In-House Recruiting Function vs. External Recruiting Firm

Many firms have established an in-house recruiting function and many more are considering it. This is not a trend that will subside in the near future. However, long term, will this trend reverse and focus more on using external firms again? I’ll discuss that in subsequent articles to follow. For now, let’s stick with the current trend and review the advantages and disadvantages of having an in-house (corporate) recruitment function. While you might feel that my opinions will be bias toward external recruiting firms, I can assure you that they are not. My opinions are based on twenty-four years of experience, working directly with C-level executives, hiring managers, HR professionals and in-house recruiters.

We’ll take a few of the most common points separately.

Assumption: In-house recruiters know your firm better than an external recruiter can.

I find this to be true – especially with recruiters who specialize at the lower- to mid-level positions. However, at the more senior level positions, this could flip the other way. Example: In many of the more senior-level searches I am brought in on, my recruitment strategy meetings are with people at the most senior levels of the organization or department. In most cases we discuss extremely sensitive issues such as:

  • Who is not performing and should be replaced
  • The financial condition and profitability (or lack of) in the department or the firm in general (which if not publicly held, could be extremely sensitive)
  • Short and long term business strategies or compensation plans that may be critical to survival/profitability but may also result in negative publicity or have a short term negative impact on morale.
  • Compensation plans for specific individuals and how they compare with those of your competitors
  • Sensitive diversity issues or legal concerns
  • Hiring from the outside to replace a key executive who does not know that s/he will be fired
  • Hiring from the outside to meet a succession planning objective; a hire that would upset a few of your internal people who believed that they were slated for the job.

It has been my experience, both as an executive search consultant and as a CEO / COO of small to mid-size firms, that there are some issues that are extremely sensitive; issues that you would prefer not be shared with your employees. A corporate/in-house recruiter is your employee. While some are highly professional and could maintain total confidentiality over long periods of time, others may let certain tidbits slip out at the next company party. Highly respected executive search consultants deal with these sensitive and confidential issues on a daily basis. In addition, their knowledge and experience in these matters can often be invaluable.

So to recap on this point, in my opinion, corporate in-house recruiters, generally speaking, usually know more about the firm and can be valuable in recruiting at low- to mid-level positions. At the senior levels, an experienced external executive search consultant working on behalf of your company may actually know more of what is going on behind the scenes, which could be critical to finding, attracting and “closing” the right individual.

Assumption: An in-house recruiting function can save your company money

Generally speaking, this is true. A company that is growing, and plans on hiring several people, can save money by developing an in-house recruitment capability. Let’s just run some quick numbers to see how this would work.

If in a year you hire the following number of people (in this case 15) at the following compensation levels, you will pay approximately $280,000 in fees under the traditional external recruiting fee pricing structures:

# of people hired Annual individual Compensation Approximate Fees
2 $150,000 75,000
3 $100,000 75,000
5 $ 80,000 80,000
5 $ 50,000 50,000

Depending on the size of the organization, corporate recruiters typically earn between $80,000 and $120,000. When you consider payroll taxes, benefits, costs for support, facilities, on-line recruiting resources (job board subscriptions, LinkedIn, associations, sourcing resources, etc.), the total cost of employing and equipping one corporate recruiter will be between $120,000 and $200,000. So given the scenario above, it may make sense to hire an in-house recruiter. As your number of hires increases, your cost efficiency will also improve. If your number of hires is lower, then it makes sense to revisit whether or not a corporate recruiter will be worthwhile.

A larger firm may need to employ an entire team of in-house recruiters. This team is usually led by a senior level executive search professional with experience managing a recruiting firm or a team of people. These people earn more money, of course, so the size of your company, it’s anticipated hiring needs, and the position levels that you will be recruiting for, will drive the need for an in-house recruiting function.

Assumption: The Quality of Recruiters is higher in the external executive search firm

People who work for executive search firms will try to convince you that the better recruiters have been successful, are well-compensated, and therefore would not take a corporate recruiting position. They will try to convince you that the corporate recruiter is usually someone who “could not make it” in their environment – a commissioned compensation structure requiring ambition, experience, and specific skills for success – not to mention an aggressive and assertive personality.

I don’t completely agree with this attitude. I believe working on the corporate side vs. working for an external search firm is one of personal preference, usually driven by personality type. I believe there are some great corporate recruiters and I can also tell you that there are some terrible consultants working for executive search firms.

The most critical determinants of a successfully executed search are found in the process. An effective process requires that a search consultant possess strong relevant business acumen, sales skills, and assessment capabilities. The people you want to interview, and ultimately hire, are most likely working for another firm, are quite satisfied, successful and not currently looking for another position. It takes a certain level of sophistication and experience to effectively sell the position, your firm, and its unique corporate culture. A good recruiter must excel at engaging the interest of high-performers, assessing their qualifications and suitability, motivating them to take the first step by initiating a discussion with your firm, working with their business issues and objections at a highly emotional time, keeping them engaged while other candidates are also being evaluated, and guiding the selected candidate through the offer negotiation and acceptance process. In addition, they must counsel the candidate through what is sure to be a difficult resignation meeting that is frequently accompanied by a counter-offer. By building a rapport and a high level of trust with candidates, you ensure that both parties are well informed, confident, and excited about their future together.

One thing to consider:

However, that previous sentence mentions rapport and trust as a critical determinant of recruiting success. My experience has shown that candidates are more likely to be open, candid, and forthcoming with information if they are speaking to a 3rd party recruiter as opposed to a recruiter who is directly employed by the hiring firm. For example, assuming you were an in-house recruiter for your firm, the candidate will be more truthful and open with me (a 3rd party external search consultant) than with an internal HR / talent acquisition employee. I hear some of you corporate recruiters grumbling now but you are delusional if you think otherwise. Here are just some of the reasons:

  • In almost every case, a candidate wants a long term relationship with me. Why? Because if not “this one”, maybe the “next one.” Candidates want to stay in touch with me and they want me to contact them whenever I see an opportunity that may be a fit for their background. Obviously they have a motive but regardless of the driver, it leads to a relationship, multiple discussions and personal meetings, and learning about all of the things that are going on in the candidate’s job search.
  • Candidates are typically very guarded with corporate recruiters. They rarely share their secrets and will also deliver feedback to the recruiter in a very calculated way. It makes sense – the corporate recruiter works for the firm so honest feedback during the interview process might be too risky. The candidate does not see the corporate recruiter as someone s/he wants to build a long term relationship with. The process is usually more transactional. If not “this one”, then I’m moving on.
  • When building trust, rapport and confidence with a candidate, I have the benefit of being able to compare and contrast my client (i.e., the firm I am recruiting for) with other players in the market. I get to meet with many hiring executives at many organizations. I bring a deeper market perspective to the candidate than a corporate recruiter could, thereby allowing me to handle any objections or deal with any issues the candidate might have. This translates into being able to attract and “close” candidates who might not have been obtainable if left in the hands of an in-house recruiter.

Having said all that, working with external executive recruiting firms is usually more expensive. So it is the lure of lower expenses that drives corporations to let their in-house recruiting department handle most recruiting assignments, regardless of the benefits of using outside resources including those just mentioned.

Those of you who have weathered multiple business cycles will remember the times when corporations outsourced their non-core business functions while keeping their core business functions in house. We know the cycle all too well. It goes from,

“We can do this in-house for a lot less money – why should we pay all of these fees – this is crazy – let’s just hire our own ______ (fill in the blank)”

to,

“Why are we doing this in-house, we should be outsourcing this –we’re not in that business – they do it better and we’ll free up space and resources to do what we do best.”

The cycle continues of course but is it different “this time” or will we eventually experience the same cycle? What role will technology really play and to whose advantage?

Either/Or

Herein lies what I consider to be a major part of the problem, and potentially the game-changer. A company has typically elected to EITHER conduct the search on its own OR contract an Executive Search Firm. If the decision is to contract a recruiting firm, then the decision moves to EITHER we pay a retainer OR we go with contingency. Most companies also associate “retained” with expensive and “contingency” with less expensive, usually not considering how different the process and the services really are.

Many HR professionals and hiring mangers develop a false sense of security when they have given a recruiting assignment to four or five different contingency firms. The fact is that most of the firms are doing the same thing –hoping for a quick placement and then abandoning the effort when it is obvious that it will require a great deal of time and effort (which translates into the recruiting firm spending it own money with the risk that it may not make a placement to cover its costs). As the former founder and Managing Partner of both retained and contingency firms, I could tell you that the business models are very different. Those business models drive pricing and pricing drives recruiter compensation. It is compensation that drives recruiter behavior. This is not about ethics or quality. It is purely about common sense business. People will work if they know they will be paid. They will even take risks and work knowing that there is a high probability that they will make money. However when they spend many hours of their time recruiting on a position and they do not make money, and if that happens again with your firm, then it is “Shame on you, fooled me once, shame on me, fooled me twice.” The next job assignment your company calls with will be met with a pleasant response but will immediately be marked as a low priority.

In the retained search world, an ultimatum is handed to the client by the search firm, “EITHER YOU will do the search, OR WE will do the search.” There is no middle ground and no compromise. In addition, the client will pay the full fee regardless of the results as mentioned in the beginning of this report.

The recruiting industry blames corporations, the users of search services, for creating this cut throat environment. The corporations blame the recruiting industry for being greedy, too expensive, and not delivering results.

Best Ways to Work with Outside Talent Acquisition and Executive Search Professionals

The solution is simple but it is rather difficult for many retained search firms to accept (although some contingency firms may be more amenable to the idea). The solution is for the search firm to work beside its client (as opposed to working in competition with its client). Search professionals should become an extension of a company’s recruiting capabilities and resources, working together with one cohesive strategy to achieve the goal of hiring great people. This means letting a company’s talent acquisition or HR department utilize all of its own resources simultaneously and in combination with a search firm’s efforts. In this way, a company can benefit from the many resources a quality search firm can also provide including:

  • Recruit directly from competitors with a 3rd party in between
  • Identifying and engaging candidates who the company would not likely find and attract on their own
  • Interim management and staff augmentation solutions
  • Pre-employment assessment testing to “ensure goodness of fit”
  • Retention strategies using assessment testing tools
  • Research and competitive market Intelligence
  • Social media recruitment campaigns

If an executive search firm unbundles its services, it can provide a menu of customized services. Pricing options may include hourly rates, weekly engagements, caps, “container” fees and fixed project fees.

Here are some actual examples of how firms have utilized our services in the past to supplement their own recruiting efforts:

Assessment testing: Priced in specific packages, depending on number of assessments. Pre-employment assessment instruments can have a significant impact on a search process. Obtaining the “right fit” is critical.

Interviewing: Clients will sometimes want an objective 3rd party to weigh in on candidates they may be getting serious about and will ask me to conduct a personal interview with the candidate(s). More times than not, I am surprised at the low quality some clients are willing to settle for. Clients “want” to hire. So they tend to not be as critical and selective as I (or other 3rd party) may be. This is billed at an hourly rate. The consultant has “no horse in the race” so can provide an objective assessment.

Recruiting supplementation: Flat or fixed project fees can be used to engage a recruiting firm to cover certain parts of the search process, develop a certain number of candidates, or source a certain number of prospects. At ASR, we provide our clients with a full reporting of all work done, people contacted, and targets in development. So a firm that hires a recruiting firm to assist them should never wonder if they are getting their money’s worth.

Sourcing: Many firms rely on job postings, job boards, and LinkedIn, to find candidates. Unfortunately, every other firm is doing the same thing and not all of the good candidates are on LinkedIn. As a matter of fact, I know of many cases in which people who are highly regarded in their field will not put their profile on LinkedIn. There are typically two reasons for this. The first is that they do not want to be contacted by recruiters. The second is that they do not want their employer thinking that they are “open” to considering other opportunities. A good search firm has the resources and research team to identify specific names and titles of people at your competitors or anywhere else for that matter. Sourcing can be priced on an hourly or fixed project fee basis.

Reference Checks: Great reference checking is both an art and a science. Many recruiters claim to do it well but I have seen very few who can get the “real story.” Reference checking can be offered in packages depending on the number of candidates and the number of references to be checked. By having a separate firm check references, you provide an excellent “checks and balances” mechanism in the process.

Conclusion

The solution, in my opinion, is for both sides to change the way they think. Search firms must be much more open to “sharing the process” with their client. It should not have to be EITHER / OR. There are many parts of a search that a corporation can do on its own and they have made an investment in their infrastructure to do just that. However, for many of the reasons previously mentioned, they would welcome the involvement of a high-quality executive search consultant in certain parts of the process or as a supplement to the process.

Corporations need to stop thinking they are beating the system by hiring several contingency firms and paying only the one that produces the winning candidate (or worse yet - not paying any of them anything if the in-house recruiter makes the placement). This will absolutely lead to churning and burning of recruiting firms and the development of a bad reputation. You get what you pay for and good executive search help is no exception.

For companies to benefit from these services, they must feel comfortable embracing an executive search firm as a true resource partner and, in many cases, this will not happen until search firms change their pricing models. They must offer a completely flexible pricing menu, much like that of a true consulting firm. Clients need pricing options and services that are flexible and customized to the company’s hiring objectives. This will allow full utilization of the recruiting tools its own HR department has put into place while having access to other resources and capabilities the company does not possess.

About the Author

Joe Ziccardi

Joe Ziccardi is currently the Chief Talent Officer and Director of Human Resources Services for Alternative Recruiting, a consulting firm and service provider in talent acquisition solutions, executive search, and performance optimization. With more than two decades of experience in providing talent and HR related services, Mr. Ziccardi brings extensive knowledge and insight to the talent issues that face small to mid-size enterprises.

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