Share this Report 2014 State of the Retained Executive Search Industry

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1 Share this Report 2014 State of the Retained Executive Search Industry Part One: An Overview of Retained Executive Search Worldwide

2 2 Introduction This summary report is intended to provide a broad worldwide overview of trends in the retained executive search business. We hope it will be of interest and value not only to members of our profession but also to client organizations that use executive search, senior executive candidates and the media. The executive search profession is a form of management consultancy intended to assist the boards and top management of organizations to identify and recruit the best executive talent to lead their enterprises. In this respect it represents one of the highest value-add professional services available to organizations and is employed by many organizations around the world. The success of this professional service has been exponential in the past 50 years as the global economy has developed, industries have become transformed and mobility has made executive talent available to all organizations as a key facet of competitive advantage. As the above chart shows, in recent years, in spite of adverse economic forces following the world financial crisis, demand for high level executive search has remained resilient and demand is roughly back to the all-time peak of While statistics on the industry are hard to assemble because of its very fragmented nature, estimates suggest that, at its peak, the search profession worldwide generated around $11 BN in revenues. As of December 2013, revenues are estimated at around $10.57 BN.

3 3 As this report will describe there are fundamental forces that drive executive scarcity and, as is the case with many scarce commodities, competition can become fierce once the market begins to heat up. It is our contention that the next cycle of economic growth, which we believe has already begun, will further drive demand for executive talent to even greater heights. The Drivers of Demand There are both long-term and short-term drivers of supply and demand for executive talent but it is the longer term trends that will inevitably have the most impact. Such forces range from educational policies, to demographics, to economic development, political stability and market sentiment. Thus the geography of talent, where it is being developed and used, becomes an important factor in competition between organizations, and even between countries, as does the confidence or necessity to invest in executive talent as a fundamentally important resource. It is a truism that those with the best people win. It is also the impact of perception and risk of opportunity that will drive executives to either stay where they are or to consider a move of employer. In todays world where corporate loyalties from employee to employer have been consistently eroded since the 1980s, executives think in relatively short term fashion about their careers, often considering job opportunities as three to five year assignments. Thus many executives will have as many as eight or nine employers during their careers. Even though there are many exceptions where executives will develop careers within one organization, this is less and less the case and thus executive mobility in itself has become a factor in scarcity and market demand. During 2013, we saw the resurgence of US market demand for executives related to several of the above factors. An increase in business confidence and thus a desire for growth strategies; a buoyant stock market encouraging liquidity in the private equity market; the growing impact of the retirement of the baby boom generation (77 million people replaced by 44 million); digital transformation and continuing globalization. On the supply side, we see an increase in executive mobility as executives become more encouraged to take risk by the healthier state of their stock portfolios, higher property prices and a desire for change from cost-cutting environments to growth. The American economy can regenerate itself rapidly, and when this huge economic machine ramps up, it often does so very quickly. Executive search firms are now seeing higher demand for strategically important positions in a range of industries that are re-evaluating their strategies for the next economic cycle. The megatrends driving the long-term growth of demand for retained executive search services

4 4 are those of major demographic shifts in the developed economies (negative birth rates and greying populations) thus reducing the supply of talent, the huge potential demand from the emerging economies of Asia, Central Europe, Africa and Latin America and the fact that more and more organizations see executive search as a natural solution to critically important executive appointments. Trends in the Conduct of Executive Search and Client Relationships While the overall trend in demand is positive, there are, nevertheless, counter forces at work in the market that can constrain the demand for executive search services. In recent years these have come from increased competition employing alternative business models such as contingent recruiting, from the development of in-house talent acquisition departments by corporations employing internet sourcing services such as LinkedIn, and from pressures on terms and conditions of doing business often imposed by HR and purchasing departments seeking to contain costs. While retained executive search firms aim to counter such forces by providing quality work at all levels, there is no question that a combination of these influences is disintermediating at lower levels and serving to drive retained executive search to the higher levels of appointment where pricing and terms of doing business are less sensitive. There is logic in this even though more volume driven client needs are attractive business that enable growth and used to provide reliable cash flow. It is, however, at the higher levels that retained search firms are able to most effectively demonstrate their strategic and analytical skills and act as trusted advisors to the top management of an organization in resolving critically important human capital issues. Thus, AESC research, in its biennial survey The Client Speaks* has discerned levels at which the services of retained executive search are more highly valued than at lower levels. Above $300,000 in annual compensation for an assignment executive search firms rarely have difficulty winning business and are recognized as providing added value in areas such as confidentiality, cross border reach, market knowledge, objective assessment, sensitive candidate handling, negotiating and consulting advice. It is also at these levels that candidates expect to deal with trusted intermediaries representing a client in the market. *The latest AESC Client Speaks Report was published in February The AESC worked with Gulland Padfield, the professional services consultancy, to shape and analyze the survey s findings and to consider some of its profound implications for executive search firms across the sector. The data for the study was gathered during the summer and fall of 2013, by polling the HR and talent community worldwide.

5 5 These trends are reflected in executive search industry statistics which show that while the number of assignments may be decreasing the value of those assignments is increasing:

6 6 In the past 20 years or so, clients have become more discerning about their use of executive recruiting services and there has been great temptation by larger corporations to save the cost of external consultants by creating internal executive recruiting departments, even employing former executive search consultants to perform a similar role on the inside of a corporation. There are, inevitably, some advantages and disadvantages to this approach and it may still be too early to see whether this will be a long-term trend, especially if there is volatility in the demand for these services internally or if the lack of third party objectivity proves to be a long term contributor to diminished quality or the ability of the client to adequately compete for the best talent. As the tide rises in demand for executive talent, we may see executive search consulting firms be more selective in which clients they represent in the market and the conditions upon which they will offer their services, preferring clients that offer unconstrained demand and the best terms of doing business. Global and Industry Distribution of Executive Search Demand One of the largest trends in business since the 1960s has been the advent of globalization. Multinational corporations have grown to meet the potential for increasing levels of world trade as more and more countries have developed free enterprise economies and wish to compete in a global market place. Executive search firms have followed this growth, and have sought to provide services to their clients not just in the developed markets of the world but around the globe as more and more countries have emerged as more politically stable and capable of sound business dealing. Search firms have not just expanded their reach into these markets by establishing local offices but have also sought to specialize by industry, as more and more sectors have become international in their own right. The most obvious of these are the financial and industrial sectors but technology, consumer/retail and life sciences, are also major sectors in which global practices are to be found among the larger firms and networks of search firms.

7 7 The United States was the birthplace of retained executive search and has continued to be the largest market for it ever since. Although Canada is included in AESC industry data for North America, the large majority of search work in North America is in the USA itself. An integrated market of some 350 million people, the USA still produces the largest GDP in the world and represents a mobile, entrepreneurial business environment where executive talent is recognized as not only crucial to organizational success but is the target of fierce competition. In this context, executive search is able to thrive. Europe, however, is not very far behind, with the second, third and fourth largest markets in the world in the form of the UK, Germany and France respectively. Executive search initially seemed to develop as a professional service more quickly in English speaking cultures, but with the internationalization of business, executive search is now also well-established in France, Italy and Spain. Other parts of the world are emerging as serious markets for executive search. These include China, India, Russia, Brazil, Poland and Turkey, and others are expected to follow this trend as entire regions such as North and Sub-Saharan Africa and Central and Eastern Europe become more engaged in the world economy.

8 8 The opportunity to expand the reach of executive search services together with the increasing demand for global executives has contributed to a major new dimension for retained executive search consulting that could only have been dreamed of 30 years ago. It is now unusual to be conducting a search at senior executive level that does not have an international component. Operational reach for a search has increased dramatically with all the complexities that go with it. Client organizations expect that candidates may be sourced from around the world and are normally prepared to deal with the expense and logistics that may be involved in relocation. In this context a number of markets such as India, China and Brazil are seeking expatriate nationals to return home. On the other hand, as regional talent pools have developed, following regional trade and business patterns, so client organizations are willing to consider candidates from other countries in a region who have experience of their market. Reflecting the importance of global markets, Board and CEO searches for multinational organizations increasingly require access to international talent. It is now not uncommon to find foreign nationals leading formerly one nation culture enterprises. For the search firm, however, these complexities translate into greater time commitment, logistical challenges, more complicated negotiations with less certain outcomes and greater expense in research. On the other hand the search for great talent is both rewarding and a great investment in the expansion of resources of value to clients. At the sector level, industries are driven by a wide range of forces mostly but not always dictated by consumer demand. Thus digitization has caused industries to rethink their strategies and their human resources in order to not be caught out by future market trends. Other industries moving into new supply and demand cycles can find themselves short of experienced management due to stagnant conditions in the past. The energy industry is a case in point, which 25 years ago did not provide adequate career opportunity for young graduate petroleum engineers, and today finds itself desperately short of qualified management. The tremendous volatility in financial markets has caused major disruption to career paths of financial executives and to the capability of financial corporations to plan to have adequately experienced management in top positions at the right time. In all such situations as market forces wax and wane, executive search presents itself as both a tactical and strategic resource to bring into the management team experience and talent that could not be grown from within. The client that recognizes executive search as a proactive process that can reach out to executive talent in isolation of other competitive offers can provide itself with a unique competitive advantage of timing and opportunity.

9 9 Structure of the Executive Search Industry Size of Firms For many years, the executive search profession, like many professional service industries, has, broadly speaking, been divided into a few very large firms, a few medium-sized firms, and many small or boutique firms. In the past years, many smaller firms have combined into worldwide groups or networks sharing a common brand name. The five largest executive search firms have global revenues in a range from $500 M to $1 BN USD and have preserved their industry positions for more than 40 years. Total revenue of this group of firms is currently around $3 BN USD. Medium size firms typically generate revenues in a range from $ M USD, networks in a range from $ M USD and smaller firms and boutiques in a range from $1-10 M USD. Because of the personalized nature of executive search, many consultants build their own reputations and client followings so that when they leave a firm, they may take client allegiances with them. For this reason, the profession has been exceptionally fluid, with fragmentation and regroupings occurring. During the past several years, there has been considerable movement within the executive search industry as individuals and firms have made new choices about allegiances and positioning of their practices for the future. Networks have continued to grow as smaller, independent firms have sought new global alliances in order to better serve their international client needs. At the same time, many consultants have preferred to run their own firms and may retire from the profession without successors or an equity exit. This has been an increasing trend in the past several years as consultants with long standing reputations in the business have retired or semiretired, often at age 70 or above. Specialization While many search consultants in the early years of executive search operated as generalists, conducting searches in a wide range of industries and functions, the trend in the past years has increasingly been to specialize. The larger firms and global networks now often organize themselves into cross-border practice teams that can bring their specialized knowledge to bear on a particular industry or function. Some operate on a matrixed basis to meet client needs. Smaller firms and boutiques tend to select one or a number of specialties where they can offer clients a track record and specific industry knowledge to

10 10 compete successfully. There are still true generalist consultants and firms; some of whom plan to become more specialized in the future, and others who will remain generalists. It is easier to work as a generalist when you are working at the most senior levels and in smaller markets. The move towards global markets has influenced many small executive search firms to join global net-works and to exchange or link their local identity and name with global brand names. The Search Process Search Completion Time Executive search has not become easier or faster to do. Despite technological advances which allow faster candidate identification and 24/7 communication with candidates and clients, search completion times on average have remained the same or become longer. Thus it continues to be typical that a senior search consultant will only handle up to 15 major executive searches in a year. On the other hand, the speed of execution demanded by a large majority of clients has increased. This dichotomy is best explained by the pressure on execution by line management who are under tight performance constraints, the often longer and more complex decision making processes within client organizations due to travel schedules etc., the increasing difficulty of those searches handled by executive search firms (the easier ones being performed in-house), the shortage and reticence of top-caliber qualified candidates, and the need for international cross-border research. Value Proposition and the Impact of Social Networking The advent of the internet and social networking sites such as LinkedIn have increased the transparency of the candidate universe and put more emphasis and importance on the advisory value add part of the search model. Since the same information about executive candidates is increasingly available to internal recruiting departments and line managers, then search firms do not have the same advantage, as in the past, of providing a unique interface to the talent pool. To less educated clients, social networking makes executive search look much simpler than it really is because they discount the selection and consultancy component which retained search firms bring to the process. The consequences of this are that the added value of executive search has been more closely scrutinized. In some cases, however, the service has been unbundled with only research or market mapping services requested by the client, leaving them to perform the remainder of the recruitment process themselves. In essence, clients are likely to perform those searches or functions

11 11 within search that they believe they credibly and easily can perform themselves. At the other end of the spectrum clients are more likely to leave the most senior and complex searches to external search firms, and in particular, rely on search firms for their assessment and consulting advice. In less mature markets the adoption and experience of working with executive search has been slower since it represents a newer proposition, especially to local client organizations. Thus clients may not fully understand the value that they are receiving, or why the process should be conducted under a retainer agreement. Leadership Consulting Services It has been a natural development over many years that executive search firms should be asked by clients to perform services for their senior executive group that transcend pure recruitment of candidates for a specific position. Search consultants have always been well placed to offer advice and guidance on topics as wide ranging as the structure and operation of Boards of Directors, assessment or audit of management teams, counseling or coaching of individual senior executives, succession planning and overall talent management. In this capacity they have essentially acted as trusted advisor to the Chairman, CEO or Board of an organization as an ancillary activity to their core function of executive search. Examples of this extension of services can be found in a number of firms almost going back to the earliest days of executive search. In recent years, however, the focus on diversification or broadening of the search firm s offering has begun to intensify as the core business of executive search has come under increasing pressure in terms of margin reduction, client control and commoditization. In an effort to search for more growth, for differentiation and for a broader client relationship a number of search firms (large and small) have experimented with a range of service offerings on a more formalized or organized basis and in some cases have created a product offering with specific pricing so that a niche business can be developed. This process is still very much under development, and discussion both within search firms and client organizations indicates that this process will continue.

12 About The Association of Executive Search Consultants The Association of Executive Search Consultants (AESC) is the worldwide professional association for the retained executive search sector. The AESC promotes the highest professional standards in retained executive search consulting, broadens public understanding of the executive search process, and serves as an advocate for the interests of its member firms. For more information, or to download the AESC Code of Ethics and Professional Practice Guidelines, please visit About Executive Search Connect The AESC also offers Executive Search Connect., a free service for the HR community offering sector information and tools to assist with senior executive recruiting, including access to the AESC membership directory and an RFP service. To learn more about Executive Search Connect, please visit About BlueSteps.com BlueSteps is an online career management service for global senior executives. As an exclusive service of the Association of Executive Search Consultants (AESC), BlueSteps enables senior executives to make their career profile accessible to over 8,000 retained executive search professionals in more than 75 countries who are members of the AESC, and use the database as an additional resource in their candidate and source identification process. BlueSteps members can stay informed of executive job market trends and news and use a variety of tools and resources to facilitate the successful management of their executive career path. Join BlueSteps today at Looking for great leaders? We help you identify the best search firm for your organization. Executive Search Connect is a free service, offered by the worldwide Association of Executive Search Consultants (AESC), to connect talent acquisition, human resources and procurement professionals worldwide with the best executive recruitment partners. Benefits include: Customized assistance from the AESC to help you select quality executive search services Directory of top executive search firms Resources for clients about the retained executive search process & what to expect from a search partner Exclusive executive talent acquisition reports & invitations to talent acquisition events worldwide Join Executive Search Connect for free: Share this Report