As the economic carnage continues to unfold on Wall Street and other financial centers of the world, Main Street is beginning to brace for what could be tough times for the U.S. While healthcare typically is spared the full brunt of the misery, hospital CEOs have already started to look for ways to cut expenses and to wrench more value from the money they pay to vendors, particularly consultants.
These threatening economic times frame a more important question for healthcare, and the broader business community: How do we hold our consultants accountable for the quality of their work and the results they promised when they sold the deal? I am of the belief that the time is fast approaching for consultants, including executive recruiters, to step up and become true partners with their clients. Partnering should mean more than smooth business-speak language that is found in a brochure or glitzy advertisement. What we are and should be talking about is for consulting firms to share the economic risks with their clients.
What does this mean for executive recruiters who work on a retained basis? I have some ideas but I would like your feedback. When you finish this blog, click the comment button and share your thoughts.
The major search firms now command 33 percent of the successful candidate’s first-year cash compensation. To calculate their fees, search consultants include the base salary, signing bonus, allowances for cars, club memberships, computers, cell phones, education and the performance bonus.
The bonus component of the professional fee is paid in one of two ways. The client and the search firm estimate what the successful candidate will earn in bonus at the end of the first bonus cycle and incorporate that amount in their final payment. The second alternative is for the search firm to wait for the actual bonus payment. In this scenario, called the true up, the search firm bases its final payment on the actual bonus earned by the candidate.
There are still numerous healthcare providers who happily pay the 33 percent professional fee. In their value system, there is a direct correlation between the fee and the quality of the search. They reason that firms who discount their professional fees cannot possibly offer the same type of quality of service.
Clients typically pay for this service in three payments: a retainer of 30 percent at the start of the search, one-half of the remaining estimated balance 30 days later and a final payment 30 days thereafter, regardless of whether the search is complete. However, there are numerous examples where search firms have been paid for work they never completed.
A New Standard
Client Satisfaction — If the client is not satisfied with the quality of the panel developed by the search team, perhaps the firm should offer a fee discount for failing to meet their client’s expectation.
Performance Fee – Why should clients pay for work that has not been completed? Recruiters should tie their payment schedule to the progress of their work. In this formula, one that our Firm has used for years, the second installment is not due until a panel of recommended candidates is presented to the client. In this payment option, the final payment is typically due when the candidate accepts the employment offer.
At-Risk Fees — Moreover, instead of using the age-old professional fee calculation, perhaps the search firm should be willing to delay the final payment until the end of the business cycle and put at risk the true up payment. If the candidate does not earn a bonus that is equal to the client organization’s historical average for performance, then the search firm would forego all or some of its final payment.
Contingency recruiters will argue that this is exactly what they do. However, they typically do not handle the top-tier assignments and spend little time with the client analyzing business operations and client culture.
Currently, most of the major firms offer a 12-month placement guarantee. In reality, they would prefer not to offer any guarantee if they could get away with it. Occasionally, in a competitive shootout for an assignment, a Firm might offer a longer placement guarantee to distinguish themselves from the competitors. However, the current norm is 12 months.
A New Standard
The cost of a bad hire at the executive level ranks is significant, perhaps 50 to 100 times the candidate’s first-year cash compensation. If you doubt the damage a failed search can cause an organization just ask companies who were victimized by a candidate’s incompetence or search firm negligence. Mistakes are possible, regardless of how diligent all the parties are. In our Firm, we believe that the new standard should be 36 months for the C-suite engagements and 24 months for other executive assignments. The traditional search firm pushback to this idea has been that the search consultant cannot control what happens after the hire takes place. However, if the search firm has done a good job with their pre-search due diligence, if they are on the same page with the client in terms of the ideal candidate profile and performance deliverables, and if they have completed an in-depth candidate screening process and comprehensive background review, where is the risk? There will always be risk, but with a gold-plated search process, that risk is mitigated. You can always make exceptions for businesses that are in distress, or where there is abnormal executive turnover as the result of governance or other operational and financial issues.
This issue should not even be on the table for debate. Search Firms who submit candidates without checking backgrounds for little anomalies like fraud, a dishonorable discharge, repeated DUIs, felony convictions, multiple bankruptcies etc., are practicing something akin to President Clinton’s infamous policy on gays in the military: Don’t ask, don’t tell. Regardless of how well known the candidate may be, there have been several glaring examples over the last five years where “known” candidates had some dirty little secrets in their background. It is amazing how overall reputation, a new book, and frequent appearances on the lecture circuit can push troubling background or performance issues into the background.
Why search firms do not routinely perform background checks on all their recommended candidates is beyond me. There is little risk for the Firm and a big downstream value for the client.
I realize for some that these ideas are heresy. I do not think they should be but now it is your turn.