The Recruiting Industry’s Biggest Taboo – And How to Cope With It

When I first accepted my recruiter “trainee” position in November of 1987, I was hired by a CPA/MBA Deloitte “Big 8” audit manager who had a then-recent position as a financial officer of a W.R. Grace division. Being somewhat naïve, along with possessing an insatiable appetite to savor success and affluence, I actually went on doing what I was told I could do during my first two years and savored initial success.

Then disaster struck in the form of the 1990-1992 Savings and Loan recession. We did not know what exactly was happening at the time however. While I still made placements during the worst of this cycle, it required more work than I had needed to perform while training and for less money. I pursued necessary new clients with ferocity and managed to battle my way through. The experience knocked some of the cocky confidence out from me. But by 1994-1995 I was back sailing the high seas and hitting figures and results that paled my initial years of success by comparison.

Then came the Asian market meltdown of 1997 which affected about a third of my clients either directly or indirectly. I got back in the saddle and rode through 1998–2000 until the dotcom bust, which was further pummeled into the ground by post-September 11^th fears which sent shudders through the economy. I really didn’t feel the impact until February of 2002. Or what I prefer calling the “silent spring”.

That one was not as easy to dust off and get back on the horse from. Especially since I was in a point in my life where my children’s private school, house, cars, business office- condo, mortgage, and numerous other expenses (not to mention salaries and payroll) all relied upon a set minimum cash flow each month.

I came to realize that while all the trainers, gurus, motivators, and edu-tainment spokespersons of the industry were focusing on placements and billings, no one was talking about protecting your backside. No one was discussing how to set up your financial affairs to carry you through business-threatening down-cycles.

Since I started my career I have since endured three major recessions and one minor one.

Those four recessions are:

1990-1991 Savings and Loan Crisis/Recession
1997 Asian Financial Crisis
2001-2002 Dot-com Bust/ September, 11th Recession
2008-2009 Sub-Prime/Real Estate Meltdown

For the purpose of this article I had three private conversations with three different recruiting industry thought leaders and search firm owners. Each agreed that the number one biggest financial threat that looms over the direct-placement executive search recruiter is the steep drop off in fees, which occurs during the midst of these vicious down cycles.

It is an unspoken taboo-like subject most would rather not publicize or confront. After all, it’s hard to be a motivational speaker and then have to address a subject which will most likely de-motivate audience listeners.

For those of you with a healthy temp/contract business you may want to skip this article. You have cash flow as long as your temp clients are paying their bills. I tried launching a temp company in 1994 and while very successful for nine years I developed a disdain for the temp/contract business. Yes it was a faster turnaround than executive search. Yes it drove a stable cash stream. But it also had a significant distraction on my executive search practice.

If you have a successful executive search practice, and your average fees are $30,000 or higher, the last thing you want is for an annoying call at 10 A.M. demanding their SAP Payroll specialist show up soon “or else”. I enjoyed executive search. Getting paid and being out of the picture to take my vacation afterwards.

By some accounts, about fifty percent of recruiters either a) went out of business or b) abandoned the industry/sector they were dealing with during each of the recessionary cycles outlined above (except for the Asian Market Crisis which affected some U.S. businesses on a more limited basis).

I had a top-producing chemistry recruiter with a nine-year track record quit during 2002 when his entire industry seized and came to a grinding halt. Yet as dismal as prospects appeared, it all turned around by 2003/2004 (Which leads to a separate subject of premature panicking, but this is for another article.).

2^nd biggest threat facing the direct-placement recruiter:

Dealing with Panic

Combined, the impact of a steep recession coupled with ensuing panic resulting from a lack of preparation can result in the one-two knock-out punch combination that puts many out of business for good.

When you are unprepared for problem #1 (the eventual drying up of revenue flow for a spell) you are left with little recourse but desperate, panic-based, reactionary tactics. And that’s not good. When you are prepared, as I was during this last down-cycle of 2008-2009, the drop in business and loss of major accounts becomes just another bump in the road you can tackle while filing your finger nails in your easy chair. While I had reached a sense of concern this past February/March, having plentiful cash stores and reserves limited concern and forestalled heightened panic. I still slept better than during any period before.

Dealing with recessionary downward spirals may require different approaches based on your specific situation. For those recruiters working with a company-paid base salary, your company’s management may (or may not) choose to fund your position through the recession depending on their level of faith and confidence in you.

For those of us who are financially un-tethered (independent), preparation requires a pro-active approach initiated during boom times so that you are not caught off guard. It’s when the revenue is coming in full-stream that you should make plans for gloomy days. Not as the storm clouds thicken in the horizon; by then it may be too late.

The following is a checklist you can begin putting to action now, as the economy heats up, so you are better prepared in dealing with the inevitable recession that must and will come to visit us again:

Financial Checklist

Set aside 10-20% of all revenue in liquid assets (Laddered CD’s, Treasury Funds, Bonds, Bond Funds, etc.)
Have enough savings to ride out a 6-month period drought of inactivity during a worst case scenario
Invest another 10% of annual revenue in your business. Examples are:
1. Annual banner ads on prominent, industry-specific websites
2. Annual ads in major print publications/magazines
3. Consider buying instead of leasing your building/office space
4. Update/upgrade your website and cross-linking to remain visible in your business
5. Pay for an SEO specialist
6. Pay or outsource a Marketing/PR/Publicity guru to cross promote your company and/or website
7. Better Computer/systems/network
8. Hire an assistant to do most of your legwork

Consider Real Estate as another equity investment
1. This can be in the form of buying your office instead of leasing
2. Buying a 2^nd or 3^rd home to rent out (can be distracting to your core profession if you are not careful).
3. Renting out a seasonal vacation home on sites such as www.vrbo.com
4. Sublease parts of your current office space (if agreement permits) if cubicles or large sections are vacant (related industries such as cpa’s, realtors, attorneys, HR Software vendors can even benefit from cross-marketing)

I find it interesting that when talking to a financial advisor who primarily sells stocks and equities he/she will always promote the idea of “diversification,” as long as you diversify within their offerings of stocks or funds. Mention real estate to a stockbroker and he/she is likely to look at you as if you just landed in a flying saucer.

The same goes in reverse with the real estate industry professionals. The truth lies somewhere in between. All investments are good investments if you conduct enough research. Art, classic and vintage automobiles, collectibles, can all be forms of investment.

In my humblest of opinions, you manage your investments well whenever you can relate to your investments. Whenever I look back and measure the value derived from each $5,000 I have spent on my own business the returns have always been about ten times the initial outlay. That’s a good investment return ratio. But they are investments I can manage and relate to as I know my business better than anyone else.

This year I experienced the worst and the best this industry has to offer. I had one of my all time worst 1^st quarters everI thought I had lost my touch.

Had I quit at the time, as many lesser-experienced recruiters might do, I would not have experienced one of my very best 3^rd and 4^th quarters ever. In fact those two quarters alone caused my entire year to tie for top best years in my 23 year career.

A cautionary note: try to resist the temptation of going out and buying a new car or lake house when those $30,000+ checks arrive in the mail one after the other. A sequence of multiple consecutive placements can lead to heady thoughts of grandeur. Relish your success. But start proper planning and take a prudent step by buying business insurance by re-investing in the best revenue-generating business of all time: Your own recruiting practice.

The Consequences of Improper Planning

The demise of many recruiters has come from the single failure to save, invest, and prepare for turbulent times. I know first hand the dread these small business owners confronted when I received so many calls in 2009 from desperate recruiters looking for any source of income possible when all their accounts had dried up and prospects for new business were dim. Having no active searches and no prospective accounts to even go after, they were coming to me for either a) advice or b) an outright job.

In each and every conversation I was able to determine their failure to plan and how such contributed to the difficulty they were confronted by.

Here’s an example of real-life reasons why those recruiters reached the end of their revenue rope. I hope learning of the pitfalls helps you avoid the same:

Recruiter #1:
1. Eighteen years in business but no website.
2. LinkedIn page was only sparsely filled out.
3. Became content with a too-low $90,000 billing level and such a low threshold quickly resulted in zero when two major clients ceased hiring

Recruiter #2
1. Twenty years in business
2. Partner left and took his accounts around 2008
3. Departing partner was not the “go-getter” – he was the “candidate fulfillment” half of the team
4. Remaining partner had no prospective clients.
5. Had no marketable candidates
6. Was seeking low-wage salaried jobs working for another recruiter due to inability to handle the client/fee end of the business equation
7. Very poor, amateurishly prepared website had multiple broken links

Recruiter #3 (met during a job-networking group event in a major city)
1. Was “laid off” by a 11-person recruiting firm
2. Business card stated “$400,000 in billings for 2008”
3. Came across well-groomed, polished, and well-spoken
4. Further discussion revealed the $400k was a result of a senior recruiter’s clients and fee contracts.
5. She was technically only a “fulfillment supplier” (sourcer)
6. When the economy got tough – and positions were scarce – having a fulfillment-only specialist was an unnecessary luxury

You can notice some trends for the reasons why the above three recruiters left the industry for alternate work. Two of the three settled on being predominantly “fulfillment” specialists of other recruiter’s contracts. They did not possess the imperative skill of finding, cultivating, and negotiating with new and prospective clients.

When you have such a skill – the world is your oyster and you will never be without income for more than a temporary dry spell. One of the three was handling both client and candidate fulfillment (recruiting/sourcing). But she had settled into the bare-minimum level necessary for her modest living standards. Ninety-thousand dollars is not so bad when you are in Wichita, Kansas working 30 hours a week.

But settling on minimal quotas means once you lose your two or three key accounts, you’ll risk dropping to zero due to the already low threshold.

Lack of self-investment was also apparent. Judging from the non-existent or poorly produced websites, it is evident two of the three recruiters might have staved off economic difficulty if their websites had been more appealing and they had better marketing and PR material overall. The email signatures often tell a lot about what is or is not going to come later down the pike.

Each of the unfortunate outcomes could have been forestalled if not avoided.

If you are like me and you don’t enjoy the contract/temporary side of the business and prefer to focus on $120,000 and above hires, along with the joy and mental stimulation that comes from big-ticket, single-service sales derived from dealing with such professionals, having three to six months of capital reserves may go far to protect your assets during sharp, steep, down-cycles.

Now if only someone had told me all this 23 years ago. Back then, the only hint we had of how to manage our funds was to follow the leader’s example. But if I had followed my second boss’ example I’d be bankrupt which is how she wound up. That person placed personal possessions, such as a siren-red Mercedes-Benz convertible coupe, expensive vacations, etc. ahead of investing in the office, office-equipment, or staff which came last.

Her self-centeredness caused a mass exodus and ultimately sent her into bankruptcy. What I did learn, if anything, is whose lead to follow versus who I should not be emulating. And that took years of discipline and hard lessons to perfect and refine.

Disclaimer:

I am not an attorney and am not providing any legal advice. I am not a financial planner or financial consultant, nor am I a CPA or tax attorney and you should not rely upon any information contained in the following article without seeking expert, professional and independent guidance of your own.

This article is from the January 2011 print Fordyce Letter. To subscribe and receive a monthly print issue, please go to our Subscription Services page.