Business Model of Retained Search Firms “Broken,” Contingency Firms Best Bet in Downturn
Chief executives are not immune from the deepening labor market downturn that cost 524,000 Americans their jobs last month, according to the WSJ. Grappling with disappointing financial results, tumbling stock prices and mounting investor criticism, the parade of CEO departures is on track to continue in 2009. The WSJ report notes that William Watkins, recently ousted from Seagate Technology LLC, is the sixth CEO of a publicly held company to be replaced in just weeks. His departure comes on the heels of CEO turnover at Tyson Foods Inc., Borders Group Inc., Orbitz Worldwide Inc., Chico’s FAS Inc. and Bebe Stores Inc. The WSJ goes on to issue an ominous prediction: the changes are a sign of significantly more turmoil in executive suites this year.
Executive search firm, A.E. Feldman, reports demand for C-Level executives is already on the rise. The firm notes that among the CEO jobs opening up are opportunities for Chief Executives with proven records of running infrastructure companies, particularly water, waste water, alternative energy and green technology. CFO jobs are also opening up. A.E. Feldman says demand is mounting for CFOs who can manage a balance sheet and get funding for growth opportunities, CFOs who know the debt markets and Chief Financial Execs who are strong on valuing assets. Flexibility and the ability to adapt to the dynamics of the market as the crisis unfolds are also critical.
Recession Pressuring C-Level Execs
The recession has put the spotlight and intense pressure on the C-Suite. In fact, with little room for error, the number of CEOs leaving their jobs hit record levels in 2008, according to Money.com. The WSJ quotes Dirk Jenter, an Assistant Finance Professor at Stanford University’s business school, who recently analyzed 1,627 CEO changes between 1993 and 2001, as saying, CEO turnover “doubles in bad times.” According to the WSJ, Jenter concluded that CEOs are most vulnerable in a downturn when their employers’ shareholder returns lag rivals.
In short, a growing number of companies will be navigating the recession under new leadership. Whether it’s a company choosing new leadership to guide it through the turmoil or a CEO finding a more secure position, the current recession is contributing to higher CEO turnover. In fact, recent data from Liberum, a research firm focusing principally on management intelligence, issued a statement saying it expects executive turnover numbers to increase. The firm also notes the Obama administration may also portend for more change at the top of many corporations that continue to fail to perform.
CFO turnover is also on the rise. CFO departures, jumped to 17% last year – up from just 11% the year before, according to Mercer Research. Translation: more than 25% of companies hired a new CFO last year, sometimes more than once. Experts agree, higher turnover will likely continue along with greater CFO accountability.
Contingency Firms Have the Edge
Filling the corner office has become a tall order. And it seems that now more than ever contingency search firms may be an executive’s best option for a high-level job search. Mitch Feldman, President of A.E. Feldman, says, “The business model of retained search firms is broken. Amid the recession, high-cost retained recruiters are losing ground and contingency search firms are rapidly gaining the edge.”
Carol Schwam, CEO of A.E. Feldman, says, “Currently many companies are opening up high level positions to contingency firms to save the money spent on retainers.” That’s because unlike retained search firms, contingency firms are hired on a non-exclusive basis. Payment is made when the firm’s candidate is hired. Since fees are not collected in advance, a contingency recruiter has no assurance of being paid unless a successful placement is made. According to Schwam, “The old expression ‘when times get tough, the tough get going’ is true. We happen to love what we do and are always driven to win. Clients now have nothing to lose and everything to gain from going contingent.” Ultimately, Schwam says, when working with a contingency firm, a client can save a great deal of money in retained fees, and that’s more critical now than ever before.
New Role for the CEO
Meanwhile, many of the executives who are still around are falling into two categories, according to Money.com. The report quotes Sydney Finkelstein, Professor of Management at Dartmouth’s Tuck School of Business and co-author of the new book “Think Again: Why Good Leaders Make Bad Decisions and How to Keep it From Happening to You,” as saying, while some executives appear to be in denial, others are facing up to the economic crisis and taking steps to do something about it. “The difference in leadership is dramatic,” he says.
Given this dichotomy, Money.com goes on to suggest that there is the potential to create a new role for the successful CEO - one who understands the relative powerlessness of the job in this volatile world, who has the nerve to reach out for help…and who can think out of the box.
Companies are realizing, now more than ever, that what they need is change. Feldman adds that a number of companies are looking to hire experienced consultants that have been successful executives, CEOs and CFOs, who can bring new perspective, offer a different viewpoint and provide options that may not be on the table.
“These times call for being open to new ways of thinking. Smart executives must be open to being more creative” says Schwam. She adds that, “Good recruiters are proactive and constantly seek out talented executives and companies where they can make vital contributions…but great recruiters are always thinking outside of the box. Contingency firms provide an environment where creative thinkers and entrepreneurs can thrive.”
Are you a CFO or CEO? Are you on the board of a company? If you want to grow your career or discuss your company’s talent needs, contact A.E. Feldman’s President, Mitch Feldman today.
