Just when you think you have heard it all – you hear ugly stories about the wonderful world of search. Let’s face it, fee structures in this market have (well) – shall we say changed a bit? I get that. Many search professionals, trying to keep their business as a going concern, are forced to make (bad) economic decisions based on whatever they have to do to sustain themselves in this current market. Some search firms have been completely wiped out in this market while others have decided to hunker down and ride out the storm.
Like most firms, we offer a guarantee for a placed candidate in the event their employment is terminated for
reasons other than corporate downsizing or layoffs etc. It’s a fair trade off for the fees we receive to ensure the placed candidate ‘sticks”. I have had to replace a candidate or two over the years, and while it’s quite painful, it’s what I agreed to - and I always try my very best to honor commitments I make.
During the past year or so we have seen some fee agreements transition from a percentage based model of the cash compensation (salary and bonus) to a fixed fee arrangement. This depends entirely on the search assignment but this business model, while great for the client, usually results in the search consultant taking a (massive) haircut on the overall traditional fees.
NEW TREND: If that’s not painful enough - some hiring managers (while kicking search firms in the gut)
are now asking for fixed fees AND an increase in the number of months for the placement guarantee. WHAT? Are you kidding me? That’s taking advantage of the situation, and I just don’t think it’s the way business should be done in any business environment. PERIOD. As painful as it is for me to walk away from clients that propose such ridiculous (and unfair) terms - I walk. Every time. Actually - I run and run fast. C’mon – you can’t have it both ways, and you should not ask for unfair terms knowing good and well it’s not fair. Thank you Sir – may I have another?
Let’s see. Fewer search assignments, fixed fees and longer guarantees. Seems fair. What else can we give? I have an idea – perhaps we should just conduct all searches for free from now on? Yea! That should do it! Kick ‘em when they’re down.
It just doesn’t feel right. Nope. That’s my opinion. OK – I’m finished with my rant. Maybe not.
We’re in a tough market, so the whole fixed fee concept probably makes sense, as it gives internal talent teams a handle on actual search costs which are scrutinized heavily. It also protects against the (unnecessary) fear that firms are pushing only expensive candidates. In this case, a search firm should also request a “success fee” should the search be completed in an agreed upon timeframe which is shorter than a normal process.
Most guarantee times usually run 6-12 months depending on the firm, and that’s enough. Beyond that (and really from the start), it’s up to the HR organization to build an effective on-boarding process, and keep their employees happy/engaged past 12 months. Most good search consultants check in with placements for the first 3-6 months anyway to make sure the transition is smooth, but asking them to redo a search 15 months later is unfair and frankly not their responsibility.
Wally:
You are on point as usual. And, yes, there is a point where we have to turn things over and check in from time to time and leave it to the new employer to drive the “newbie” thru the on-boarding process. I’m talking about hiring managers that want to pull the squeeze play on lower fees while asking for more time on the guarantees. A plain and simple non-starter. Wouldn’t be prudent. Nope. Thanks for your post as usual!
I applaud you Tim for walking away, and I wish more search consultants would do so when faced with unreasonable terms. If they did, organizations would be more focused on finding firms that add real value and don’t just cut price to get the business.
However, those of us in the business need to realize that with low barriers to entry and potentially high incomes there will always be a large supply of recruiters. When there is lots of supply and low demand, like there is now, many people will take anything they can get. And with corporate budgets being slashed every quarter for the past 6+ quarters, you really can’t hold it against hiring managers for trying to get more for their money.
All that said, hiring managers who use the fluctuations in supply and demand of recruiting resources to negotiate “unfair” deals when times are tough better be prepared when the economy rebounds to improve their terms or watch every quality recruiter run away as other hiring managers eventually offer better terms to attract better recruiters. And, recruiters who work with these types of hiring managers need to realize this type of behavior is not indicative of a strong, long-term relationship. What it is indicative of is someone who sees recruiting as a cost of doing business only, a commodity.
Lastly, I recommend recruiters focus on controlling what they can control…who they choose to work with. If you don’t like the terms the client is willing to agree to then move on and find someone else who values your services more. Focus on finding those who place the highest value on your unique selling proposition. If the market for you USP is big enough and you provide good service you will make money. If the market for your USP is not big enough, change your USP or get out of this business. Whatever you do, don’t try and change the behavior of hiring managers. If they don’t value recruiters they will be among the worst clients you ever work for. Trust me, I worked with a few of these clients and they cost way more to serve than the revenue they generate.
Tim, I think you are spot on here, but what we’re neglecting to mention is the hidden gaffe here by most placement firms.
Sure, they are lowering fees from 30% to 25, 20 or in some (insane!) cases, 14%. But what I’ve also seen is that many guarantees are dropping from what used to be 3-6 months, down to 30 days. 30 days!?!? I usually tell firms, it’s gotta be 90 days or thanks for your time. That’s our own internal evaluation timeline, and they should play along with that. Again, classic case of some firms playing only to the current market and not looking into the future.
Great post.
Agreed. You either have great “value exchange” in a business relationship – or not. If it’s only a one way street, you should find new clients that value what you do and appreciate your service. It’s hard to turn away business in a down economy – but it’s far worse to sell your soul on the cheap!
What about a shared risk model? Charge a company 5% every six months. If it doesn’t work out, your client hasn’t invested too much. If the employee stays 2 years, you make 20%…10 years and you make 100%. Have your clients do the math, the cost of replacing most employees is quite higher than 10% of an annual salary, so they will have ROI. In this model, everyone wins and it gives recruiters an incentive to find the right person, not just someone who will get hired and stay beyond the guarantee.
I was a recruiter back in the recession of the early 90s. A lot of this squeezing was going on, some of it ridiculous. My employer was a rather sly dog. When the largest company in town tried to dictate a below-cost fee, she spent a lot of time “negotiating” a graduated fee schedule, which started with the stupidly low fee and increased with each placement and/or time on job. Then she sat back and waited….When the company eventually called, their need for the right person exceeded their need to dictate fees. They agreed to her usual fee without batting an eye….
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Monday, September 21, 2009
Fixed Fees and Longer Guarantees – You Can’t Have it Both Ways…
Just when you think you have heard it all – you hear ugly stories about the wonderful world of search. Let’s face it, fee structures in this market have (well) – shall we say changed a bit? I get that. Many search professionals, trying to keep their business as a going concern, are forced to make (bad) economic decisions based on whatever they have to do to sustain themselves in this current market. Some search firms have been completely wiped out in this market while others have decided to hunker down and ride out the storm.
Like most firms, we offer a guarantee for a placed candidate in the event their employment is terminated for
reasons other than corporate downsizing or layoffs etc. It’s a fair trade off for the fees we receive to ensure the placed candidate ‘sticks”. I have had to replace a candidate or two over the years, and while it’s quite painful, it’s what I agreed to – and I always try my very best to honor commitments I make.
During the past year or so we have seen some fee agreements transition from a percentage based model of the cash compensation (salary and bonus) to a fixed fee arrangement. This depends entirely on the search assignment but this business model, while great for the client, usually results in the search consultant taking a (massive) haircut on the overall traditional fees.
NEW TREND: If that’s not painful enough – some hiring managers (while kicking search firms in the gut)
are now asking for fixed fees AND an increase in the number of months for the placement guarantee. WHAT? Are you kidding me? That’s taking advantage of the situation, and I just don’t think it’s the way business should be done in any business environment. PERIOD. As painful as it is for me to walk away from clients that propose such ridiculous (and unfair) terms – I walk. Every time. Actually – I run and run fast. C’mon – you can’t have it both ways, and you should not ask for unfair terms knowing good and well it’s not fair. Thank you Sir – may I have another?
Let’s see. Fewer search assignments, fixed fees and longer guarantees. Seems fair. What else can we give? I have an idea – perhaps we should just conduct all searches for free from now on? Yea! That should do it! Kick ‘em when they’re down.
It just doesn’t feel right. Nope. That’s my opinion. OK – I’m finished with my rant. Maybe not.
Editor’s Note – Tim Tolan is a partner at Sanford Rose Associates and specializes in Executive Search in Healthcare IT. He’s a closer, and you really don’t want to call him unless you’re ready to bring out the bazooka to bag some big game…
Posted by Tim Tolan on Monday, September 21, 2009 at 07:25 AM in Tim Tolan, Working With Recruiters | Permalink
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We’re in a tough market, so the whole fixed fee concept probably makes sense, as it gives internal talent teams a handle on actual search costs which are scrutinized heavily. It also protects against the (unnecessary) fear that firms are pushing only expensive candidates. In this case, a search firm should also request a “success fee” should the search be completed in an agreed upon timeframe which is shorter than a normal process.
Most guarantee times usually run 6-12 months depending on the firm, and that’s enough. Beyond that (and really from the start), it’s up to the HR organization to build an effective on-boarding process, and keep their employees happy/engaged past 12 months. Most good search consultants check in with placements for the first 3-6 months anyway to make sure the transition is smooth, but asking them to redo a search 15 months later is unfair and frankly not their responsibility.
Posted by: Wally Greene | Monday, September 21, 2009 at 02:24 PM
Wally:
You are on point as usual. And, yes, there is a point where we have to turn things over and check in from time to time and leave it to the new employer to drive the “newbie” thru the on-boarding process. I’m talking about hiring managers that want to pull the squeeze play on lower fees while asking for more time on the guarantees. A plain and simple non-starter. Wouldn’t be prudent. Nope. Thanks for your post as usual!
Posted by: Tim Tolan | Monday, September 21, 2009 at 06:15 PM
I applaud you Tim for walking away, and I wish more search consultants would do so when faced with unreasonable terms. If they did, organizations would be more focused on finding firms that add real value and don’t just cut price to get the business.
However, those of us in the business need to realize that with low barriers to entry and potentially high incomes there will always be a large supply of recruiters. When there is lots of supply and low demand, like there is now, many people will take anything they can get. And with corporate budgets being slashed every quarter for the past 6+ quarters, you really can’t hold it against hiring managers for trying to get more for their money.
All that said, hiring managers who use the fluctuations in supply and demand of recruiting resources to negotiate “unfair” deals when times are tough better be prepared when the economy rebounds to improve their terms or watch every quality recruiter run away as other hiring managers eventually offer better terms to attract better recruiters. And, recruiters who work with these types of hiring managers need to realize this type of behavior is not indicative of a strong, long-term relationship. What it is indicative of is someone who sees recruiting as a cost of doing business only, a commodity.
Lastly, I recommend recruiters focus on controlling what they can control…who they choose to work with. If you don’t like the terms the client is willing to agree to then move on and find someone else who values your services more. Focus on finding those who place the highest value on your unique selling proposition. If the market for you USP is big enough and you provide good service you will make money. If the market for your USP is not big enough, change your USP or get out of this business. Whatever you do, don’t try and change the behavior of hiring managers. If they don’t value recruiters they will be among the worst clients you ever work for. Trust me, I worked with a few of these clients and they cost way more to serve than the revenue they generate.
Posted by: CorDell | Monday, September 21, 2009 at 07:56 PM
Tim, I think you are spot on here, but what we’re neglecting to mention is the hidden gaffe here by most placement firms.
Sure, they are lowering fees from 30% to 25, 20 or in some (insane!) cases, 14%. But what I’ve also seen is that many guarantees are dropping from what used to be 3-6 months, down to 30 days. 30 days!?!? I usually tell firms, it’s gotta be 90 days or thanks for your time. That’s our own internal evaluation timeline, and they should play along with that. Again, classic case of some firms playing only to the current market and not looking into the future.
Great post.
Posted by: Pete Radloff | Tuesday, September 22, 2009 at 09:20 AM
Agreed. You either have great “value exchange” in a business relationship – or not. If it’s only a one way street, you should find new clients that value what you do and appreciate your service. It’s hard to turn away business in a down economy – but it’s far worse to sell your soul on the cheap!
Posted by: Tim Tolan | Tuesday, September 22, 2009 at 09:21 AM
What about a shared risk model? Charge a company 5% every six months. If it doesn’t work out, your client hasn’t invested too much. If the employee stays 2 years, you make 20%…10 years and you make 100%. Have your clients do the math, the cost of replacing most employees is quite higher than 10% of an annual salary, so they will have ROI. In this model, everyone wins and it gives recruiters an incentive to find the right person, not just someone who will get hired and stay beyond the guarantee.
Posted by: Matt Chapman | Tuesday, September 22, 2009 at 10:57 PM
I was a recruiter back in the recession of the early 90s. A lot of this squeezing was going on, some of it ridiculous. My employer was a rather sly dog. When the largest company in town tried to dictate a below-cost fee, she spent a lot of time “negotiating” a graduated fee schedule, which started with the stupidly low fee and increased with each placement and/or time on job. Then she sat back and waited….When the company eventually called, their need for the right person exceeded their need to dictate fees. They agreed to her usual fee without batting an eye….
Posted by: Me | Tuesday, September 22, 2009 at 11:55 PM
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Matt:
A shared risk model sounds interesting although I’m not sure where a monthly retention fee would start in terms of the amount. While is sounds great for the client, for larger search firms this would be a huge cash flow issue. Interesting point. Thanks for your post.