Investment Research

The Economics and Investibility of the Executive Search Industry

This is a post of a piece that was written on June 6, 2006, while performing some research on the executive search industry.

The Economics

The Executive Search market concentrates on searches for positions with annual compensation of $150,000 or more, which generally involve board level, chief executive and other senior executive positions.

The industry is comprised of retained and contingency search firms.

Retained firms typically charge a fee for their services equal to approximately one-third of the annual cash compensation for the position being filled regardless of whether a position has been filled, and are retained by the client company on an exclusive basis. Out-of-pocket expenses incurred during the search are billed to the client.

Contingency firms generally work on a nonexclusive basis and are compensated only upon successfully placing a recommended candidate. All major market players adopt the retainer model.

A typical search process is as follows:

  1. Consult with the client to understand its organizational structure, relationships and culture, history, expectations, challenges, future direction and operations.
  2. Determine the required set of skills, experience, and other characteristics of an ideal candidate for the position. General parameters of an attractive compensation package may be developed.
  3. Select, contact, interview and evaluate candidates on the basis of experience and potential cultural fit with the client organization.
  4. Present confidential written reports to the client on the candidates who potentially fit the position specification.
  5. Schedule meetings (few rounds) between the client and selected candidates.
  6. Conduct thorough due diligence and background checks on qualified candidates.
  7. Assist the client in structuring the compensation package.
  8. Final offer made and accepted.

The Investibility

The Executive Search industry is a cyclical industry, estimated to be worth US$8 to 9bn at the height of the dotcom boom, to US$5 to 6bn by 2003. The North American market accounts for about half of all executive search business, with 35 per cent of revenues sourced in Europe, while Asia, Latin America and Africa absorb most of the remaining 15 per cent.

The industry is dominated by 4 major players: Korn Ferry International (KFY), Spencer Stuart & Associates, Egon Zehnder International, Russell Reynolds Associates, Inc., and Heidrick and Struggles International, Inc. (HSII).

Ordered by 2004 revenue, we have: Korn Ferry (US$438m), Spencer Stuart (US$378m), Heidrick and Struggles (US$375m), Egon Zehnder (US$336m), and Russell Reynolds (US$273m).

None of these firms has any significant competitive advantage over the other competitors.

During an economic downturn, Executive Search firms will typically face significant revenue declines (e.g. 20%) and lay off hundreds of staff to offset losses in the search business. During boom times, revenues will jump (e.g. 30%) and significant hiring will occur.

Assuming no increase in the market size (e.g. expansion in China, India and Russia markets), the Executive Search industry is not a good industry to invest in.

The Executive Search industry has shown its historically consistent tendency to over-invest and over-correct for economic booms and busts. Granted that economic cycles are hard to predict, nonetheless, a systematic problem prevents a CEO to do proper corrections even with accurate predictions.

Imagine being the CEO of a major Executive Search firm. At the peak of a boom, when the firm is experiencing double-digit revenue growth and flush with profits, will the CEO be able to 1) ‘downsize’ firm operations in anticipation of a economy slowdown?, or 2) return cash to shareholders for the same reason?, or 3) slow down the frenzy rate of hiring of search consultants and staff? The obvious answers are No, No and No. The firm will have to go full-steam ahead in hopes of greater and greater profits.

And after some time, when an economic slowdown comes around, the firm starts to find its revenues tanking while its fixed costs are remaining high (e.g. exec search consultants). Massive layoffs result and surplus cash from the previous boom gets ‘burned off’. At the bottom, whatever cash that is left behind will be used to either 1) buffer against further bad business, or 2) kept in reserve in anticipation for their use when the ‘good times’ return.

So where does all these lead to for the small shareholder? In good times, profits go towards expansion and increased operational expenses. In bad times, retained earnings get ‘burned off’. Does all these money ‘come back’ to the small investor? Does the firm get to accumulate profits and consistently grow? The answers to both questions are a flat NO. In summary, the economics of the Executive Search business makes it inappropriate as a long-term investment.

Despite the above, we recognize three factors that may allow an investor to make profits in the Executive Search business:

  1. Growth in the Executive Search market through expansions into other markets (e.g. China, India and Russia). While the cyclical nature still persists, the size of the pie still has potential to grow.
  2. Capital appreciation when the economy picks up. This involves making short-term bets to ‘ride the wave’ as the economy recovers and brings the search firms along for the ride, and cashing out before an economy downturn. This carries with it the significant risks of market timing.
  3. Enduring competitive advantage in terms of customer loyalty. Though extremely tough to pull off, search firms may be able to ‘lock in’ customers through long-term retainer contracts, comprehensive candidates database, etc.

However, relative to other sectors/industries, we believe that investing in the Executive Search industry still remains as an inefficient use of capital.



One thought on “The Economics and Investibility of the Executive Search Industry

  1. Dear Blogger/Author

    My name is Marc Erzberger, a consultant with Egon Zehnder International (EZI), based in Geneva Switzerland, the home/fouding country of Egon Zehnder International.

    I read with interest your blog, which generally describes the industry. There however quite important differences among the top 5 search firms listed in your blog. These differences are not just cultural, but are more fundamental in terms of business model and ways of engaging with clients and with colleagues.

    I invite you to discover some of the things that clearly differentiate EZI through the following link:


    Marc Erzberger

    Posted by Marc Erzberger | July 13, 2007, 12:31 pm

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