Heidrick & Struggles (HSII) Chief Executive Officer Kevin Kelly made his name raiding corporate America’s ranks on behalf of his clients. These days a lot of them are turning the tables and hiring his employees to do the work themselves. Companies such as General Electric (GE), Coca-Cola (KO), Pfizer (PFE), Microsoft (MSFT), and Nike (NKE) are increasingly using their own executives—many lured from outfits like Heidrick—to recruit talent and avoid fees that can run as high as 40 percent of a new hire’s first-year compensation. Heidrick is “seeing a trend of individuals going to work at clients” to do in-house recruiting, Kelly told analysts on a July 31 conference call. “That’s something new that we’ve seen over the last 12 to 18 months.” Three months later he told the same analysts that the talent drain to clients was continuing.
Heidrick, Korn/Ferry International (KFY), Spencer Stuart, and other executive search firms still dominate the work of replacing CEOs and board members. Yet they face increasing competition for searches in the lower senior- and middle-management ranks, where candidates are plentiful and technology and social networking sites make it easier to find talent. “Clients are looking at executive search, just like legal and other services, and saying they want it faster, cheaper, and better,” says Bob Benson, a former Spencer Stuart partner who now heads RL Benson & Associates, a New Canaan (Conn.)-based consultant to search firms. “There’s a dramatic shift in who’s doing the work, with a lot of recruiting moving in-house, especially at levels below top C-suite jobs. That’s the work that keeps the lights and heat on.”
New searches undertaken by the $9 billion search industry fell 7.6 percent in last year’s third quarter, according to the Association of Executive Search Consultants, which tracks 1,430 senior executive recruiters in 46 countries. Third-quarter revenue in the industry fell 9.7 percent, following declines of 6 percent and 7 percent in the second and first quarters, respectively, the AESC found.
GE has built an internal recruiting staff of about 500 in the last six years. In 2012 the team, helped by LinkedIn (LNKD) and BranchOut, filled most of GE’s 25,000 openings, about 10 percent of which were executive and senior professional positions. They completed most searches in about 73 days, compared with the average 170 days it takes outside firms. “We still use outside recruiters but only when they’re absolutely required—for confidential searches or very specialized jobs,” says Steven Knox, who heads recruiting at GE for markets outside the U.S. and Europe.
The company’s cost savings have been substantial—close to $100 million last year in search firm fees alone, according to a person familiar with the matter who wasn’t authorized to discuss it publicly. Even more important, Knox says, GE is able to keep attractive candidates on its radar for future searches and find hires who better fit its culture. Explains Knox: “Our recruiters know what it takes to work here.”
Coca-Cola does about 95 percent of its global executive recruiting in-house, with recent placements including the company’s chief technology officer, the CEO of its Indian bottling operations, and a senior vice president of finance in Japan, says John Goldberg, the company’s executive recruiting director. As recently as 2004, recruiting at the world’s largest soft-drink maker was virtually all done by outside firms, says Goldberg, whose team includes former search executives from Russell Reynolds Associates, Korn/Ferry, and Heidrick.
Executives hired at Coca-Cola by outside recruiters are twice as likely to leave, and the diversity of candidates is about twice as high for candidates hired by the inside team, the company says. The searches are also completed in about a third less time.
The trend has intensified competition among search firms and triggered pricing wars. Instead of charging the traditional one-third of a candidate’s first-year salary, some outside recruiters are taking 25 percent or less, dropping extra administrative charges they once commanded, or accepting fixed payments. “Fees are being negotiated all over the place,” says Caroline McClure, who runs ScoutRock, a Baltimore consulting firm for in-house recruiters. She started her career at Korn/Ferry and later was head of executive recruiting at Lockheed Martin (LMT), where search firm fees averaged 40 percent of new hires’ salaries, spurring her to build an internal recruiting team.
“The executive recruiting industry is going to get smaller,” and costs to companies that use headhunters will go down, says McClure, whose seminars for companies considering in-house recruiting also attract search-firm employees who want jobs at those companies. “Search firms will see fewer and only the most difficult searches, and they’ll require more partner involvement—which means thinner margins for each assignment,” she says.
That’s one reason big firms are diversifying beyond executive recruiting. Spencer Stuart, which conducts more than half of all searches for directors at U.S. companies, advises boards on succession planning. Korn/Ferry since 2006 has acquired four consulting businesses, including PDI Ninth House, a talent assessment and coaching firm it agreed to buy in 2012 for $80 million. Now Korn/Ferry gets more than 35 percent of its revenue from leadership consulting. “The search business enables us to forge relationships with CEOs, and that gives us permission to talk about how we can help companies in a much broader way,” says Robert Damon, Korn/Ferry’s president North America.
Heidrick, which posted an 18 percent drop in third-quarter revenue and a 19 percent decline in the second quarter, earlier this month announced its $53.5 million acquisition of Senn-Delaney Leadership Consulting Group, a “culture shaping” and executive assessment consultant. Now Heidrick will get 15 percent of its revenue from nonrecruiting services. None of this may be enough to offset the shift to in-house talent hunting or to diminish recruiters’ angst. As Heidrick’s chief financial officer, Richard Pehlke, told analysts in July: The changes under way across the industry “are driving some people that are trying to be in this business a little crazy, frankly.”
The bottom line: As more big companies move recruiting efforts in-house, the executive search industry’s revenue fell 9.7 percent in the third quarter.
