Why Do Executive Recruiters Consistently Undercharge?
I'm an OD (organization development) consultant by trade, so you can always tell me to mind my own business. However, aside from my normal client base of firms such as Mercedes-Benz, Merck, Hewlett-Packard, and the Federal Reserve Bank, I've also become a consultant to other consulting firms, such as Arthur Andersen, Peat Marwick, and Solving International, among others. That latter group is a result of my publishing Million Dollar Consulting (McGraw-Hill, 1992, 1998, 2002) which suggested that consultants were consistently undercharging for their talent, since they based fees on time and materials, instead of value, and offered methods to change that inequity dramatically. Many consultants have heeded that call.
I've since had the opportunity to work with several executive recruiting firms. and I'm astonished at the degree to which this profession also undervalues its contribution to corporate well-being.
Consider my hypothetical case: If you were able, as a consultant, to increase shareholder value, public image, annual profitability, top line growth, top-talent acquisition and retention, and market share for a given firm so that the aggregate benefit were well in excess of a billion dollars, what would you charge? I'm guessing you'd say something that was in the tens of millions.
Well, that improvement was exactly what Lou Gerstner has accomplished, and more, for IBM. His remuneration reflects that, as does his standing in the community. But what of the search firm that placed him? What was its 33% of first year total compensation (or whatever the formula) worth? It probably looked wonderful at the time, but it doesn't look so impressive in light of the actual, dramatic results.
Every day, search firms are placing people who will, by design and intent, change the face of their new organizations. In strong organizations, where normal succession is taking place, the newcomer is expected to carry on and improve upon tradition and precedent when no internal candidate is deemed appropriate (Ray Gilmartin, recruited from Bectin Dickinson, succeeding the retiring Roy Vagelos at Merck). But in most cases, the recruiter is serving as a combination of the CIA and Marines, using stealth, skill, and savvy to bring in someone to retrieve a calamitous situation (e.g., Larry Bossidy at Allied signal).
In view of the tremendous long-term value produced by executive recruiters, why does the profession act like the real estate industry, which is itself locked into an arbitrary 6% commission rate, despite booming demand for houses in short supply, additional needs for trailing spouses, assistance in obtaining financing, and all kinds of other ancillary services simply "thrown into the pot"? What is so magical about a third of first-year projected compensation?
Both the realty and recruiting industries have continued to educate the buyer incorrectly. It's lunacy to view a rare beach front home, and a modest city retreat in great abundance, as meriting the same commission rate, irrespective of the difference in their prices, just as it's bizarre to charge the same rate on the same type houses for buyers who are in no great hurry and buyers who must have something within 30 days. The measure of value to the buyers is far different, and that is the main criterion for establishing the worth of one's services. (Why is a top-of-the-line Mercedes or a Dali painting worth so much? Because people are willing to pay that much.)
In the search profession, why isn't the nature of the client's need, the urgency of the project, the degree of potential impact, and the uniqueness of the candidate (difficulty of acquisition) factored into a reasonable fee basis? Attorneys, constrained by the primitive and inefficient hourly billing system of their profession, have created contingency fees, where they are entitled to a (hefty) piece of the pie when successful. Consultants, at least the ones who listen to me, have begun billing based on their contribution to value, not their hours. Why is the value of a successful search any different? Why has the profession failed to seize on an opportunity which could radically improve the bottom line with virtually no need for an increase in business (in a closed market, where market share has to be gained at someone else's expense)?
My layman's view of the profession is that the answer lies in pure inertia. There is no ethical imperative that demands fixed percentage fees. I believe there is the fear that the client will complain that "this is not standard in the industry, and we can always go to the competition." I see a fear in attempting to change billing bases and a lock-step march of "let's not rock the boat." I believe the reasons include:
- The search firm bases its value on its deliverable, research, knowledge base, etc., and not on the ultimate value which a successful search provides for the client.
- The profession contents itself too often with dealing with or through the human resource area, which is always charged with conserving budget and conforming to standard practices, as opposed to dealing exclusively with the board, CEO, or other senior officers who do understand value and are willing to invest in it. As a rule, human resource people are not privy to top strategy and do not appreciate value vs. task.
- The personality cult and partnership apparatus, which can enrich an individual who is seen as well connected, on a "hot" streak, or just plain lucky, even within the present limited fee parameters. The notion of enriching the entire firm isn't sufficient to overcome that complacency (or the aspiration that, some day, "that will be me").
- Dread fear of losing business to competing firms, since search firms have not done a very good job of differentiation by talent, approach, or infrastructure. Anyone can hang out a shingle, and personality and timing often win the day.
Perhaps. But perhaps someone will have the courage some day to realize what the true value-delivered of top-flight executive search efforts are, organize a practice around them, and educate clients and prospects accordingly. Where is the locus of leadership in the profession? I hope it's better positioned and more respected than in the consulting profession, which suffers from a lack of industry voice and leadership. (It's of some interest to me that I couldn't think of the firm that placed Lou Gerstner at IBM as I was writing this, and I'm extremely well-read and highly active in major organizations.)
Ah, well, back to my own turf. Just do me one favor. Don't show this article to any realtor friends. I'm going to be buying another house soon.