Contingency vs. Retained Search - Common Fallacies
In selecting a search firm, it's wise to look first at their track record and their understanding of your business needs. But then, when you start comparing search firms, you will see a broad array of business models, involving when you pay (retainer, contingency, or hybrid pricing); how much you pay (flat fees, fees as a percent of annual compensation, or contract recruiting by the hour); what you pay for (interview questions, reference checking, education verification, etc.); what performance is guaranteed by the search firm; and how long placements are guaranteed (3 to 12 months typically). There are always new business models sprouting up. With all these variations in search firm terms and conditions, it is perhaps no wonder that so many buyers are confused about which firm to engage, and on what basis.
Unfortunately, some employers try to simplify their decision making by implementing a search firm policy, as in "we will only work with search firms on these terms and at this price." These policies essentially put the cart before the horse, selecting pricing terms over search firm competencies - as if search services were all interchangeable. And while these policies may appear to make things simpler and perhaps even more cost effective, all too often they backfire in expensive and unpredictable ways. I recently spoke to someone who inherited such a policy, and it cost them dearly.
But first some background. I've worked in executive search for over 25 years. When I was just getting started in the search business in the late 1980's, I worked for a large contingency placement firm. We charged a fee equal to a percentage of each candidates' first year salary (25%) and we were paid only after the candidate started work. While that business model is still quite common, it lends itself to functional specialization (such as working exclusively on HR searches, or just IT or accounting searches) and therefore was not the right model for Staffing Advisors. We set out to make staffing easy for our clients - handling all their staffing needs across the functional areas - so we chose to work on a flat-fee retained basis, meaning our search fees are not indexed to candidate salary and our retainer is paid at the start of the search. A third of my current clients do not have the budget to afford a traditional search firm and another third have NEVER used a search firm before. OK, so that's the background you need. Now back to the story of the policy that backfired.
A few weeks ago, I was referred to a company who had struggled for months to fill a $200k CFO position. We offered to do the search on a retained basis for $30k. (Yes astute mathematicians, that particular search fee amounted to only 15% of annual salary.) But, because that company had been "burned" in the past by a poor outcome on a retained search, they implemented a "policy" of only using contingency search firms - so they could not even consider our offer. Everyone in the meeting knew that a typical contingency search firm would charge tens of thousands of dollars more for the same search (20 or 30% of annual salary). Most contingency firms have a 3 to 6 month guarantee, ours is 18 months. Typically a contingency search firm will produce 3-4 qualified candidates, we usually produce 6-8. And finally, most of our searches complete in just 4-5 weeks - considered blazing fast by any standard. None of these facts were lost on the buyer, but they had a "policy." End of conversation.
Their well-intentioned, but misguided HR policy had boxed them into spending twice as much for a search that will likely take longer, produce half the number of qualified candidates, and be secured by a guarantee less than half as long . . . probably not the result they intended when putting that policy in place.
Just like your employee handbook, many HR policies are created to avoid repeating a bad experience in the past. Did we need to fire a past employee for bad behavior? Well let's add a policy about that particular bad behavior into the employee handbook. Did a search go wrong in the past? Well let's add a policy to deal with that. But rigid "policy" is a poor substitute for good judgment.
I find that most search policy decisions are based on misconceptions and outdated information - fallacies. For example, many HR professionals think retained search firms always cost more than contingency search firms. Many people think contingency search firms are faster, and retained search firms are more thorough but slower. Some people think retained search firms are better for senior level hires and contingency search firms are better for mid-level hires. Some people think retainer firms are more ethical than contingency search firms.
And of course, many people are wrong.
Retained versus contingent search is simply a choice of business models. Neither one is inherently more thorough, or expensive, or faster, or more ethical. While these misconceptions are common, they are not facts you should make business decisions with, or worse, base policy decisions on.
If you work on a retained basis, you are essentially paid by the employer to research and find great candidates - and it is presumed that any candidates you uncover from that research are "owned" by the employer until they are removed from consideration. The entire candidate pool "belongs" to whoever paid for the research. The retainer firm wants the employer to hire the most qualified, compelling candidate from any source - either in the pool or drawn from an employee referral. It's all the same to them.
In a contingency basis, the search firm takes on the risk and expense of developing relationships with lots of candidates (which is why they often specialize in just one functional area). They did the work and took the risk, so essentially, they "own" the candidate pool. To ensure they get a return on their candidate research investment, they must present those great candidates to lots of employers. The employer committed nothing, and therefore has no right to the pool of candidates, so the search firm is wise to present the best people to multiple employers. If you hire a contingent search firm, you are essentially in a race with other employers to see who makes an offer first. This is why some employers feel their interests are better represented by a retained search firm and some job seekers feel like they are better represented by a contingency search firm. The contingency search firm wants ANY employer to make a compelling job offer to their candidate, while the retained firm wants the employer to make an offer to ANY compelling candidate, regardless of source.
With all the innovation occurring in the search business, it pays to be flexible with your search firm policy, re-examine your assumptions, and understand the implications of the new and innovative business models that are emerging.
The key for you as the buyer is to understand which business model best suits your needs. Each model has it's benefits and downsides, so you should know ahead of time what exactly an executive search firm can really do for you. You are welcome to learn more about the executive search and hiring process in our Resource Center.
Topics: Executive Search