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How to Hire and Manage Search Firms


How to Hire and Manage Search FirmsOur experience has repeatedly shown that there is a wide-spread lack of understanding about the different types of search and recruiting firms, the types of services offered by search firms, what search firms actually do and what is the best type of firm to use in a given situation.

The purpose of this article is to inform you about the nature and services of the search and recruitment industry so that you can make informed decisions. We also want to point out some critical issues that you should be aware of when selecting and managing search firms.

Self Assessment

Regardless of whether or not an opening requires the help of a search firm, a corporate self-assessment (see KCG Hiring Self Assessment Guide) is the first step to successful hiring at all levels.

  • What is the nature of the corporate culture surrounding the opening?
  • What type of person would be best suited for this environment?
  • What do you want the person in this position to accomplish?
  • How difficult (or easy) will it be to attract good candidates?
  • How much help do you need with the interview and hiring process?

Concretely identifying your needs, and your available resources to fill your needs will help clarify the extent and type of external services you may require.

  • Certain positions require full-blown, retained international searches.
  • Other situations are better served by a supply of resumes from a contingent recruiting firm.
  • Maybe you only need help with reference checks and interviewing.
  • As a general rule, more important and higher level positions require more capital (time, energy and research) to complete.

Contingent versus Retained
The main dividing line in the search and recruitment industry is between contingent and retained firms. The differences between the two types of firms extend far beyond the fee structure.

Fee Structure
Contingent Firms:

  • are paid in one installment upon the successful hiring of their candidate
  • usually do not have exclusive agreements with their clients
  • typically charge between 15-25% percent of the candidate’s annual compensation

It is generally in the clients’ interest to use more than one contingent firm for each position since no money is owed until after the assignment is completed
Retained firms:

Retained firms:

  • enter into an exclusive agreement with their clients and bill in three installments

  • collect the fee no matter where the winning candidate is sourced, even if he or she comes from within the client’s organization

  • usually charge 33% of the winning candidate’s total first year compensation (including bonus, stock option, pension, etc.)

  • In the typical arrangement, one third of the fee is due upon signing of the contract, the second installment is due after one month and the final third (and expenses) of the fee is due after two months, regardless of whether the work is completed or not.

The Real Difference

It would seem that the arrangement with contingent firms is far more beneficial than the deal offered by retained firms from the perspective of the client: lower fees, no money up front, more flexibility, etc. However, the way each type of firm works, and what they are able to deliver, varies greatly. The style and substance of each search firm is a direct reflection of their contractual obligations and fee structure.

Contingent Firms:

  • keep large databases of active candidates, often within a specific functional area (accounting, law, etc.) or industry (health care, insurance, etc.)
  • make money by generating activity—good contingent recruiters are measured by the number of active candidates they send on interviews
  • spend considerable effort convincing employers and candidates to agree to interviews, offers, etc.
  • have no allegiance to clients or particular assignments since they are not contractually obligated to complete any work they begin.
  • work on a large number of similar positions simultaneously, competing with other recruiters and their clients’ own candidate sources
  • sell candidates not service; their goal is to get their candidate hired as quickly and efficiently as possible

Retained Firms:

  • are Professional Services Firms that partner with their clients exclusively on specific assignments
  • work closely with their client to find the best candidate for the position, regardless of the source, since there is no competition from other search firms
  • use proactive search techniques (calling directly into clients’ competitors and referral networks) to source top performing candidates, rather than relying on the passive techniques (ads and postings) utilized by contingent recruiters
  • employ much more rigorous and refined candidate vetting techniques (comprehensive screening, long interviews, 360° reference checks, background checks, etc.)
  • act as consultants and advisors during the search process

Which is Right for You?
Good search firms do not try to be all things to all people. Each type of firm is useful in certain situations. If you do not need the complete array of services offered by a firm for a full search, try to negotiate a more limited service agreement.

Use a Contingent Firm when:

  • you have a highly refined or centralized interview process and won’t benefit from a consultive approach to hiring—you just need resumes
  • your opening requires a very specific skill-set, with less emphasis on personality or promotability
  • you have a tight time constraint—contingent firms generally have a roster of active candidates available immediately
  • you have many identical openings and need to cast as wide a net as possible over a long period of time (in this situation it may be best to use numerous contingent search firms in conjunction with ads, postings and word of mouth)

Use a Retained Firm when:

  • the position is senior or important enough to require proactive search techniques to yield superior, top performing candidates
  • you will benefit from a consultative approach to hiring, where the search firm partners with you to provide interviewing and evaluation tools, advanced reference checking techniques and general expertise throughout the duration of the engagement
  • you need to be represented in the marketplace by a more professional and focused presence

Fixed Fee
Historically, search firm fees have been calculated based on a percentage of the winning candidates’ annual compensation. However, an obvious conflict of interest arises as it is beneficial to the search firm to present candidates with the highest salaries. Often search firms will start looking for candidates at a certain salary point, then announce that no one can be found at that point so the salary range will have to be increased.
As the search industry evolves, more and more firms are turning to fixed fees to eliminate this conflict of interest. Try to negotiate a fixed fee based on a percentage of the expected starting salary for the
position in question. A fixed fee is not the right answer for every assignment, but the nature of the search firm’s response will say a lot about their character and business style.

Pay for Performance
The advantage of retained search firms is that the contract obligates them to partner with their clients and execute the search. Sometimes—for a variety of reasons—searches are not successfully completed. On the monthly billing system, where the search firm bills the client in thirds on a monthly basis, the client is forced to pay for work that may not have been properly completed or for searches that remain open.

Try to negotiate a “pay for performance” contract with the search firm where you are not required to pay fees beyond the non-refundable retainer until the search firm completes the work. Using this model, the second installment is usually payable after satisfactory delivery of a short-list of candidates. The final installment is due when the winning candidate accepts the offer of employment. If either party cancels the engagement, for whatever reason, you have only paid for the preliminary work which has been presumably completed by the search firm.

Small versus Large
Search firms range from single operators working from home to large international conglomerates with offices in major cities on every continent. As is the case with contingent versus retained, small and large firms each have their advantages and disadvantages in certain situations.

Large Firms

  • have extended reach and resources for international searches
  • have extensive databases and referral networks
  • often have junior employees complete the actual search work, whereas the partners interact with the clients
  • are more cumbersome and less adaptable to unique assignments
  • have long lists of existing and previous clients that cannot serve as candidate sources (search firms cannot ethically recruit from their past or existing clients)

Small Firms

  • have expertise in specific geographic areas, industries, or functions
  • use partners to complete the actual search work, often resulting in more effective and personalized service
  • have much smaller client rosters and thus have a larger potential candidate base
  • have a limited ability to perform international searches or cost-effectively serve clients in distant locales
  • generally try to complete searches locally, reducing additional expenses and travel costs passed onto the client (large firms tend to think most openings require national or international solutions)

Hiring a Search Firm
Look or ask for:

  • Experience. It is important that the search firm in question be experienced and competent, but don’t put too much stock in specific industry experience. Many contingent recruiters work in industry-specific silos and have large “rolodexes” within their specialties, but experienced retained search consultants who use proactive search techniques will be able to quickly penetrate any market.
  • References from existing clients. Just like a candidate’s past performance is the best predictor of his or her future performance, the same goes for search firms.
  • Examples of previous Position Specifications (job descriptions written by search firms that include client and market profiles). The firm’s writing style will reflect their professionalism and how they will represent you in the marketplace.
  • Written list of client companies that cannot be used as candidate sources before you sign the contract. You may be amazed at how extensive this list can be when dealing with a large or international search firm.
  • Fixed-fee contracts (no financial incentive to increase the starting salary).
  • Pay for performance contracts (invoicing only occurs upon successful completion of pre-agreed upon deliverables).
  • Who will actually do the search work. It is customary that search firms use Associates and Research Assistants to complete the work, but ask to meet them. Be sure you are comfortable with the actual team who will represent you in the marketplace.
  • The search firm to provide you with real weaknesses of each candidate. Phrases such as “works too hard” or “doesn’t suffer fools well” are not a real weakness.
  • A systematic and methodological vetting process. Does the search firm facilitate comprehensive long interviews? Such interviews are necessary to humanize the candidate. Is the search firm partnering with you to ensure the right candidate—not the first or easiest candidate—gets hired? Be wary of firms that say such in-depths interviews are not necessary.
  • Comprehensive and in-depth reference checks. Many employment agencies will allow a Junior Associate to conduct the reference checks. There is a high level of skill required to perform meaningful reference checking.

Managing the Search Process

  • Be responsive and involved. Most search timelines extend as the result of clients dragging out the final interview process. To maintain search momentum, stay in frequent contact with the search firm and, in general, on top of the whole process.
  • Require detailed weekly updates. Ask for names and concrete descriptions of prospects, not just generalities and statistics (‘We screened 50 people”).
  • Evaluate sample resumes and review telephone screens early in the search to be sure you are “on the same page” with the search firm.
  • Ask the search firm to generate specific types of candidates to help achieve your staffing goals. For example, if your company needs more women in management, require that a certain percentage of candidates they present be women.
  • Require detailed, written reference reports that spell out the specific positive and negative proficiencies and competencies held by the candidate.
  • Sign a contract preventing the search firm from recruiting your company’s employees for three years. Your entire company, not just your division, should be protected from the search firm’s future recruiting efforts.
  • Respond quickly to the search firm’s emails and calls. Run a fast schedule as the search progresses. Maintaining momentum is an essential component to presenting your company as professional and “together” to prospective candidates (who are, of course, interviewing you as well).

Value Added
Companies retain search firms to complete specific assignments. During the course of the assignment, recruitment firms work closely with their clients, often developing strong relationships and gaining valuable insights into the client’s corporate culture. However, when the assignment is complete, the relationship can abruptly end if there are no more imminent hiring needs; both parties quickly move on to other challenges. Maximize your experience with search firms by asking what else they bring to the table beyond complet¬ing the task at hand. What will you learn from the process?

  • Does the search firm download their intellectual capital? Many search firms see themselves as “information brokers” and guard their processes and candidates closely. Look for firms that are willing to involve you in the process and teach you the secrets of the trade so you can be more effective in your own internal hiring processes in the future.
  • Will the search firm coach you to ask the right questions when you meet with candidates? The employment agency should provide you with an interview template that is tailored to fit your needs.
  • Does the search firm have the depth and expertise to go beyond the expectations of the specific assignment and make meaningful organizational development recommendations? Executing search assignments gives Search Consultants unusually close looks at the internal processes and culture of their clients. This knowledge can be used to assist clients in making organizational improvements that go far beyond the position at hand. Is your hiring process as effective as possible? Do you have a proper transition strategy? Do you have succession planning and retention measures in place? Are there “toxic” employees who degrade the broader culture or underutilized star players?
  • In general, will you develop an open, consultative relationship with the search firm? Is the search firm a true professional services firm that always holds their clients’ best interests as their primary concern, or are they merely going for the quick fee?

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