In the midst of writing this white paper, I learned that Right Recruiting won two regional awards. The timing was good because, oddly, the awards lend validity to the topic at hand. We were the only recruitment firm in the region to be ranked in the Philadelphia Business Journal’s annual listing in two different categories. We were at number 11 in the retained list and at number 24 in the contingency list. The last was a surprise because Cathy only started focusing on the contingency market last year. Good job, Vice President Cathy Bird!
This White Paper is geared towards employers. Recruitment has changed dramatically over the last five years. Candidate behavior and expectations have changed. Many companies are being caught off-guard and realize that they need to expand their recruitment resources. For a variety of reasons, advertising is almost useless as a predictable source of candidates. In the past, it provided a flow of average people with an occasional gem. Now, employers are beginning to discover that it doesn’t even get them a flow of average people. It gets a trickle, at best. Candidate behavior has changed.
That means that an employer in today’s world needs to actively reach out to people. Technology has allowed people to let job information come to them. If they are good at what they do, their next career move will appear in their inbox or voicemail.
Large companies have recruitment staff and budgets into the seven figures. That includes staff and technologies that allow them to actively reach out to people and attract them. Small and mid-sized firms don’t have that luxury and often find that they need to turn to recruitment firms to augment their effort. Many have never done so before or haven’t done so in years. However, the landscape has changed and what worked before may not work now. This White Paper is specifically intended for those executives, managers and HR professionals who want to better understand the recruitment landscape so they can make better vendor decisions.
I know this may sound self-serving since we are a recruitment vendor, too. We obviously want more business. But it is my hope that you will see beyond that and find the underlying principals beyond the message. If it leads you to us, that would be great. If it leads you elsewhere, then at least the message has helped you. That is not a bad thing.
There are two types of recruitment vendors. They are, in the order that we will address them, contingency and retained. We do both. I will address them and give some insight on how to approach them to maximize the relationship. To help you evaluate this objectively, Right Recruiting is 80% retained, and 20% contingency. Most of our retained clients started as contingency, but switched to retained to save money. More on that later.
I will start with two statements about contingency recruiting.
- It is wildly overpriced.Contingency firms fill less than ¼ of the jobs they receive. Clients give them assignments, but have a wide divergence in expectations of completion. Some employers list jobs with every conceivable contingency firm as a way of supplementing their own resume flow. Some list their jobs because it is free to give a contingency assignment. Some employers throw contingency assignments out randomly but really have no intention of hiring anyone from a recruiter. To them, it is free market research and a way to get a pushy recruiter off the phone. On the other end of the spectrum, there are employers that are looking for a serious business partner and expect results.
The problem is that the contingency recruiter can’t tell the difference between the serious and non-serious engagements and they waste a lot of time. So, from an economic sense, the clients that actually hire people subsidize the efforts being put into the dry holes. Contingency recruitment is overpriced because risk is priced into the equation.
- It is a disincentive to professionalism.
Contingency recruitment is a classical transactional relationship. The first recruiter who emails the resume gets credit for the submittal, even if they have never spoken to the candidate. That is the only criteria. The incentive is on high volume and quick resume submittals. There is no reward for an objective professional analysis of the candidate’s interest and qualifications. That is not the recruiter’s fault. HR professionals who complain that they are getting the wrong type of resume or that they are getting no information along with the resume (no salary, background data, etc.) need to step back and analyze the pricing structure.
It is basically a “first through the post” system. If that is what you want, then don’t complain that the recruiter cuts corners and wastes your time. Why wouldn’t he or she? You are not paying for any detailed work or research. You are paying for an email. The more random emails that the recruiter sends, the better probability of eventual payment.
Because of the nature of the contingency pricing system, the recruiter is basically focused on selling you whichever resume is on top of the pile on his or her desk at that moment. If your project gets bogged down, is too difficult or if an easier one appears, they focus on the next project. Why wouldn’t they?
That is why the second or third project you give a recruiter after their first success is often a disappointment. The first successful placement was a function of luck – they had the right resume at the right moment. Luck is not a process, unfortunately. It is not duplicable.
However, if you are locked into a contingency model there are a few things you should do.
- Meet with multiple firms and select one. If a firm won’t meet with you, pass on them and select another. If they won’t invest their time, neither should you.
- Ask how the fees are split and accounts are managed. You will probably want one point of contact. That is your Account Manager. That person will control the information flow to you so you are not overwhelmed by multiple calls from multiple people.
Things can get tricky here. Usually, the Account Manager gets a part of the fee on a successful placement and the recruiter who finds the candidate gets part of the fee. If the recruiter with the candidate gets too high of a percentage, than there is an incentive built into the system for the Account Manager to screen out others’ candidates till he or she has found someone themselves. After all, by ignoring everyone else’s candidates, the Account Manager has a better shot at 100% of the fee by finding their own candidate. They may not want to take only 10% or 25% of the fee by supporting a peer’s candidate, even if the candidate is good. That math makes sense for them, but not for you.
- Ask for references from other clients. You want to know what other companies think of the vendor. Make sure the references are about the person who will be your contact point and not the company in general.
- Use your gut. If you’ve met with 2-4 recruiting firms, choose the one that takes you seriously and speaks with intelligence on your situation.
- Give them a month to get you good resumes. If they haven’t done anything within a month, find another firm.
Contingency recruiting is like the Wild West. There are no real rules of behavior. A little research on your part can go a long way.
Most people think of retained recruitment as exclusively focused on executive searches. That means big fees ($100K fees) and at least mid-six figure jobs. That pricing structure makes sense for large corporate America, but not for small to mid-sized firms.
Retained firms require a down payment on the fee to begin the project. This down payment (retainer) covers the firm’s costs in identifying candidates. These costs can include research to identify prospects, time spent interviewing them and preparing reports on each candidate and other background functions. Unlike the contingency firm, the retained firm is not selling a specific candidate. The retained firm is building a process that gives the client a choice of candidates. The retainer covers the cost of building the process.
There are two pitfalls to retained relationships.
- The size of the retainer can sometimes be a profit center itself. In a typical retained relationship, the fee is 30%+ of salary and the retainer 1/3 of that. That means on a $200K job the retainer is $20,000 or more. Candidly, at that level the retainer is paying for overhead, not just project costs. Retained recruitment firms can be similar to what law firms used to be before their corporate clients realized that they were unnecessarily paying for their client’s fancy marble lobby.
- The retainer shifts some of the risk to the client from the recruitment firm. The client may change its mind about the opening, fill it internally or put it on hold. As I mentioned in my contingency overview, I think that contingency fees are high because it pays for the risk. The problem with retained is that most retained fees are actually a higher percentage than contingency. The typical contingency fee is 20% to 25% of the salary and the average retained fee is 30% or more of salary. So, employers seem to pay more for retained and, at the same time, accept more of the risk. Why?I think it’s a legacy issue. There was a time when law firms never advertised, which kept legal fees high. There was a time when stockbrokers all charged the same, very high commissions. Technology eventually caused that to change on a massive scale.
Retained recruiting fees have been set by the original market for retained recruitment – large, Fortune level companies. Small and mid-sized employers rightly recoil from writing $20K checks as retainers 2 or 3 times annually. They do not give enough volume for the average retained recruiter to consider a reduced fee. The mid and small company was thrown into the contingency pool due to pricing.
That is beginning to change and my firm is an example of that. We service the small to mid-sized employer/division market and price our fees accordingly. If you want to consider evaluating a retained firm as a recruitment partner, here is what you should do.
- As in the contingency world, interview them and get references. That part is obvious.
- Nor so obvious is the second step. Don’t worry so much about whether they have worked in your specific industry. Instead, worry about whether they have worked with companies the same size as yours. This is important for two interconnected reasons.
Large companies are different than small companies. Publicly held companies are different than privately held companies. They operate differently. A recruitment firm that works with a lot of small privately held firms may not transition well to working with a large, Fortune 500 headquarters operation and vice versa. That part is probably obvious.
But the real problem is the candidate base. A few years ago, a client turned to us for a project after a large national recruitment firm had disappointed them. They were a $50,000,000 company looking for a VP of Marketing. They hired a large retained firm and saw a series of people from billion dollar firms making $100K more than the salary range. The people had the right titles and, on paper, the right backgrounds. It was a problem of scale. Scaling down from a large to smaller employer can be tough. The salaries don’t mesh and the business infrastructure is not the same. Not only were the people not right for the job due to scale, they were not interested in the job. It was a step down in scope and resources.
That was the candidate pool that the large retained firm worked with because most of their clients were large Fortune companies who hire people from large Fortune companies. There was a huge mismatch between the recruiter’s research pool and the client’s needs. The mismatch was contextual, but important.
We filled the job within two months at half the fee that the large firm charged, because we swim in the same waters as that client and knew the candidate pool for their size firm. Do not underestimate client size as an important component of recruiter selection. If you are a small or mid-sized firm, find a vendor who will take your project seriously.
Put simply, the contingency recruiter is trained to sell you the person they have right now. The retained recruiter is trained to give you a slate of qualified people. Those are two different functions. It takes work to identify a supplier for any service or product. Most functions like IT, legal, benefits, etc. are purchases and commitments that are carefully considered by the buyer. Probably because of the contingency element in recruitment, that function has too often been a more of a random choice. Whoever calls and pitches a candidate at the time of need is the vendor du jour.
Imagine if you bought any other service that randomly. Then, imagine that you are randomly buying a service and also paying more than a well thought out vendor selection process would charge you. I once had a VP of Supply Chain at a $500,000,000/year Lehigh Valley company tell me that if one of his buyers ever used the criteria that was used to chose recruitment vendors, he would fire them. A little research can save you money in the long run and get better results, as well.
At this point it would be very appropriate to close with the same closing that we use on all of our White Papers – thanks for getting this far and please remember Right Recruiting for all of your recruitment needs.