True Cost of Ownership: Contingent vs. Retained

Search is expensive, exponentially so relative to the level of talent that you are seeking. A failed search is expensive; even more exponential is that cost relative to its particular need.

Let’s talk through this one. You just made a hire. For the sake of round numbers and because it is too early in my day for me to break out my Ti 89, let’s call this person a manager making $100,000 plus 15% target bonus.

Since this manager is a “specialist” and you are a busy HR leader who doesn’t have the time or resources to conduct this search internally, you called in a headhunter. And by the way, I love this term. It is so aggressive, and whenever someone asks me “oh, so you are a headhunter?” I beam with pride. I have the image of some primitive tribal warrior with shrunken heads strung around his neck. But I digress.

When you were choosing to use a third party for this search, how did you evaluate that talent?

I know: the whole reason that you decided to go outside for this one is because you didn’t have time to evaluate talent. But bear with me. There are a tremendous amount of options, and all too often hiring managers and HR leaders don’t even consider the option of retained search because “why would you pay up front when you can use five contingency firms at once that will fight against each other, and you only pay them if you make a hire?”

I understand this. If I go out to a restaurant with my family, I am not going to give the waiter $20 just because his team “has more experience or a better process.”

But this is not a steak dinner, and frankly, if you had the resources in house, you would do this on your own.

My point here is that the industry is too competitive and too saturated for anyone to claim a distinct advantage over the candidates, or end product that they can produce, through a contingency search. If you were in their shoes and you knew that you were competing against four other firms, you are going to try to find people as quickly as possible, and just like in that restaurant, when your steak is rushed it either comes out way too rare or burnt to a crisp.

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You can’t afford a rushed process and or no process at all. Retainers protect your investment. They are like insurance policies. You know that when a firm is retained, you have their undivided attention, or you should. If you don’t have that level of interaction, then you didn’t vet them properly. If a competent firm has the ability to truly screen candidates out of the process rather that screen them in, you will get a better product, and it will be guaranteed (another benefit of the retainer is a one-year replacement guarantee; why do you think contingency firms don’t make that promise?).

Back to cost. You haggled all of these contingency firms and played them against each other. We are down from a fee of 33% to 25% (which, by the way, many retained firms will entertain in the right situation). $100,000 plus 15% bonus is a $115,000 first-year total cash compensation. That’s $28,750. Nearly $30,000 just to hire this guy, and you want to rush this? It isn’t just the steak that is going to get burned.

Now you train this guy, and he gets through the 90-day contingent guarantee and you start to see the warts. For a litany of reasons, this guy isn’t working out and you let him go. How much have you spent? Three months of salary plus payroll cost is nearly $35,000. A search fee of $28,750. Many estimates put the training of skilled labor at this level at nearly double the salary — $200,000, but lets call it half that because this guy wasn’t there a full year, so $100,000.

Now you have down time or lost productivity to account for the loss of new business or any number of direct impacts to the top and bottom lines of your business. And you have to conduct another search that you now have to manage more closely because the rushed search the last time created a black hole that is sucking money from your company. We are talking about hundreds of thousands of dollars that this search has cost you because it failed.

How much have you spent? What is your total Cost of Ownership? I’m not trying to berate the contingency model. There is a place for every service, and there are many contingency search firms that can perform at a very high level in the right situations. Rather, my point is that there is a better way to control costs, develop talent, and find a partner that can help you … truly help you in your process. I cut my teeth in the contingency search business and ran as fast as I could away from that model. Retained search is more difficult and it is more intense and I have to be available at all hours. But I love it! I am free to add value in a positive way by deeply understanding my clients’ problems and finding creative ways to come up with solutions with them, as part of their team. Contingency search is transactional in nature, and when you are dealing with a commodity that is as variable and volatile as human capital, give retainers a chance. The total cost of ownership is lower in the long run.

Geoff Votta is a retained search consultant with O’Neill Consulting Group, a leading boutique retained search firm based in Providence, Rhode Island. His experience includes leading national executive level recruitment efforts for Fortune 500 clients in the following industries: CPG, Food Service, Industrial Manufacturing, Financial Services, and Heath and Wellness. With an unprecedented track record of success in Supply Chain/Manufacturing Operations, specifically TPM/Continuous Improvement talent development at both the corporate and local level, he is quickly becoming an industry leader in all things LEAN. His unique straight-forward approach and ability to quickly diagnose management teams to identify gaps has proven to be a key differentiator for him in his career. He is focused on bringing a higher quality retained search product to organizations unfamiliar with the lower overall cost and greater ROI of the boutique retained search industry. For more information about him and O’Neill Consulting Group, please email him at geoff@oneillconsulting.com.

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16 Comments on “True Cost of Ownership: Contingent vs. Retained

  1. Thanks for the article Geoff. I am also a fan of having a dedicated search professional doing the work when its cannot be done internally or is not in the best interest of the organization to do the work.

    The divide between contingent and retained is not has defined as your article plays out though. There are contingent firms that I have dealt with that will gladly take on a year guarantee, and I have seen retained firms that only provide a 90 day. The terms and conditions of the contract really don’t have a set of standards, although the AESC does what it can to provide such a guideline. The advent of performance based search and RPO has really blasted the standards on conditions, price, and service level.

    Of course there are fine professionals on both sides, and I am sure we can agree that some bad apples exist on both sides too. Of course the candidates or the opportunities don’t change.

    It is the vetting process in which you speak that really hits home for me. Know your partner, their practices, and their methods. Ask for the research. Ask for calibration. Demand a strong job spec, and understand the strategy they are using. Develop a service agreement and get expectations out early. If you want three candidates to interview – say so. If you want them in less than 30 days – say so. As the ones placing the order, we should tell the partner what we need and want early, and let them decide if they can fulfill the request.

    We recommend that when engaging a partner you should be cautious about when they say “yes” right away. Did they really listen? Did they consider the effort that would be required and the profitability for their firm? A great partner is one that takes on work that they can do predictably and reliably so you don’t have to do it – which is why you gave it to them anyway.

  2. Geoff- Thanks for your article… Very interesting…

    Paints a picture of the value of working with 3rd party recruiters and I LOVE that!

    I my view retained is CXO/Board members OR very specialized skills like “Algorithm Developers”

    Contingent is for Individual contributor’s up to the director level…

    Never once, have a I heard an opinion I agreed with surrounding hiring a retained recruiter for a “senior software engineer”…

    Great article… Best, Brian-

  3. Geoff, Where did you get 33% and 25% for contingency search fees?

    The market rate is 20% and any company shopping agencies knows this. In some markets, it’s even lower. You don’t have to misrepresent contingency rates to prove your point, although if a client told me they didn’t have the time to partner with me on a search, I’d run, not walk (and have on several occasions).

  4. Perhaps there is room for a more creative shared risk model, a sliding scale that might average 5-8% per year and varies based on the role rather than a one-time up front fee. From the employer perspective, it decreases the initial cost which lessens the consequences/cost of a bad hire. If the hire stays beyond 4-5 years, the employer will end up paying much more than the typical 25-35%. However, in this scenario, I believe the total cost of ownership will still be favorable for the employer when you factor in the cost of replacement had the employee only remained 2 years under a typical contingent/retainer arrangement. On the recruiter side, it provides additional incentive to recruit employees who stay beyond the 90 day guarantee and even encourages ongoing coaching and development of their placements. It could create a more aligned partnership between recruiter and employer.

  5. My View: Third party recruiters are NOT in the “employee retention business” they are in the “The recruitment business”

    Retained: 33%/FEE 3-6 months “replacement” Guarantee
    Contingent: 25%/FEE 1-3 months “replacement” Guarentee

    These #’s are “fair”, and I personally did exceedlingly well in this “so called” “GREAT RECESSION”… We Simply did not participate…

    Find your Passion, and you don’t worry/stress about your finances life… This world is an “INSIDE” game but sadly folks let external factors/forces drive there action/behaviors…

    Best to ALL, Brian-

  6. Perhaps I’m not vetting / evaluating “retained” search vendors well enough (maybe not having the time to do the search also leads to little time for this type of screening), but in my 15 years experience they offer little more that contingent firms do.

    The “undivided attention” theory sounds reasonable enough but once the few retained firms I’ve worked with become engaged in search, I get a sea of “A for effort” type response. One firm sent me all of their “call logs” to show me how many people they contacted which has no value to me.

    I’m certain there are third party retained search firms out there that provide value. I’ve just had very little luck with retained search.

  7. For many years,I have wrestled with which kind of recruiter… contingency or retained…that I should be. My answer came as it has so many times. I asked myself, “If I were a hiring official, who would give me what I am looking for?”

    I work to “please.” I want to please the client company, the candidate/family, and me. If the first two are happy, the end result is that I am happy and on top of that, I get paid…more happiness.

    The ideal agreement for me is to get a 30,60,or 90 day exclusive assignment with no money involved until the job is complete. With exclusivity involvements, I can complete the task for a much lower fee because I feel that most of what I do will be monetarily rewarded. I believe that retainers may be for those that do not trust that their client is giving them an exclusive search assignment. I treat every search that I do as if it were an exclusive search anyway.

  8. Hi Geoff,

    I reviewed your bio: Geoff Votta is a retained search consultant with O’Neill Consulting Group, a leading boutique retained search firm based in Providence, Rhode Island.

    Nice article (or ad)! Although, you did forget one important factor.

    Repeat business……

    As a mostly contingent recruiter, I like to provide a great value for our clients…..with unforgettable results.

    What our current and prospective clients like about us is that they can review candidates without obligation.

    We don’t use the “job wanted boards”, network groups, or alike.

    We source our candidiates by networking with other passive candidates…real candidates not money hungrey individuals.

    That is why clients/prospective clients have an advantage with our office. We do what a client cannot do.

    We even offer the gurantee terms mentioned above.

    We like to provide for our client’s “wants” for the following reason. Repeat business.

    Actually, we need the repeat business…gotta make a living you know. So, we perform a great job at contingency recruiting.

    That is why we are retained as our clients’ (and prospective clients’) first choice contingency recruiter.

    If by chance another agency brings forth a great candidate for job opportunity, our clients/prospective clients won’t be upset with us.

    Can’t win’em all, I suppose.

    Does a retain recruiting firm give back retainer if another office brings forth a good candidate?

    Ken

    1. The average job to placement ratio of contingency recruiters is 1 in 5. In other words, a 20% success rate.

      Retained recruiters have a 95% success rate.

      That’s what brings clients back.

  9. I find this whole train of thought amusing…

    The whole discussion of the retained verses contingent model of recruitment is so yesterday… With Linked In, Facebook, Twitter, and myriad other avenues of engagement – I hate to say it but – it sounds like a discussion from a 100 years ago listening to two buggy whip salesmen chatting about which blacksmith to align themselves with…

    Talent Management NOW is not about Third Party Recruitment solutions – it’s about who can manage the relationships for people that may have an interest in our client’s business -or providing ways to encourage talent segments to have an interest in a client’s business… Once managed effectively through Talent Communities or other means, assistance can be provided for Assessment, Selection, Scheduling and Offer Management.

    After 20 years of recruitment business ownership (mostly retained exec search), it is amazing to see the shifts that are happening. The Talent Management world is changing before our eyes and worrying about who sells that last horse whip will only let the rest of us fill the void as you’re left behind.

    It’s time to wake up and not be left holding the wrong end of the horse…

    (No offense intended to Geoff or his well written article…just a different way to look at things…Oh and Maureen’s right – great picture!)

  10. Thank you all for the great response. This topic seems to strike a cord for everyone… and that was the goal. I agree with a great deal of your comments and I disagree with an equal number of points.

    The face of our industry is changing and I think that K.C. does a pretty good job of framing it out. If you can not truly evaluate talent then you will not survive. Anyone with a computer can find a resume, Linked-In profile, etc. and those companies that provide active, or even actively-passive candidates will find their market shrinking quickly.

    Outsourced business processes and services outside of identifying where candidates “live” is where we are headed. You need to be able to screen out B and C talent and prove how to manage the relationships with the true A players. That is how you retain business, not by emailing MPC’s or allowing someone to look over the list of candidates in your database.

    Again, thanks for the all the responses. Stay tuned for more and please check out my blog at: http://search-savvy.blogspot.com/

  11. @Jeff Ross – I am not sure that I would conduct a search for 20%… let alone less than that. I can’t afford to work for free and I would not expect others to either.

    Racing to the bottom produces poor results every time.

  12. Thought provoking article – Thanks! I have 30 years as a contingency recruiter. The use of TPR’s, retained or contingency, is not going away. Over the years it has been said that we are no longer needed; the job boards will replace us, Linked, Twits, and Faces will be our demise. Sorry but just like the picture above, those sources only provide “what you can see”. BUT if you have not developed relationships; with your clients and your candidates, you won’t be around very long.

    We are still in business even through the “great recession” because our clients still have needs, they still have problems, and we wouldn’t be around if we didn’t solve those problems. The overwhelming majority of the positions we work on are from repeat customers.

    There has been a big wash out of the non-performers in our industry over the last 24 months (probably many that took 20% or less), those of us left will be in greater demand because we know how to find and “sell” the candidates that are “under the surface”.

    A hiring organization in need (for whatever reason) should use a TRP – retained or contingency (really doesn’t matter) if you are using the right one; that knows your industry, knows your company, and can sell that opportuntity – everyone benefits. As Bill mentioned – everyone is happy when I complete a search – Client, Candidate and me!

    As for fees, if you accept anything less than 25% you are in the wrong business – those fees are relegated to the turn and burn agencies that have no idea what value added means. And to the hiring organizations that think they are saving money – you get what you pay for, typically the candidates that other clients reject. I walk away as soon as a company says “take it or leave it” – they don’t value my expertise (or yours).

  13. @Geoff:
    I agree completely, and I say this as someone iwho is neither a contingency nor a retained recruiter. IMHO, TPRs should have searches that pay at least $30k in fees (30% of $100k+). They are NOT the types of searches that should be done on the cheap. If sonemone is looking to hire a single/few positions, they should consider these factors:
    1) Easy to find, easy to get- run an ad, do it yourself.
    2) Hard to find, easy to get- hire some $10/hr phone/internet sourcers, unless it’s a purple squirrel, then hire a $50+/hr sourcer, or pay $85 or less to get a search done on the thee big job boards by a service that does that.
    3) Easy to find, hard to get: use a 30% TPR.
    4) Hard to find, hard to get: use a 30% TPR.

    Hiring a lot of positions (YAY!): no-source (eliminate), through- source (automate) or out-source (send away) recruiting activities that aren’t worth $50+/hr to do, because they can be done for a lot less than that amount. Hire people that are worth $50+/hr to do what’s left over, and pay them that.

    Cheers,

    Keith “Will Show You How to Do It” Halperin

  14. Although I don’t agree with your assessment of contingent recruiters, Geoff, this is a good article – it brings out plenty of debate which is always cool.

    Hate to break it to folks, but employers are offering for (and very much getting) 21-22% fees on average, all across this market, for high profile or senior positions. I’d hesitate to accuse recruiters that accept fees in that range of “racing to the bottom”. It’s just reality. Headhunters have the option to not accept the fee – just move on.

    Respectfully disagree that a 33% upfront retained fee is “insurance” as you claim. There is insurance in using contingent search as well, it’s called “pay for performance”

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