Hiringnomics
Published Wednesday, April 16th, 2008 in Uncategorized
Finding talent. Sometimes you can use a recruiter and sometimes talent shows up in the unlikeliest of places — as the video below demonstrates.
Why don’t more recruiters work with startups? The most obvious answer is startups have a DIY, bootstrapping attitude out of necessity and cannot afford a recruiter (especially retained) which as a fee can range from 30-50% of salary. That is probably not the explanation though because people are the main ingredient to start-ups and so companies should spend the shillings for a recruiter service.
John Frager blogged about why large companies use recruiters and startups do not, a topic he had previously discussed with Charlie O’Donnell (Founder of an exciting startup in the undergrad career/recruiting space). John writes “the marginal productivity of a particular employee is far less than that of the corporate executive“, and,
Lets assume a key executive at a large and hierarchical company quits. The projects and peopled managed by that executive will quickly lose their direction and leadership. They might be able to function independently, but they will certainly be less effective. In a large organization, and for a high level executive, this may amount to significant declines in productivity for the entire company. Thus, the cost of leaving that position open is very high. Here, a headhunter, “Executive Search Firm”, steps in and uses its contacts, specialized experience, and familiarity with the industry to quickly fill that position. They garner a large commission for providing a very valuable service by minimizing that costly leadership gap.
His argument is that a large corporation, and not startups, pay recruiter market making rates becuase largecos have a significant time cost of hiring. I think this is a good point, because the new hire’s P&L responsibilities make it an obvious hard cost decision to get someone running that P&L ASAP. Evidenced by the fact that the replacment hire (for executives) starts the same day the predecessor leaves at a large company. Most large company executives are on the 6 month notice plan, not the 2 week notice, because public markets would eat companies alive for suddent announcements without the replacement in tow.
There are additional reasons why recruiters work more often with largecos. Fist off, law of large numbers as there are more jobs to fill, and largecos represent higher probabilities of recurring business for a headhunter. Managers want to protect their budgets and grow them at the same time = proactive hiring. Large companies also have internal recruiters who can make 3rd party recruiters out to be the scapegoat of fills, time to fill, cost per hire, bad hires, turnover. This actually leads to more demand for external recruiters from largecos. Recruiters can command higher fees as there is more time value than a largeco hire, because the hires are less of a flight risk and there is less probability of the company folding. I am also speculating that headhunters focus on fewer clients as the increasing talent war and demands of a particular company (e.g. de-centralized workforce and globalization requiring more travel from a recruiter have made a hire a more time consuming process. Also, recruiters are specialized and look for a package to sell, and the profile of a startup employee takes longer for a recruiter to analyze. It is less of a resume hire at a startup; with more emphasis on entrepreneurial characteristics, team fit and that hire’s network. Management team needs to sell the role. Finally, recruiters would like to earn repeat business not just from you but from other companies in your space (with your company serving as a set of references in the market they are addressing).
There are a few reasons startups might avoid recruiters. First, it is harder to forecast the value of a hire at a startup and there is more volatility in performance than compard to small companies.. It is tough to put emhpasis on new hire ROI with all the startup unknowns. Also, there is a startup tenet to mind cash and not hire VPs until certain milestones are hit. Startup salary/financial package negotiation is less vanilla than your at typical largeco. It is typically going to be the job candidate, not recruiter, who is better prepared to judge a startup’s quality of revenue, product, company competitive forces and team…not to mention collect performance to date and funding history. This judgement impacts how the candidate values stock options (which have greater risk/reward at a startup). The many unknowns about the startup’s future make it tough to derive a recruiter’s value. Also, startups prefer to hire through their network even more so than largecos. Team fit is much more critical at the startup level where the innovation cycle requires frequent and significant decision making. Financial package negotiation is a process that should not be outsourced to a recruiter because these conversations help entrepreneurs decide if they can work together.
At this point, it might seem I don’t think headhunters and startups should go swinging in the tree 
The opportunity cost of a bad hire may be bigger in absolute dollars at a largeco but it is felt more at startup level, because incremental change has significant impact to a startup’s bottom line. This in turn affects pricing, margins, market share, and dilution. As the startup grows from toddler to adolescent stage, the company profile changes quickly and so does the target hire. Basically, there is little margin for error, a company grows outside a founder’s network, and there is urgency for hire. These are some reasons why startups need to work with recruiters. I am aware of venture capital firms that maintain relationships with 100+ recruiting firms in order to find talent outside of their network for portfolio company hiring (also others that form partnerships with help of headhunters). One hidden benefit of a recruiter is that they can assess the current team and identify the holes that everyone else might have missed. When you run a company, you live inside its problems and sometimes cannot see them clearly.
The net has also enabled recruiters to thrive. Although, we still have a long way to go from today’s resume database, corporate web site, ATS information overload scene — future innovation for sure will include data portability, open source, RSS, social networks, meta and deep search. I blogged more about current and future state of job boards here. That said, I am a believer in peer recruiting as the best vehicle and referral hire stats back this up. LinkedIn revenues are growing nicely. I think many people realize that broadcasting a search to 200 of your professional contacts can be an effective recruiting method. H3 , Yorz believe that once employers start offering serious money to non professional recruiters that can find them the talent their looking for, it hardly makes any sense for them to take solely rely on the relatively monolithic approach of using single professional recruiter. H3 should open up searches to the general public (versus the current invite model) and partner with a experts network like a Gerson Lehrman.
Broadly speaking recruiting, the education system and government have especially tough situations. Schools have 65% retention and a 30% transfer rate that equals $8M in extra annual costs. $3M is spent by the average school for starting new students; in total $70B or 20% of revenues. The massive competition from the 6k+ schools have led to a focus on sales and a drop in quality in counseling. At the same time, FFELP loans are not even being backed by institutional investors; despite the government guarantee (my guess is that orginators, guarantors have private loan lines as well which spook the investors). Apparently 40% of students choose their school based on whichever school first returns the approved loan estimate package. Government has a workforce with an average age of 47 with 70% eligible to retire. Areas of further reading and listening relevant to recruiting:
- Civic Ventures pdf- “How Boomers Can Help Our Government Meet Its Talent Need”
- HBR Ideacast podcast - “What Make Gen Xers tick”
- Businessweek, Cover Stories podcast - “Youthquake”
Excerpt on Gen Y from the Businessweek podcast with Michelle Conlin
They had a schizophrenic coming of age…they were the children of the rising Dow and it was unbridled prosperity and it was a boom time and things looked so rosy. And then after the crash came terrorism, war with Iraq, it’s their friends that are dying in Iraq , it’s their planet that is given rise to sunbathing in January and so they are a generation formed by epic uncertainty, nowhere does that play out in a greater way than their economic prospects, they have more debt, federal loans for schools are dwindling, tuition is rising, price of affordable house with neighborhood in school district bid up astronomically, and they are the inheritors of the great risk shift, the shifting on to soldiers of individuals health care and retirement - things that government and employers once took care of…the system needs an update and they have faith they can shape that update…when they graduate college, they enter this global discount labor bizarre, competing against counterparts for pennies on the dollar in china and India.