Recruitment Fees – A necessary evil?
Compare these typical transaction costs:
- 10 year Treasury: 5c per $100
- Gold Future: 30c per $1678
- UK Residential property: 1%-1.5%
- Recruitment of a Chef: 15%
- Recruitment of Front Office Candidate: 33%
... recruitment fees are perhaps only bettered by illegal arms & drugs dealing?
What's going on here? How can a Search firm charge such a high fee?
First of all, please note Arbitrage is not so high, charging 28% for a fully retained search, giving detailed interview feedback on every potential economist for the role etc. And is the only search firm run by an ex-economist (I await a black-swan on this fact).
Still, why might a Search firm charge a firm £33k for a £100k salary, when an estate agent charges £1,500 for a £100k property?
First of all, there are volume differences, clearly a highly liquid market such as treasuries turns over $bns, so volume is one factor. The most candidates I have ever placed in one month is 4.
Secondly, the amount of work involved can be very high and time-consuming... but again, some estate agents have to show round many potential buyers of property, just as I have to have 45min coffees with everyone I think a potential candidate.
3rd potential reason: quality of advice. My clients are paying me for expert advice, just as they pay for lawyers – the time old reason given by head-hunters. Interestingly, many of Arbitrage's placements have been made below the targeted salary (sorry candidates!), for example we are well-placed to recognise skilled economists who are ready to make a sideways step into an investment bank for the first time, rather than the client needing to pay an enormous pay-rise and guaranteed bonus to attract someone from a competitor (ie we are increasing the supply in the sub sector of financial economists). On the other hand I know major hedge funds who have refused to pay head-hunter fees, and as a result only ever saw and hired the candidates who were passed over by everyone else.... Most of these funds have had a terrible 2011 losing $bns of client money - I wonder what % returns may have been if they had used Arbitrage Search and got the inside view on who the market is keen to hire?
4th reason: Confidentiality. If you are a candidate looking to move 3, even 6 months before your bonus is due you would crazy to put your CV on a jobs website, which you HR dept. has access to. Due to the city's specialisation nearly everyone works in a fairly small sector and your current boss and future employer probably know each other. A head-hunter can have discrete chat – and withhold your personal details, so a candidate may choose to use a head-hunter even for a known vacancy. (But be cautious, some firms are unscrupulous and may take your CV and email it everywhere hoping to make a lucky fee – this 'machine gunning' of CVs is illegal in my view of the Data Protection Act, but common due to the huge pressure most search firms apply to their armies of largely untrained staff. Arbitrage never sends a CV without explicit permission from a candidate).
The 5th potential reason, and in my view the most important, is the restriction of supply by HR and internal recruitment teams. It is common practice in all large firms to operate a 'Preferred Supplier List'. As a result an entire division of an investment bank may only use 5 outside firms for recruitment, when the city must contain at least 250. However, there is good reason for this too, namely ease of management from the HR perspective, and also the fact that recruitment firms are vetted (in theory). One well known Economics consultancy for example works with many recruitment firms and as a result have pushed their recruitment fees down to an alleged 12-15%, this is sensible, offering to widen the supplier pool could seriously reduce transaction fees. The solution is run open and transparent tendering processes – and encourage price competition, but in reality firms rarely have open public tendering processes. Oil companies are much better at this, and for example often pay just 18% fees for candidates earning £250k (I know this because my wife works in HR for an oil company).
Another reason: Typically, fees do not cover bonuses, so if a candidate earns a 100% bonus and this is not guaranteed (ie billable from a recruiter perspective), then the effective recruitment rate from the employers perspective may well only be 15% of the total salary package.
Technology is now closing the gap and reducing the potential for recruitment firms to arbitrage the market. For example Linkedin.com (worth far more than the £10bn market cap in my view) is eating into the recruitment market, although it is still far from perfect it has effectively removed the need for search firms to employ armies of graduates randomly calling firms pretending to do a survey – although plenty of firms still stick with this old-fashioned and needlessly expensive methodology. Furthermore, Bloomberg contains 99.9% of everyone worth knowing in financial markets, although less used by some economists. This means that a modern search firm should focus on hiring skilled consultants who can interact effectively with clients and candidates, with the intelligence required to understand their work as deeply as possible. One modern consultant, with linkedin and bloomberg can do as much work as a 4-man team did in the mid-90's. Arbitrage by focusing on a niche within a niche, also has substantial synergies for certain types of candidates such as economists – and for regular clients these synergies can be passed on.
Lower fees could be pushed by a determined industry, some firms have cleverly brought a large amount of their recruitment process in-house with bloomberg and linkedin.com, and then only turn to external recruiters when these have failed to yield results. I understand some major US asset managers to have an effective policy on this process.
However, there are limits to this – we have never placed a candidate found using advertising, despite using linkedin adds, and efinancialcareers.co.uk., and firms do not like to be seen to directly approach candidates – legal suits are common when whole teams move, I have heard of banks and brokerages suing each other, and the legal claims for lost business have been as high as $750m! Using head-hunters reduces this legal risk. How urgent is your hire? I ask clients to think about this. Typically if you advertise a role for over 6-9 months you will find your candidate (who may then have a 3m notice period!). A typical recruitment fee of £30k, might be the equivalent of a traders DV01... nothing in the grand scheme of things, but if a team is without a strategist for 9 months the risk of not having any cover could be countlessly higher than £30k. So typically a recruitment fee saves a firm 6 months of lost business or risky exposure.
Generally speaking high recruitment fees, which are probably a 'dead-weight loss' in strict economist terms, will remain a necessary evil, but the premium charged in the Financial sector is likely to fall long-term. We aim to lead the charge and pressure the cosy oligopolies supplying firms, yet still over-deliver by cornering a niche in Economists and Strategists.