We often hear the 80/20 rule applied to many things– 20% of a company’s products represent 80% of total sales, or 20% of employees are responsible for 80% of the work. There are many correlations in the executive search realm as well.
However, today I want to write about the 80/120 rule as it relates to how Quantum views achieving optimal results for our clients as well as fair pricing for our services.
First, the 80% aspect.
If the research conducted for any given executive search reveals 200 top potential candidates, ideally clients would want their search firm to be able to approach 100% of those individuals. However, large global firms, and sometimes even geographically or functionally-concentrated boutiques, are many times unable to approach a large chunk of those prospects. The reason is that large firms have many partners – all with several active client engagements. Search firms generally don’t (or can’t) prospect candidates from one of their partner clients while a search is active there and typically up to a year afterwards. This may sound harmless enough, but imagine if that large firm has 100 search consultants with 10 active clients each. That’s potentially 1000 companies that are off-limits to recruit top talent from. The same restriction can happen with some larger boutique firms that are geographically concentrated in the area you want your consultant to search. Or maybe they specialize in one primary function – i.e. Finance, Manufacturing, or Supply Chain and have a lot of active clients at many of the companies you would want prospected by your search firm.
Any of these scenarios could result in a significant reduction in the original candidate pool. I have personally seen situations where 10%, 20%, 30% and even 40% of the candidate pool is eliminated from consideration before a search even starts because of off-limits restrictions. If you arbitrarily pick an average of 20% off-limits, imagine starting with only 80% of a candidate pool?
What great new leader do clients miss out on and never realize? I used to be a Partner in some of those firms and it was surprising how many clients didn’t know this even occurred, and thus never asked their search firm – “Which companies are off-limits and how many candidates do you have to ‘skip’ while prospecting for us?” In short, why would any client settle for only 80% coverage?
Now the 120%
Most search firms base their fees on projected first year cash compensation of the final negotiated offer – cash compensation is commonly a base salary plus incentive bonus, but excludes things like stock, benefits, perks, etc. The large global firms typically charge one-third of that first year projected cash compensation. PLUS, they tack on an additional administrative fee which is usually 10-12% of the search fee. This can push the overall fee to as high as 36-37% of cash compensation. I compare it to booking a hotel room for $199 per night, and then when you check out – with all the add-on fees – you end up paying $241. It’s irritating and no one likes hidden fees and getting “nickel & dimed.”
I can’t tell you how many annual meetings, firm-wide phone calls, et al. that I have been on where partners complain about being required to charge this extra administrative fee. (A little known fact is that many firms will extract part or all of this fee from their search consultants compensation if they don’t charge their client!). Many times search consultants can’t even articulate to their clients what the extra administrative fee is even for, other than an additional profit center for the search firm. In the old days it was said to defray “facsimile and phone charges” things we don’t do or pay for any more. So then the narrative changed that the admin fee was to cover things like our database or research – but aren’t those a part of what clients expect us to have or provide as a part of our overall search fee? Clients get irritated when they get inflated and extra charges and we believe rightly so. A total fee of 37% is about 20% higher than what a search firm like Quantum charges.
Conclusion
Why have 80% of a search done for a 120% of what we believe a normal and reasonable search fee should be?