Light flickers at end of the tunnel for recruitment

The recovery is broadly spread. Heidrick & Struggles, a US-based firm which targets high-level jobs, is up more than 50% in the last six months.

The share price of UK-based Michael Page, whose focus is on middle-ranking positions, has nearly doubled.

Figures like these suggest the recruitment sector is doing more than just float upwards with the rest of the market. The improvement has in many cases followed restructurings that have been more savage and more imaginative than critics thought large recruitment companies capable of achieving.

Heidrick has dealt with a 40% slump in revenue in the past two years by reducing staff numbers by the same amount and says it will continuously keep staff levels in check. At Korn/Ferry the figures are similar.

Both search firms announced quarterly losses in the past few weeks; but these are smaller than last year and the companies' survival belies predictions by sceptics that they could not slim down that quickly without collapsing.

In Frankfurt, Antal, a pan-European firm, says it has come through the economic downturn so far through a blend of realism and flexibility. David Ririe, a consultant, says staff numbers have fallen from 30 to 10 in the past three years, with most of the cuts made early on.

He says: "We've come through it by putting on different hats for different clients. While some specialist financial services recruiters have gone out of business, we are more diverse and also operate in other sectors such as pharmaceuticals." Antal says it has also put more effort into supplying extra services for clients, such as checking references.

With Germany in recession hopes of a recruitment upturn look premature. However, Ririe says some banks are now more willing to hire staff in its core areas, such as risk analysis and operations project management. "We have kept up our long-term relationships with the banks, which are more important in Germany than other places. When the economy picks up, new entrants to the market will find it hard to compete."

Alberto Gavazzi, a senior consultant in Milan with Russell Reynolds, says he has survived by changing tack sharply over the past two years. "I do less corporate finance and capital markets work and have moved more into asset management and private banking. You must learn new skills and make new relationships, not just hope your existing sector will pick up one day."

He adds that with no sign of a recruitment upturn in Italy, he will have to stay alert to changing trends.

Though not a public company, Russell Reynolds is subject to much the same pressures as listed global rivals such as Heidrick and Korn/Ferry. Among these are fierce competition from smaller firms whose normally lower overheads, such as office space, give them a natural advantage when times are tough.

Gavazzi says, however, that the increasingly international nature of financial recruitment - especially in a small market such as Italy - means there is no substitute for a global presence. "A lot of our work involves our offices in both Milan and London, for example. Small firms cannot offer that service."

In the UK, easily the biggest financial services recruitment market in Europe, several small firms have closed down this year. One, D'Arcy, acknowledged that its demise was the result of its reliance on a single sector - corporate finance - that had been moribund for two years. Seven people lost their jobs.

Another small firm that collapsed was Astbury Jones, majority owned by the South African company Adcorp. In July, Adcorp said another UK recruitment company it owns, Sandton, had experienced difficult trading conditions. Despite signs of an improvement in Sandton's performance, Adcorp had decided to commit no more money to the company.

However, many small companies have survived in exactly the same way that large ones have - by slimming down and switching focus. Shepherd Little says its staff of 20 consultants and researchers less than three years ago has dwindled to 10 today. Tony Tucker, a director, says: "It's straightforward common sense. We've also moved away from quiet areas such as mergers and acquisitions and telecoms and towards niche areas such as tax-driven finance and credit and market risk. It gives us a platform on which to build when the upturn comes."

Recruitment firms have also been forced to adapt to drastically lower fees paid by banks. While in their heyday search firms could often charge one third of the first year's compensation of every candidate they placed, most now accept far less.

One headhunter says he charges 25% and was meeting resistance even to that figure. At least one of his rivals, he complains, is working for 18%. Banks are also more choosy about which recruitment companies they will talk to. Tucker says while five years ago they would deal with any headhunter who seemed to have something to offer, they now often confine themselves to a small number of firms they already know well.

None of which deters new recruitment firms, often set up by one or two people, from entering the market. Jardine West, which opened for business in July, is focusing on niche areas including compliance staff and supervisory analysts. Susan West, a former global head of production in equity research at WestLB Panmure, says: "There are just two of us and costs are low because we are both working from offices at home. I know from experience that large firms often put forward the wrong people so there will be work for us."

Another small firm, Adam Grant, has focused on fund management since it was set up two years ago. Russell Adam, a director, says: "Keeping costs low is vital. It is where the big firms still fall down."

Recruitment firms of all sizes will have to remain flexible to cope with a hiring market that remains poor. Many that have expanded into fixed income, for example, may have to get out again quickly if weakness in parts of the sector this year is sustained. They might even find themselves returning to corporate finance.

Andrew Chancellor, managing director of the financial and professional services division of Robert Walters, one of the large mid-market players, says: "We are cautiously optimistic about the second half of the year across the board. With the holidays over, September will be a key month that will set the mood for the rest of the year."

Jonathan Evans, managing director of recruitment consultants Sammons Associates, says: "When the markets pick up most investment banks will be understaffed and the drive to recruit will reoccur in classic investment banking style.

"Most, if not all, of the global investment banks play 'chicken' with each other - they wait until one or more of their competitors acts first, whether it be hiring or firing, and follow accordingly.

"All the time they are attempting to compare their internal headcount with the competition while feeding misinformation into the market about themselves."

Most quoted recruitment firms have a long way to go if their share price is to recover to former highs. Both Heidrick and Korn/Ferry are trading at less at than a third of their price three years ago. Nevertheless, at least they are moving in the right direction.