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In my 25 years of recruiting, one of the most perplexing things I’ve noticed is the wide variety of relationships that exist between recruiting firms and their clients. I’ve heard everything from "We don’t ever use recruiting firms, you swine" to "Thank you for helping us fill our job" and everything in between. There must be a better way to structure the client/agency relationship. I can think of no other business with a pricing structure like my industry. It might be helpful to analyze the types of recruiting firms and what you can expect from each. From that we can discuss how to maximize the relationship for both parties.
There are 2 types of recruiting firms, contingency and retained. You probably know the difference. Retained firms are perceived as more "high end" and the fee is paid up front. They keep the fee even if they don’t fill the job. They are usually used on executive level jobs. They can be expensive. Fees range from 25% to 33% of salary. It’s not refundable so you have to choose your retained firm wisely. If you want to fill a $150,000/yr. position you may pay someone $25,000+ just to start the process and then not get any results. Retained firms are good at selling their services and are skilled at client presentations so references from actual clients are essential. When doing references be careful. Some retained recruiters are downsized executives and were hired as recruiters to service their specific industry. Their references may be nothing more than their ex-boss, the guy who originally laid them off. When choosing a retained firm do two things. Make sure using a retained firm is actually the best strategy for filling that job and do your own references on the recruiter before signing a contract. I’ve had many companies come to me over the years asking me to fill jobs after they had paid a retainer, only to never hear from the recruiter again.
The more common type of recruiting firm is contingency. Most of the work we do is contingency. While we have started doing some retained work, we set up the pricing and payment plan differently than most retained firms. Contingency firms will work between 15% and 30%. Most fees are between 20% and 25%. The fee is earned only when the candidate starts. Properly managed, this relationship can save an employer money and still get them a more reliable vendor.
There are two ways a contingency firm can earn a fee. One, they can get an assignment from a company to fill a specific job. Two, they can run across a strong candidate and talk to appropriate companies about the candidate, hoping to spark interest - basically having the right candidate at the right time. We do both. Let’s talk about each.
When a company gives an agency a job to fill, what they are really saying is "If you can find me someone with the following qualifications who will work for me at the following salary, I will pay you the following fee." It’s a speculative deal, one where all the risk is on the agency’s side. Candidly, that is why fees are high. High risk - high reward.
Now, put yourself in the shoes of a recruiter who must choose between devoting his time and energy between two assignments. Company A is trying to fill a job at a 25% fee and is listing it with 10 agencies and has already advertised it with no success. Company B has a job to fill but only wants to pay 15%. They have done no work on it and don’t want a lot of vendors messing things up. They want someone they can count on but don’t want to pay a lot for that. At face value, many people might assume that the higher fee company will get more attention. Not true. In fact, the higher fee company will get less attention and worse quality. Here is why.
Let’s pretend Joe Recruiter has both these jobs in front of him. He knows that he has an excellent chance of filling Company B’s job. There is no static with other recruiting firms and no legacy ad campaign that has poisoned the market. Joe Recruiter knows that if he buckles down and focuses there is a strong likelihood that he will earn his commission. Also, because the company is using only him he is comfortable giving unvarnished advice about candidates because he knows he will fill the job. In other words, he has the freedom to be the professional he wants to be.
However, he has no need to tell Company A that he doesn’t want to have their job too. After all, maybe the perfect candidate will appear and he will get lucky but his efforts will go to Company B. What is worse for Company A, all 10 agencies are thinking the same thing - if I get a resume that’s even close I’ll just send it to Company A, before my competition, claiming prior contact. If the guy is good maybe I will get lucky. Speed over quality. I talked to a VP HR once at a major local pharma company that liked setting it up like Company A. He got a perverse thrill out of thinking of all us little commissioned recruiters chasing his big-guy/big-company check. It was a power issue, I think. It was false shrewdness on his part. He was overpaying someone in the end and creating enemies among the losers.
It’s a similar situation when Company A calls a recruiter after advertising the job a lot and getting nowhere. I get that all the time. Here is what the company is saying. "Hey, I’ve exhausted all my efforts and can’t find anyone. I’m getting desperate so I will consider paying you a fee. I don’t want to ask for help but I am, and, by the way, give me a price break. I’ve already spent ¼ of the fee on ads to no avail."
Here is what the agency knows. First, their ads for that job would have been more effective. Sometimes people seem surprised when an agency runs an ad. Good recruiters know how to write an ad that will cause the right candidate to respond. I’ve been writing ads for 25 years. I should know how to write them by now. Don’t you hire an advertising agency to write copy for your product ads? Why do you rely on having your employment ads appear looking like a cold list of skills rather than an enticement to respond to that specific ad rather than your competitions? Many company ads act as if the respondent will be a burden. A good ad acts as an enticement. It speaks to why this particular job will appeal to the right person. It says, hey, give this recruiter a call for details. He will gladly tell you why it’s a great job.
The agency also knows that the company ads are still floating around on web sites. Joe Recruiter might work on this, talk to people, create referrals and then lose out because one of the referrals ends up seeing the ad and responding directly. Joe Recruiter doesn’t really want to create a "buzz" about the job and find it working against him. I once spoke to a person about a job and had that guy turn around and call his friend at my client to present him for the job so they could split the referral fee. His friend hadn’t even known he was looking. Like I said, high-risk, high-reward. That’s one of the reasons fees are so high. This company has already wasted money on ads and will get so-so service from an agency. The fee they will end up paying will also be higher than one they could have originally negotiated. The earlier the agency enters the hiring process the cheaper the fee should be.
As a manager you put in a lot of effort to identify good vendors. Because the fee structure in contingency recruiting is so unusual companies often make the mistake of throwing their jobs out to a lot of agencies. After all, it doesn’t cost anything to give out the job. But the cost comes when you actually have to start reviewing bad resumes from multiple sources and still end up paying a high fee to someone who has gotten lucky. No other recruiter will tell you this but the companies who pay a fee are often subsidizing those who waste a recruiter’s time. Good recruiters love situations where they are involved in the job from the beginning and can exercise judgment in selecting candidates. It allows them to work as a professional and feel good about themselves. It also increases their probability of filling the job. In return, they will reduce their fee.
A quick story. A few years ago an HR person called me. She was proud that she had never paid a fee before and that she didn’t like agencies. She had a job that she had been unable to fill on her own. She wanted me to help her but she wanted a 10% fee. Here is exactly what I said to her, "You have just told me that you hate my business. You have said that you have tried everything possible to fill this job. You have said that even if I do a great job for you I will get no more business from your company because you don’t like agencies. Now why would I give you the same price I give my very best clients?"
In general, if you understand your vendors’ needs, you can help create a better (and sometimes cheaper) vendor. Despite the unusual and speculative nature of the fee structure, the recruiter/employer relationship can be improved like any other business relationship. If you understand that the recruiter wants a high probability of filling the job you can then get them to negotiate on other issues. For the recruiter, there is nothing worse than competing with your client. It’s awkward for all parts of the equation; employer, recruiter and candidate.
There is a second way that recruiters make money. They run across a stellar candidate, strong background, academics, good motivation, etc. and contact companies who might need someone like that. Some of you may have gotten emails from me about candidates like that. Here is something unusual. This should be a cheaper fee than a normal search. The person is already in the recruiter’s inventory. There is no labor involved. The recruiter has already identified the person. If a company normally pays someone a 25% fee to go out and do a contingency search why should they pay the same amount for a person that is already on the recruiters desk? I don’t know. Maybe they shouldn’t.
Another quick story. I emailed a group of managers a few months ago about a strong design engineer. I got a call back from a manager who had an opening and thought the guy sounded good. He wanted the resume and liked the background a lot when he saw it. When he went to HR he got squashed. She was not going to approve a large fee. When he told me that, we set up an arrangement that worked for everyone. If he interviewed and hired that person he would get a reduced fee. If he interviewed that person and found them off target I would check my files. If I had someone who fit better in my files I would charge a figure between the original reduced fee and a normal fee. If he needed a full effort and I could work with him directly I would charge a little more, but still a lesser fee than his HR person ever expected.
Two factors go into fee. We’ve already spoken about one, the predictability of getting the fee. The story above illuminates the second factor, inventory. If I already have a candidate in my inventory I don’t have to go out and find them. Less labor on my part should mean a lesser fee. That’s why when I send out emails for already identified candidates I can charge less.
Lot’s of industries have changed over the last 10 years. Most of the change has been driven by smaller firms who see an opportunity to provide a service to a market and take advantage of that opportunity. Right Recruiting is a small firm and we want to re-evaluate the way recruiting firms work. Next time you get an email from us about an interesting candidate who might be valuable to you, let’s figure out how we can make it work. Thanks for your time. Jeff
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