Fees crisis forces rethink

Many in the business believe that the old model by which firms could demand one third of a bank employee's first-year remuneration has been shattered. Shaun Springer, managing director of the search firm Napier Scott, says: "There are no hard and fast figures, but I would say the standard for a lot of search firms has come down from a third to a quarter."

Emma Weir, managing director of Eban, the headhunter, believes good firms can still charge the same proportion as before. But fees have plummeted anyway because far fewer bank staff are finding jobs and, when they do, their bonuses are a shadow of what they used to be.

The consequences are inescapable. A search firm that found 20 corporate finance staff in 2000 might have done well to find two in 2002, given the hatchet that banks have taken to those departments. The search firm's fee income in that sector could have fallen by 95% or more as a result.

Few areas are suffering as badly as corporate finance and some, such as credit derivatives and securitisation, are thriving. But the pain is widespread. This has enabled banks to put pressure on another practice beloved of headhunters - charging a third of their fee up front before they have done any work. Often it is the large global firms that have insisted on this most rigidly.

"There are still headhunters who won't get out of bed without a $50,000 (€50,000) retainer," says Weir. "But I don't know how much longer the banks will put up with it."

The share prices of the big search firms reflect their predicament. Korn/Ferry and Heidrick & Struggles are down by 75% in just over two years, while the shares of TMP Worldwide (which is also active in advertising, another damaged industry) are down by more than 85%.

At Korn/Ferry's European executive search practice revenues fell 24% in the third quarter last year, compared with the year before. The figure covered all industries, but Paul Reilly, the chief executive, said investment banking was especially problematic.

Pain in the recruitment industry is being felt across Europe. In Paris, Denis Marcadet of the search boutique Vendômes Associés, says: "We have forgotten what champagne tastes like. This has been an awful year in France."

Headhunters in small firms are watching the discomfiture of the global giants with schadenfreude, depicting them as dinosaurs too dim even to understand that their day is over as the climate changes. High fixed costs, departures of key staff and sclerotic internal bureaucracy are supposedly killing them off.

This may be too simplistic. John Matheson, a headhunter at Stonefish who supplies consultants to other recruitment firms, says: "Some big search companies have realised they were behind the times and I have watched them adapting. They are moving faster than before, becoming more streamlined in the whole process from winning a mandate to delivering an employee."

Certainly the decline in the share price of Korn/Ferry and Heidrick at least slowed last year, after both shed scores of consultants. Their performance may be turning around too. Heidrick made a small profit in the third quarter of 2002 after a loss the year before, while Korn/Ferry reduced its losses by 40%.

A Korn/Ferry spokesperson says: "Banks still turn to us when they want a job done well."

Reputations are becoming more important as banks reduce the number of recruitment firms they consider using in response to lower hiring needs.

Springer of Napier Scott says one bank has cut back from 106 to 14, a trend that will leave many firms without the contacts that are their lifeblood.

Many big firms also have strong board practices, which could benefit from the increased scrutiny of senior appointments that has followed financial scandals in the US.

Whatever their size, recruitment firms could suffer from a move by some banks to do more of their recruitment in-house by hiring headhunters on a salary.

Sally Talbot, a consultant at the recruitment firm Redwood, which finds human resources staff for banks, says: "It's cost-driven. If an in-house recruiter hires six or seven fixed-income staff in a year, the bank might easily save a hundred thousand pounds in fees."

With thousands of unemployed bankers applying to them directly, banks see a chance to cut out the middleman. But here again, the big search firms that focus on top jobs could be relatively unscathed. Hiring at that level is a more skilled affair than the relatively commoditised process lower down.

Talbot says banks are also improving their staff databases, pinpointing who works where in other banks, how much they earn and whether they want to hire them. In the past they relied more on headhunters to provide such information.

But recruitment firms are putting on a brave face. They hope the banks have now completed most of their staff cuts, and in some departments this must be true, as more than half have been axed already.

They are also hoping for a traditional pick-up in hiring in the first two or three months of the year when bankers get itchy feet after receiving their bonuses.

"Things might not get much worse," says Eban's Weir. "They could even get better."