Do you care?  Yes, you should.  When people work on a salary vs. a commission only (or close to it) basis, the dynamics change.  Undeniable truism.  If you know you get a pay check every other Friday vs. only getting paid if a client’s check/placement happens in that period, how a recruiter relates to clients and candidates changes.  It can’t help but to.  (Great grammar, I know, but it conveys the thought.)

Now think of all the recruiters you have dealt with.  Who is more likely to call you 10 minutes after you finish an interview?  Who is more likely to push you those next steps to make an offer?  Who is more likely to sugar coat references?  Who is more likely to manipulate a candidate into taking an offer today?

The reality is that a retained firm is just that, retained.  Though you should have accountabilities in place for quality and timeliness, they should be proactive, but not pushing a process too aggressively.  Their compensation is not tied as close to making this placement with this person today, but in finding the right match for your position.

Wrapping up:

As you can see, we didn’t cover a lot of topic ground.  However, I think you can already see that there are some distinct differences in the very basic operational areas of different types of search firms.  I hope you see the value of this and will continue with me through the other operational differences.  I won’t take anymore time today, I value yours and mine.

Choose to make it a great week.

Don Rottman

HR Evangelist  

 

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