I have been hearing about and am now seeing first hand a developing trend that has me quite concerned.  Having started in this business back in the 1980s, I’ve managed through multiple down cycles; working through the need to maintain my company’s viability and meet client’s perceived need to match price with both value and market considerations.  However, the ‘cram down’ on fees that I’ve seen during this downturn is different.  If what I’m seeing is generalized at all, then I fear it could have lasting consequences on future quality of service.

I am aware that for years, corporate clients have been suspect of just how profitable and therefore, warranted recruiting and retained search fee-levels are.  This debate has ranged from unspoken/seething to healthy debate around metrics and value-add to open cynicism and cyclical rejection of external vendors altogether.  In downturns it is certainly more difficult to rationalize spending fees to hire talent when the perception, and to varying degree, reality, is that on-target and high quality availability of candidates should preclude the need for external search consultants.

On one hand, this is true and after all, we in the search industry fully understand that our services will only be required on a small percentage of all hiring activity going on across enterprises. This said, any perception that when tapped, our services are of less value and warrant significantly lower fees in down markets is both a misnomer and a dangerous precedent.One of my division heads recently came to me for advice on a preferred-provider negotiation where this large company’s procurement group (a client I had served at a very senior level in the past and had known to carefully assess quality when selecting search vendors) was insisting on terms that, at best, would result in break-even business for our firm.  The client’s designated negotiator admitted that the internal users of our services were championing our candidacy. However, procurement was comparing our bid to  those submitted by firms without the depth or breadth of expertise, geographic reach and infrastructure (all critical elements according to the client’s own designated criteria and) necessary to address the anticipated needs under this agreement.  Further, our quality metrics were far superior to all contenders.  Yet, we were required to meet these other firm’s lowball bids or be pulled from consideration.  While I may be deemed to be crying over milk-spilt-frequently, this sort / nature of negotiations (dissociated from reasonable quality and delivery capacity considerations) is new to me. 

Alarmed by this, I called some of my contacts in this company and around the globe to began to explore just how prevalent this trend is.  The results lead me to suspect that we are seeing a more profound and lasting ‘cram down’ on fees than in prior downturns.

While I won’t explore the potential ramifications in detail…at least not in this posting…let me say that the vast majority of quality firms in our industry are better run than they ever have been.  Professional management has increased dramatically in both its degree and prevalence.  We now have multiple public company benchmarks that show that the traditional fee structures are not out-of-line and, in fact, are quite necessary to maintain the infrastructure and investment required for quality delivery.  We have made productivity gains but we, as an industry, are professional services businesses and as such, will remain heavily dependent on costs associated with the acquisition, development and retention of skilled human assets.  Of course we are not the only ones whose ‘valuable human asset’s’ compensation cost structure is under pressure.  However, I would contend that our cost,  profitability and compensation structures as they exist today withstand scrutiny.  Regardless of whether any client believes this is true; it is a dangerous precedent to push for price-of-service concessions that undercut the cost structure necessary to deliver those services and I fear we may be trending towards a crisis level.

There WILL be those firms who are more than happy to step into this gap with short-sighted below cost bids or sub-par resources in order to win the business.  On the positive side, this (like every downturn) will also make all of us look more closely and critically at our cost structures to make certain our houses are in order.  However, if this trend reaches ‘scale’ and ‘permanence’ we risk deterioration of the already lacking fundamentals our industry as a whole has in place to ensure true value-add (yes, I fully admit that our industry needs to do more to promote and ensure consistency of quality…that’s another post for another day).   No one will be served-well if we have to lower the bar on quality because clients are no longer willing to pay the costs necessary to deliver quality.

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This entry was posted on Tuesday, May 18th, 2010 at 5:00 am and is filed under Executive Recruiting. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.