The first step to selecting a search firm is deciding what search firm type you need. If you are a CEO who is new to the world of executive search, there are critical differences between search firm business models of which you should be aware. If you have used search firms in the past and have been frustrated with the outcome, understanding the key differences can help you choose a better search firm partner.
Contingency and Retained Search Differences
There are two traditional search firm types in the world of executive search — contingency and retained. Contingency search firms are not paid to do the work of recruiting. They are only paid if and when they make a placement. Retained search firms charge a retainer to do the work of recruiting. While it is the goal of the firm to fill the opening, the firm’s fee is not contingent upon making an actual placement. Next-generation search firms are hybrid models that address the weaknesses of traditional search firm types, while they enhance the benefits.
Contingency Search Firms
Contingency firms primarily focus on individual contributor and mid-level roles. Most of the contingency agreements are non-exclusive, meaning that multiple firms often work on the same search — may the best recruiter win. Contingency is a business of volume and speed. As a result, contingency firms submit as many candidates as possible to the client. If they happen to have a great candidate in their hip pocket, they can deliver just the candidate you need. Yet clients complain this often results in a contingency firm throwing weak or unqualified candidates against the wall just to see what sticks. To expedite, contingency firms focus on active candidates — often the unemployed and the disgruntled — skipping harder-to-recruit passive candidates who are not actively looking, a higher quality candidate pool.
Contingency firms charge less than retained executive search firms. In fact, some hiring executives may be under the impression that contingency firms work “for free”. That’s how contingency firms market their services. But alas, my friends, that is an illusion. While a contingency firm is not paid to do the actual recruiting, if the contingency firm delivers the perfect candidate — which, of course, is the point — you will pay a placement fee. Every single time. And you will pay the full 20-25% of first year salary regardless as to whether it took just 2 days or more than 2 months to deliver the winning hire. The contingency fee is totally detached from time or effort.
The piece that I find most disturbing about contingency search is the risk. Contingency firms make it a practice to abandon searches that are too hard or that take too long to fill — they have to in order to survive because, hey, you’re not paying them to do the work of recruiting. And because you’re not paying them, they don’t owe you any explanation when they walk away. In fact, you will likely be under the impression that they are still working on your search when, in fact, they have moved on to easier searches more likely to yield a placement. As a result, critical openings languish unfilled, exacting a tremendous cost in lost revenues, lost time-to-market, and in lost morale. So, when you do the math, you need to factor in the opportunity cost. Making matters worse, if you decide to engage another search firm after a contingency firm has hit the wall, you have no idea what ground the contingency firm covered. Remember? They don’t owe you an explanation. You are back to square one — only now you’re 3 or 6 months or a year behind the eight ball.
Retained Search Firms
Traditional retained executive search firms work exclusively to fill board and senior-level executive roles, job openings that are rarely, if ever, advertised or posted online. Done well, the process is consultative because retained search is a form of management consulting. On average, retained search firms charge 33% of first year total cash compensation. Often, they charge another 5% for expenses. Like contingency, the vast majority of retained firms insist on charging a percentage even though it creates that conflict-of-interest.
Retained firms focus on delivering top performing candidates. When the typical fee for a retained executive search is in excess of $100-thousand dollars, most clients expect a rock star. And when you examine the research, that strategy makes sense. As HR thought-leader Dr. John Sullivan Pareto Principle, the law of the vital few, holds true. But will the retained search firm ultimately deliver the winning candidate? Sadly, for a host of reasons that I’ll get into in other posts, 40% of retained searches fail to complete. As for that retainer you paid? You’re out the $100-thousand and have nothing to show for it. Ouch.
Now, many hiring executives take the failure rate as being par for the game. It happens. Move on. The next great hire will more than make up for it. And the traditional retained search firm business is, by no means, hurting as a result of what some consider to be a pretty dismal track record. According to the AESC (Association of Executive Search Consultants), retained search fees are higher than they have ever been. Apparently, the 80/20 benefit delivered by retained searches does, indeed, offset for the down-side.
What to Avoid
Percentage Fee Conflicts-of-Interest
Traditionally, retained search firms and contingency search firms charge a percentage based on the compensation of the candidate who is hired. That’s something you should avoid. The percentage fee sets up a conflict-of-interest because it rewards search firms that inflate the salaries of the candidates that they place. The more the candidate gets paid the more the search firm makes. So, one might wonder, whose side are they really on? I ask not to disparage contingency recruiters or retained search partners, many of whom I count among my friends. The traditional search firm business model is the issue. From where I sit, you shouldn’t have to wonder where a search firm’s loyalties lie. That is why I recommend doing business with firms that charge a simple flat fee. They’re out there. In addition to The Good Search, Egon Zehnder, one of the leading retained search firms in the world, charges a fixed-fee for the same reasons,
Unlike the traditional model of search consulting, we charge a fixed fee for our assignments. That means our only incentive is to deliver what’s best for you. Our fixed-fee policy frees us to be diligent, thorough, and completely unbiased, able to assess internal and external candidates on an equal basis and facilitate hiring negotiations with no conflict of interest.”
Opaque Black Box Process
Traditional executive search process is often an opaque black box. That is also something to avoice. While you know what goes into it (your search fee) and what comes out of it (candidates), you don’t get to see what’s going on inside. Traditional retained search firms don’t hand over the candidate research. That means there’s no way to audit the search firm’s work. You have no idea where the firm has been or whom the firm has talked to on your behalf. Traditional retained search firms like it that way. They fear that by sharing the research that you won’t be as inclined to use them the next time you have a similar opening. You’ll just use the research instead. However, that’s pretty short-sighted. Sharing the research throughout the search engagement lays down a foundation of real trust, ensures everyone is on the same page, and facilitates more effective collaboration. Seriously, why wouldn’t a firm want to show its work, unless it has something to hide?
Lack of Data Research Expertise
With the amount of data in the world doubling every two years, traditional retained search research methods and research associates no longer cut it. You need to a firm that invests in research and that hires researchers with with deep investigative and data analytics skills out of other research intensive fields. People who want to do intensive business research for a living do not go into executive search as an occupation. They go into investigative journalism, competitive intelligence, marketing research, investment banking — or they go work for the NSA. Retained search firm that lack the necessary research skills miss top candidates, who all too frequently are standing in plain sight. It is just that too many lesser candidates got in the way. You need a firm with the know-how to wrangle TMI. Without research expertise, retained search firms are, in effect, searching with their eyes closed.
How to Decide
So what’s a hiring executive to do? If your current search firm is working for you — if it really has your back — develop that partnership. Forging a strong relationship with the right executive search partner pays real dividends. The best headhunters are among the most connected people you’ll ever meet. Not only can they help recruit members to your team, they can help refer business and funding your way. And if that hot startup of yours runs out of runway, they can help you find a soft place to land.
If your current search firm is not working for you or if this is the first time you’ve considered using an executive search firm, you need to figure out what search firm type best suits your needs. So, do the math. Weigh the drawbacks and benefits. Factor in the opportunity cost of failed search. Then pick the model and the firm that you trust.
For some, trust comes in the form of one of the major retained search firms — Spencer Stuart, Russell Reynolds Associates, Heidrick & Struggles, and Korn Ferry. There’s no way a boutique search firm can best the collective track record or geographic footprint of a major retained search firm. Yet boutique retained search firms have their advantages which include offering concierge quality client care. So check out the boutique firms that specialize in your industry. Our boutique retained search practice The Good Search specializes in technology as does BSG Team Ventures, CT Partners, Daversa Partners, and Vell Executive Search. We’re all established players in this space, but we come in different flavors. You decide what’s right for you.
If you’d rather manage the search yourself, a research firm can give you the opportunity to save on search fees. Our recruiting research practice Intellerati regularly partners with in-house executive recruiters. Often, we focus on the front end of the recruiting process, handing off interested, qualified candidates to our clients who manage the candidates through to hire. But Intellerati is by no means the only executive search research practice out there. Iris Libby, Execuquest, Qualigence, Reveal Global, RW Stearns, Sheila Greco Associates (SGA Talent), and TechTrak have also been in this space a long time.
So consider the firm, but as important, consider the executive search partner with whom you are working. In the end, you must recruit the executive recruiter who is right for you.