Monday, 2 November 2009

The Recruitment Industry Is Broken

Recently, on announcing sharply decreased profits, the CEO of high end recruiter, Heidrick & Struggles (H&S), L. Kevin Kelly, dourly warned that the recruitment industry's 55 year old business model was broken.

Citing the growth in DIY recruiting tools now available to firms and the waves of online search facilities at companies like LinkedIn, there is no doubt that there is a huge squeeze at the mid-market and low end. Finding candidates is no longer hard and the best value recruiters can be is an external sifting resource on generally available candidate information rather than having CV repositories as in the past. It certainly means that the age-old James Caan mantra of 30% of the first year remuneration as a fee per hired candidate is no longer a viable structure in this market and, as the recession bites, companies have not only reined back on recruiting activities but are now shopping around a great deal more.

It was inevitable really - recruiting in its regular form has had a good run for the money and the money has been exceptionally good. Even at the high end where H&S headhunt highly remunerated Board positions the market is also experiencing an erosion of fees as web based matchmaking services come onto the market to compete at much lower prices. H&S is a super, debt free and cash rich company and can survive but it now sees its future in a radically changed market model. In the past, search has yielded around 90% of its fees - in the future it will shrink to only 50% while 40% will be taken up by executive retention and coaching services, another 10% on tools to support this. For this to change, H&S is actively seeking acquisitions with its $183m cash war chest.

That sounds fine for companies like H&S but for smaller players, heavily exposed to the contingency recruiting market, this is impractical. Few have the cash resources to acquire such services and skills while many are still clinging desperately to an increasingly valueless model. There is no way companies will pay 15-30% of first year remuneration for a few clicks of a mouse and a first interview at best. Few recruiters have 'skin in the game' like performance linked fees and few come from the industry they are recruiting into, let alone have done the roles of the people they are identifying as talent.

Value is the key to the future for recruiters or volume, and the latter means more streamlined, web based service. Clients in the industry haven't helped the process with many driving the value out of recruiting by hammering on fees to the extent of running web based reverse auctions for volume placements. The whole recruiting industry is being squeezed from both ends in a market in recession. With the credit crunch to boot, it has been the 'Perfect Storm' and many recruiters who have suffered badly may never regain the lost ground as the market must change to deliver greater value to clients.

Companies like H&S are moving in the right direction when it comes to their high end market. But for mid to low end salary ranged specialists, life will get ever tougher as they are at most risk by the low cost, high volume models from the web. Even James Caan's golden touch has tarnished as his latest investment has struggled badly and only the agents in the City have done well recently.

There is a desperate need for a daring change in the business proposition and model in the recruitment industry that needs to resonate with clients and deliver real value. The days of large contingency fees for a few hours work are long over. Who will deliver the new model? Will clients respond?

The next year is crucial to the recruitment industry.

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