Sat, 31 May 2003

Seeking a better deal with executive search firm

Andi Y. P. Martosubroto, Senior Consultant, Consult Group

With the increasing competition in the business world as a result of globalization, especially with the implementation of the ASEAN Free Trade Area (AFTA), it is imperative that companies ensure that they have the most talented professionals on their team.

For many reasons such as time factor, resource limitations, and the sensitive matter of recruitment, companies often turn to executive search companies and ask for their assistance in identifying best professionals in the market and hire the most suitable individuals for their team.

Nowadays there are many executive search or recruitment firms that offer various types of recruitment services. These companies might provide services for a particular industry, a certain level of position, or even specialize in certain regions.

However, the common theme with these services is that they charge their clients either a contingency fee or a retainer.

Now, I am going to discuss the pros and cons of the payment structures and how they really affect your organization.

Suppose you are the decisionmaker for recruitment matters in your company and you are reviewing two proposals for recruitment services. Your immediate reaction will most probably be to go ahead with the consultant that charges on a contingency basis.

I don't blame you. On this basis no fees are paid up front, you just have to wait until the consultants come up with a selection of candidates, interview them and if one of them is hired then you pay for the consultant's services. Everyone is happy.

So why would anyone engage in a recruitment service that requires a retainer? Your first question with this type of fee structure will be: Why pay up front when there is no guarantee that I will get the right candidate?

Well, I guess the advantage of the contingency fee and the disadvantage of a retainer are easily identified, as mentioned above. However, what is the advantage of a retainer and is there a disadvantage with contingency?

Contingency-based searches are conducted in an environment where the search firm has no obligation to deliver results (as the client has not made the commitment of a retainer).

As with all types of businesses, "contingency" firms are always revenue driven. Being revenue driven without an assignment-completion commitment will, nine times out of 10, be directly reflected in the way the contingency searches are prioritized.

The fact is contingency assignments will always first address the assignments that are easy, i.e. those where there is a higher chance of them securing a placement fee.

This tendency is also relevant to firms with consultants who are paid on a commission basis. In order to increase their paycheck, consultants will immediately target the positions that are easiest to fill. Meanwhile, the client's most critical vacancies remain just as they are: vacant. What this actually means for a client is that assignments that are deemed "difficult" are not properly addressed, as there is less chance that the consultants will be able to complete them. Hence they will often sit on the back burner for months.

Sometimes, despite the firms' promises, they are not addressed at all. As the client has not made the commitment of a retainer, the search firm has no obligation to deliver results. In these situations, for the employer, the apparent reduction of risk by not paying a retainer can actually turn into a huge loss when that key vacancy remains unfilled. Needless to say, the increased "hidden cost" of this workload can be substantial.

If a critical vacancy is given to a contingency firm that fails to deliver after a period of time, a client may have saved on a retainer fee. However, the real cost to the client is having the unfilled vacancy. In most cases this cost will be substantially more expensive than the sum of all recruitment fees. It is also important to point out that with or without a retainer, the total cost of the assignment remains the same.

To sum it up, whether contingency fee or retainer, both methods have their strong points and are most advantageous when applied to certain positions.

Conducting recruitment assignments on a contingency basis for junior or noncritical mid-level positions is fine, particularly when time constraint is not an issue. These nonurgent, noncritical junior to middle level staff vacancies, when handled by a contingency recruitment firm, can often prove to be the most cost-effective solution for the client.

However, for senior level or positions of vital importance, I do not believe contingency recruitment is able to successfully deliver first-rate candidates in an agreed time, simply due to the manner in which the majority of contingency recruitment is managed.