January 8, 2016 – A great shift is underway in the executive search field – and few industry professionals have witnessed more change than Steven B. Potter. As managing director of U.S. operations at Odgers Berndtson, the sixth largest international search firm, Steve has captained numerous C-suite and board director searches, with a special expertise in financial services. He has also spent decades managing recruiting firms, most recently co-founding the U.S. division of Odgers in 2011.
Starting his career at Russell Reynolds Associates in 1982, Steve became one of the industry’s early rising stars. Thirteen years later, he formed his own firm, Highland Search Partners, into one of the largest global search boutiques at the time. He sold Highland to TMP Worldwide for $48 million in 1995. He then launched Sextant Search Partners and, later, Allyon Solutions.
In the following interview, Steve looks at the current state of the search industry and tells us where he sees it heading in the next decade. And though he is optimistic, he says the industry must be willing to step up to meet the changes that are already transforming the recruiting profession – and he gives some tips on how his industry colleagues must now serve their clients.
The last four years have seen exceptionally high growth rates for executive search firms. Will the good times continue?
Actually, the search industry has only just reached revenue marks that are equal to pre-crash levels … so, yes, we have had good growth in a lousy ‘recovery.’ People forget that many boutiques went out of business at the start of the Great Recession and all the big recruiting firms let go between 25 and 40 percent of their employees. In many ways, this has been the most difficult recovery from a bad economic downturn. The post ‘87 crash, Russian bond default, and dot com bust all had faster and more robust recoveries. Right now we are back to where we started with a lot more fee compression thrown in. Short answer: Yes, I see enormous opportunities ahead.
Steve, your recruiting career has spanned three decades. What’s been the biggest change you’ve seen?
The biggest change I’ve seen is the maturation of recruiting as an industry – and all the good and bad that comes with that. When I first started in the business at Russell Reynolds Associates in 1982 we were still raising fees – from 27 percent to 30 and then to 33 percent. All the other firms followed us immediately when we did this. Then, for years, the whole industry enjoyed full, uncapped fees. Those days are gone for good. Fee structuring has followed along the lines of a classic Harvard Business School case study in terms of what happens to a mature product, with little barrier to entry, in an overly competitive market. Recruiting margins have been squeezed and as a result search professionals work harder, better, and smarter to make less money. A million dollar partner at one of the big firms receives no bonus now while 15 years ago they would have received a substantial one. One of the consequences of this market shift is that many of the larger firms have morphed into sales-driven cultures, with assignment execution pushed to younger, less experienced non-partners. Hence, global completion rates remain stuck at around 67 percent.
Has some of this come about due to a lack of innovation among search industry leaders?
Yes! I am struck by the remarkable lack of innovation that has come from search firms over the last 50 years. Of all the innovation in human capital, I am hard pressed to find anything major that has originated from, or within, a search firm. McKinsey was responsible for the research and publication of the ‘War for Talent,’ not a search firm. Why is that? Your firm produces deep and insightful talent leadership intelligence every day. With the possible exception of Egon Zehnder, all of the work around leadership assessment and testing has come from PhDs, while RPO and other similar products have come from outside the recruiting industry. All of the human capital content and conferences of any consequence are hosted by market research, consulting or accounting firms. While it’s true that Korn Ferry and a handful of others have bought into an array of related human capital products and services, the fact is they didn’t create them. There is a serious lack of innovation among key industry leaders. This is a phenomenon probably not unique to this field, and it likely explains why it is a lot easier to get to the top of an industry vertical than to stay there. But in the future, search firms must innovate and pioneer change – they must stay ahead of the shift, or they will become roadkill for the digital revolution.
Compare and contrast for us large firms versus boutique specialists.
When I started 33 years ago in this field, having large firm experience was almost a requisite. The market was new and not entirely accepting of executive recruiters as the primary means to find talent for a company. There were few boutiques and, frankly, they struggled with a market that was still being ‘educated’ about the benefits of hiring an outside search provider. As time went on, however, the arrogance, politics, and bureaucracy of the big firms began to spawn more and more good boutiques – and many of these firms thrived. I have been on both sides as I have run one global firm – TMP, a substantial piece of another – Russell Reynolds Associates, and I have founded or co-founded three boutiques. No one is more aware than I of the advantages and disadvantages of both. The key advantage of a global recruiting firm is that the brand works for you. ‘Brand bias’ exists in the C-suite and at the board level and not just for recruiters but for all service providers. So, great brands originate and sustain business and that will likely always be the case. The clear advantage of a search boutique is that there is less bureaucracy and one can make a lot more money for the same level of production. Work quality and completion rates, in my experience, also tend to be higher at the boutiques. Clients, therefore, win with boutiques. The reason I chose to launch the Odgers affiliate in the U.S. is that in many ways we have the best of both worlds: we are small – growing, yes, but still small – and therefore can compensate our employees better than most of the big firms. Having said that, we are part of the sixth largest global search platform in the world, joined under one brand with revenue sharing and policies that are virtually identical to how the large U.S. firms operate. This allows us to play in the C-suite and at the board level in a way that most small boutiques cannot.
How will the industry look in 10 to 15 years? Who will be the winners and losers?
The clear losers will be those that focus too heavily on the $200K to $350K jobs. Clients are increasingly only willing to pay for the real value-add at the C-suite level. If your average fee isn’t going up it’s usually an indication that you are doing more for less in the middle market, and that is a losing strategy. The fastest growing division of Korn Ferry is the mid-market search division of Futurestep. They are cannibalizing the lower end of search, their own business included, which is smart. Meanwhile the lower end of the search division just hangs on and works harder to make less. Without a clear strategy to go as far ‘up market’ as possible and having that linked to a clear digital strategy, I don’t believe that many firms will survive in their current configurations. The current generation thinks mobile and digital in ways that many of us find unfathomable and they will all be running the show in another 15 years. The human capital industry is at the beginning of a major consolidation (we saw the same thing in advertising in the late 70’s and 80’s and the banking industry in the late 80’s and 90’s) and this may present a lifeline to some of the larger brands that are sitting on their hands. But most will have to innovate or they will die – and, as I have said, innovation is not the long suit of most search firms.
Are you bullish looking ahead?
I am. Very much, indeed. But I also know that corporate talent acquisition professionals need help now more than ever. Demographic trends are horrible and putting huge pressure on talent. Next year is the first year in American history when the workforce will actually decline. We are retiring 10,000 baby boomers a day and this is just the start of the bubble. Immigration policies are not replacing workers fast enough and the state of inner city education in America is appalling. The G-8 suffers from the same issues. On top of this you overlay a digital, social, mobile, big data, cloud, tech revolution that threatens to totally overturn whole business models faster than ever and you see what we’re up against. Clients need talent that can navigate this brave new world quickly and expertly. They will pay for people to help them get there. If, as a recruiting firm, we are seen as a trusted advisor – especially in the C-suite – and knowledgeable about these issues we will do fine in the coming years. As I said, when I look out into the distance what I see is immense opportunity.
Contributed by Scott A. Scanlon, Editor-in-Chief, Hunt Scanlon Media and Stephen Sawicki, Managing Editor, Hunt Scanlon Media