A Nor’easter hit my hometown of Westport, Connecticut — rather, more like a hurricane, with wind gusts exceeding 60 miles per hour. It rendered my town impassible. Downed trees blocked egress on virtually every major and minor thoroughfare. We were without power, cable, television, and phones for a week. Hotels within an hour’s drive radius quickly sold out, their rooms filled with displaced victims of the storm and CL&P crews brought in from surrounding states to repair the damage. We felt lucky to find room at a Marriott just 30 miles away, and even luckier that we could stay there the full week while others who did not foresee an extended stay were forced to find shelter elsewhere.

In retrospect it seems a fitting metaphor for our financial crisis, and, in turn, for the executive search business crisis, especially retained search firms. The massive trees felled on our property serve as testimony to how swiftly the mighty have fallen.

According to my CPA, the executive search business has always been cyclical. He does the taxes for number of search firms, large and small, retained and contingency. He’s noticed these companies are always among the first to get hit in a financial downturn and the among the last to recover. Hiring executives pull back hard on hiring at the the first signs of a slowdown and they often postpone hiring until they’re sure a recovery is well underway. Ironically, retained search is always hit the hardest: it seems they have the most to lose.

Experts believe we have witnessed what will remain the worst economic crisis of our lifetimes. In fact, many are predicting that the retained executive search business has been forever changed. Companies reduced their use of retained search starting in 2007 and, some say, many learned to live with it quite simply because it is so costly. Traditional retained search charges as much as 33% of a candidate’s first-year compensation plus expenses. Moreover, nearly half of the time the money’s wasted because, according to industry expert David Lord, 40% of all retained searches fail to complete. And it appears, a growing number of corporations have had enough.

Korn Ferry’s stock price is still down 30% since before the financial collapse from a high of $26 in June of 2007, dipping to as low as $8; Heidrick & Struggles stock price is down 40% from a high of $51, dipping to as low as $14. Heidrick is now ranked among the bottom five companies in the Human Resource & Employment Services industry as measured by the potential gains between the current stock price and the projected average analyst target. These are all signs of an executive search business crisis.

As a result, the major retained search firms have diversified their service offerings to make up for the deficit in search engagement revenues. But the writing is on the wall. An increasing number of employers are breaking with tradition and are turning away from traditional retained search and toward more innovative firms that offer a better return on their investment.

For Part II, click here.

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