May 13, 2015 – August 24, 2013 — In 1953 Gardner Heidrick and John Struggles left the management consultancy for which they worked, to found a new company which would focus on recruiting corporate bosses. It was the first of what would become the big five executive-search (or “headhunting”) firms, and has been a leader in the recruitment industry for 60 years. The firm’s placement of Eric Schmidt as the head of the then-upstart Google in 2001 is regarded as a signature success: he stayed in the position for a decade, and still serves as the company’s executive chairman.
Today Heidrick & Struggles is, well, struggling. Its revenues fell from $616m in 2008 to $444m last year, and over the past year its profit margin has been 3.4%—piddling by the industry’s standards. In July its boss, Kevin Kelly, stepped down after its board said it was considering “strategic alternatives”, including a sale.
Heidrick & Struggles’s strong position in recruiting for financial firms left it vulnerable after the 2007-08 crisis. It compounded its woes by overreacting, cutting staff drastically and failing to pay its best recruiters competitively. That opened the door for rival firms to raid its talent. The market has recovered since, but the firm still has 25% fewer consultants than at the end of 2008. Mr. Kelly sought to rebuild the business by offering “leadership” advice to senior managers, but these efforts are still at an early stage.
Like other headhunters the firm is also suffering at the top and bottom end of the recruitment market. At the lower end, employers seeking managers can now call up a huge database of potential candidates using LinkedIn, a professional-networking website, allowing them to cut out the middleman. And when it comes to filling the most senior jobs, although globalization is increasing the size of the potential market, clients have begun to rebel against the fat fees charged by the largest executive-search firms: a third of the first-year salary for the position, plus a further “administrative fee”. Both are charged even if a suitable candidate is not found.
Some users of headhunters have also taken umbrage at their “off-limits” clauses, in which they promise existing clients that they will not poach staff from them. That keeps many of the best candidates off new clients’ shortlists. And they question the value they get for their money: an internal review by Heidrick & Struggles in 2009 found that 40% of the people it placed in jobs left within 18 months.
As a result, many employers are now doing their own searches for new bosses. A recent survey by Hunt Scanlon Media, which studies the recruitment industry, found that in-house recruiting has increased by a quarter over the past five years. Scott Scanlon, Hunt Scanlon managing director, estimates that this trend is costing headhunting firms $650m a year. In 2003 Time Warner, a media conglomerate, set up an in-house search group, which now includes 30 recruiters across three continents. “It’s a business within a business, which could be competitive with any of the big outside firms,” says Maggie Rubey Lynch, its director. She says the team hires better people in less time than before, and estimates that it has so far saved the company $200m.
Most big headhunters have responded to this threat by investing in new capabilities. Korn/Ferry has gone on an acquisition spree. After buying PDI Ninth House, a leadership consultancy, it now derives 40% of its revenue from non-search sources, including assessments of managers and succession planning.
Russell Reynolds is concentrating on the growing need for technology staff among non-IT companies. Spencer Stuart is focusing on energy firms. And Zurich-based Egon Zehnder, the only member of the big five whose headquarters is outside America, has sought to build up its presence in emerging markets. Damien O’Brien, its boss, says he expects those regions to account for a third of revenues within five years—though he admits that Chinese employers tend to resist the high-end fee structure, in which the firm is paid even if a job is not filled.
The strategy of Heidrick & Struggles, in contrast, will remain unclear until it completes its own hunt for a new head. The board now says it intends to keep the company independent after all. Nevertheless, Mr. Scanlon thinks it would be better for it to sell itself to a foreign buyer. He cites Recruit Holdings, a big Japanese human-resources firm seeking to expand in North America, as a “perfect matchup”. And with its shares 70% below their 2007 high, “Heidrick is a very affordable company.”