A few days ago I was talking with the Chief HR officer of a large financial services firm in New York City regarding the pros and cons of the retained search model. His perspective of the value of the model has changed significantly over the past 4-5 years.

Mr. Smith (Identity withheld to protect the innocent!) spent time in a retained firm early in his career and regularly used their services as a client for the 13 year he led HR prior to the recession of 2008-2009. Since that time Mr. Smith has seen a dramatic decrease in retained costs and a dramatic increase in the level of service provided by the firms that he uses.

Mr. Smith stated that the value of the retained model is still quite high – assuming the cost model continues to evolve. He predicted that the typical 30-33% retainers will disappear over the next 5-7 years in favor of models tied directly to performance of the retained firm with a potential tie to the performance of the candidate – Can you really hold a search firm accountable for candidate quality like you can that of corporate recruiters? (We will save this question for a later blog topic.)

Mr. Smith suggested that the retained model has a number of inherent flaws:

  • Does the retained drive the consultant to potentially oversell a candidate in order to close the deal and maximize the profit margins of the firm at the expense of quality? Is the client getting the best or the first available?
  • Does the retained model of partner sells the deal and the associate does most of the recruiting create the most value for the client or the retained firm?
  • Does the retained model potentially cause the consultant to get a higher compensation package for the candidate in order to increase their final retainer payment?
  • Does the retained model that includes candidate assessments really have an unbiased approach to the assessment of the candidate? Does the retainer influence the quality of the assessment so as not to discount a potential candidate?
  • Does the retained model drive the “rob Peter to pay Paul” syndrome? In other words, understanding the market is a selling point of the retained model – but does that mean the consultant continues to recruit and place the same rolodex of names from client to client?

These are some interesting points to consider for any retained search firm. Is the typical retained compensation model sustainable as organizations continue to create their own internal executive search functions? Is the typical retained model sustainable as firms tie part of the fee to the short term performance of the placed candidate?

I don’t know the answer to these questions, nor does Mr. Smith; however they are interesting questions to consider. It seems every other industry changed – it stands to reason executive search may need to change as well. Only time will tell.

Interesting Note:

As I was writing this short blog I received an RSS feed regarding the first quarter financial results of retained search firm Heidrick & Struggles. In essence their first quarter revenue fell 7.9% to $106.5 million from $115.6 million in 2011. The good news is that they posted net income of $679,000 compared with a first quarter loss of $4.7 million in 2011.

Heidrick is forecasting a decrease in revenue between 5.5% and 12.5% for the second quarter. Is this a sign of the times? Is this the sign of industry changes to come? Who knows but it will be interesting to watch!




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