Global search firms face growing issues of politics

The nature of the job, the publicity surrounding the departure of Ian Harley, investor scrutiny and internal politics were just some of the issues. Others included the deep involvement in the final decision of Lord Burns, chairman of Abbey National.

It was a tricky assignment, especially considering that Spencer Stuart's fees are also likely to have been capped in the deal, at probably around 200,000 to 250,000 (€316,000 to €375,000).

The appointment of Luqman Arnold, the former president of UBS just over a fortnight ago, is widely seen as a good result. Lord Burns gave up his executive responsibilities on Arnold's arrival and returned to his previous role of non-executive chairman. Arnold is to be paid a basic salary of 675,000, 11% more than his predecessor, and will also get options that could make him more than 1m.

The point of the story is that the headhunter's job in financial services search is getting harder in an intensely political environment. From the top levels of search down, survival strategies are being drawn out with no upturn expected in the markets before this time next year.

The big global search firms - Spencer Stuart, Heidrick & Struggles, Russell Reynolds, Egon Zehnder and TMP Worldwide, have all had to bring down their cost-structures in line with reduced revenues.

TMP last week spun off its eResourcing and executive search arm into a separate publicly traded company. This was clearly a move to put some distance between its troubled search business and its very profitable internet recruitment product, Monster.com.

Simon Hearn, head of global financial services at search firm Russell Reynolds, says: "In these markets the large firms are under pressure. Typically, those that are well run are surviving and taking market share, while others are not doing well."

At rival big-brand search firm Heidrick & Struggles, Rupert Channing runs the global financial services practice in London. He says: "We have gone through a considerable cost-cutting process after a period of reckless growth at the end of the 1990s. Our culture now is to revisit costs regularly."

Consolidation is expected as search firms mirror further consolidation within the financial services industry.

But as investment banks deal with important issues of structural change, there are opportunities for good headhunters to provide ideas for the upgrading of talent, intelligence on what the competition is doing, and the access to the right people.

Channing says: "The investment banks are looking at major issues of structural change, such as whether to consolidate debt and equity capital markets. Banks like HSBC are refining their focus to address six main industry sectors. It is all about driving the cost of the business down."

Heidrick & Struggles says one of its survival strategies is to be very aggressive on "off-limits" agreements, agreeing them only on business that is substantial. "It is not the biggest issue on a client's shopping list," says Channing.

Almost all headhunters in the industry face a squeeze on their fees, in one form or another, although few will admit it.

"Fee caps are being bitterly fought about and there is a battle going on between the investment banks and the bigger search firms on the small print in "preferred supplier agreements".

The head of financial services at one big global search firm says: "There is a supposition in HR departments that they can crush search firms on fees and it is just not on."

A director at a prestigious boutique firm says: "We are having difficult conversations with our clients at the moment, as they are insistent on fee caps, but we do not want to compromise our product." One answer has been to cap in bands at different levels, with each deal negotiated individually with a client, and then kept as quiet as possible.

The smaller players in the search market can afford to be more flexible on fees, a contributory factor to the rash of new niche financial services search firms in London.

But there is also a strong sense that clients want in-depth relationships with a handful of individuals who know the market and can achieve closure on a hire - which also helps to explain the arrival of so many new players.

The most high profile new arrivals may also span financial services and board practice work, in the wake of all the recent corporate scandals. Anna Mann has announced that she will be retiring from Whitehead Mann and has already set up her own consultancy.

John Viney has left Heidrick & Struggles to set up the Zygos Partnership in London. Roddy Gow has left Odgers Ray & Berndtson, where he was head of the financial services practice and chairman of the board practice, to set up Gow & Partners out of New York, London and Hong Kong.

At the Omerta Group, named after the mafia code of silence, Jason Mort and John Goodall are aiming to build on existing relationships in the fixed income and equities markets.

Sally Talbot from Armstrong International and Stephanie Staton from Richmond & Co have established a niche in HR with Redwood, while David Barone from Odgers Ray & Berndtson has teamed up with Jonathan Astbury with a new venture called Sandton Group, which is backed by the South African company Adcorp Holdings.

Despite tough markets, there have also been successful launches of search firms by individuals such as Victoria Spence, who left Russell Reynolds to set up on her own and has established a niche at JP Morgan.

Having a diversified portfolio and a mixture of clients from the top-tier down to the bottom is also a good strategy of survival for search firms. Putting all one's eggs in the basket of top-tier search, though lucrative, can be very stressful.

When the head of Germany for a bulge-bracket bank was finally placed by a boutique last month, it had been more than 18 months since the agreement for the search was signed.

In that time the head of investment banking had changed several times, the responsibility for the search had changed as well, more than two offers were turned down by the candidate and the head of HR had resigned.

The political nature of financial institutions is not likely to diminish before there is an upturn. As one headhunter put it: "This cut-throat and opportunistic industry will always re-invent itself."

While the investment banks seek to hone their competitive skills, headhunters are also being given a means of survival.

Lee Thacker, recently appointed head of debt finance for the Whitney Group in London, says: "Our brief is often to look for those who are professionally highly successful and personally unsettled."

Amid this ruthless search for talent the investment banks are saying they mean it about not spending vast sums on search fees.

JP Morgan and Goldman Sachs have always had some in-house search capability, but now Goldman is reported to be expanding it further.

UBS Warburg has also been interviewing search consultants with a view to an in-house position.

Headhunters mutter about the threat to their livelihood, but in reality the best of them are sanguine.

First, they know that the very political nature of investment banking means that no one in HR wants to rap knuckles and lay down the law on the use of headhunters, so searches will always be mandated to those who are known to the people in charge.

Second, as the head of one boutique firm put it: "Let the banks go and build an in-house capability in these markets.

"It will take them ages and cost a lot. When the bull market returns, they won't know where they are or what to do, they will have egg all over their faces and people will get fired."