The Benefits of Internal Executive Search and Why Now Is the Perfect Time to Make the Move

Now is the perfect time for organizations to bring executive search capability in-house. While the business case for this strategic shift has been clear for some time, ongoing cost-containment efforts combined with increasing demand for strategic staffing make now the perfect time to execute the shift and build out the tools/approaches needed.

In many organizations, executive search fees consume double-digit portions of the recruiting budget, yet produce results only 45% of the time. Few budget items are more costly and ineffective, but the motivations behind this shift are not solely monetary. Executing executive searches internally dramatically increases the business impact of the talent acquisition function and raises the visibility of talent acquisition as a key contributor to business performance significantly.

After all, what else in recruiting could possibly impact business results more than bringing in a high-quality, innovative executive capable of delivering market-changing increases in efficiency and effectiveness?

The increase in “face time” between talent acquisition and the executive committee further increases the function’s ability to sell the vision of the organization and sustain operations when budgets get tight. In the following section, you will find numerous arguments supporting the shift.

When you add up all the positive benefits, it’s hard to argue that there will be a better time to explore this strategic move.

Changes in the Business Environment Make It a Perfect Time to Act

Economic factors always play a role in determining the feasibility and desirability of business decisions. Some of the economic factors that make this a perfect time to bring executive search in-house include:

  • Many organizations have time to focus on building new initiatives. Cost-containment efforts and hiring freezes coupled with reluctance by organizations to eliminate their talent acquisition functions have contributed to a situation where many recruiters are on the payroll but working on many non-recruiting related activities. As hiring volumes are not likely to increase dramatically for at least 8 to 12 months, many organizations have the time to plan and build a robust executive search function internally.
  • Available executive recruiters with proven track records. Executive recruiters are in a different league than most corporate recruiters. The great ones often know more about their client organizations than the senior-most HR leader and are viewed by candidates and executives just as much as coaches as they are recruiters. As the economics of third-party search models continues to erode, a significant number of recruiters with proven track records could be enticed to join an organization.
  • Executive search openings will become frequent. Historically, the demand for external executives was sporadic, a condition that contributed to a strong argument against building executive search capability in-house. However, increased volatility in global markets, double-digit growth in emerging markets, changing workforce demographics, increasing rates of knowledge obsolescence, and years of pent-up frustration among executives chained to jobs that no longer motivate due to economic conditions will drive a significant increase in the demand for external executive hires as turnover skyrockets. Left unmitigated, the demand for external assistance in recruiting organizational leaders could chew up a majority of existing talent-acquisition budgets.

Changes in Recruiting Tools/Approaches Also Make Now a Perfect Time

In recent years, the Internet has brought a phenomenal amount of transparency to labor markets around the globe. That transparency has enabled many innovative recruiters to gain access to a wide range of cheap but effective recruiting tools that render closed databases of candidates such as those maintained by third-party agencies much less valuable.

Some of the changes in recruiting that make now a perfect time to shift executive search back in-house include:

  • Finding executive prospects is now much easier. Finding the names of potential candidates is no longer a challenge. A majority, if not all, of the most visible leaders in an organization are visible externally both on user-maintained websites like LinkedIn and other white collar social networks and system maintained databases like ZoomInfo and Jigsaw. Even the corporate homepage of individual firms now list their executives. In addition, most executives in public companies receive stock as part of their compensation, making it easy to find their name and job title in financial disclosures required by the SEC.
  • Building relationships with prospects is easier. Executive recruiters are masters when it comes to building relationships, the key to which is not trading solely on the value of a job opportunity to a candidate. Great executive recruiters use competitive intelligence so that they can deliver value to a candidate during each and every interaction, be it via email, phone call, or face-to-face meeting. Social media tools like Facebook, LinkedIn, Ning, and Twitter, combined with CRM methodologies, make sustaining longer-term relationships with larger masses of professionals much easier. In many respects, these tools have brought executive recruiter type “tickler files” out into the public.
  • Search firms aren’t as strong. If you read the business news, you already know that executive search firms have been going through a great deal of turmoil themselves in the past few years. As a result, many have built sourcing functions offshore, shed high-cost relationship builders, and replaced knowledgeable account executives with younger, more sales-oriented professionals who know little about the nuances that characterize an industry. They have added other value-add services to help defray the impact from declining search revenues. Combined, all of these factors result in former powerhouse agencies producing results that most corporate functions can match or exceed at a fraction of the cost.

Factors to Consider When Determining to Shift Executive Search Inside

If you decide to begin a formal assessment as to whether or not it’s a good idea to build an internal executive search function, start with a simple “business case” checklist of factors that can impact organizations, including the benefits and opportunities that accrue to organizations executing executive search in-house and the problems that can occur when using executive search firms.

Benefits and Opportunities Resulting from Internal Search

  • Increased sales, partnership, and CI opportunities. No firm wants to lose sales and partnership opportunities. Recruiting for executives requires you to “sell” a large number of influential executives inside and outside your industry on the value of your firm. When you use external executive search, relationships “belong” to and are retained by the external search firm. However, if your own recruiters build these relationships and sell your firm effectively, it’s possible that a significant number of those candidates not hired will hold a more positive image of your firm, and as a result may consider becoming a customer or strategic partner with your firm. The benchmarking and candidate assessment work that is now done by your own recruiters might also yield competitive intelligence that can be used to benefit your firm. The dollar value of this benchmark information and potential sales and partnership opportunities need to be added to the positive ROI of an internal function.
  • An opportunity to build a competitive advantage. All high-impact business functions need to provide their firm with a distinct competitive advantage. When you develop your own search function, you have the opportunity to build a truly modern, technology-driven global function that could provide your firm with a distinct competitive advantage. Search firms are generally forced to offer the same services to all clients, so using them seldom provides a major competitive advantage.
  • Internal recruiters know your firm. In the past, one of the advantages of search firms was that over time, they got to know your firm, its needs, and its culture. Unfortunately, the downturn has dramatically changed how many third-party search providers operate, reducing their ability to be as knowledgeable as they once were. In addition, in the fast-moving world of business, it is nearly impossible for any outsider to keep up with changes in organizational needs.
  • Referral programs can produce amazing results. Traditionalemployee referral programs routinely produce hires who are better performers and have higher retention rates. Referrals produce these results because top-performing employees tend to know a high percentage of the harder-to-find, “not actively looking,” currently employed top performers. Referrals also work because colleagues are often more willing to talk to their peers at other firms about opportunities, than to recruiters of any type. Although it’s a surprise to some, referral programs focused on executives can have even more dramatic results, in part because executives have much broader networks than the average employee. As a result, specially designed executive referral programs can produce amazing results without the need to pay a referral fee (many such programs donate a reward to a charity of the executive’s choosing).
  • A chance to build up HR’s image. Using external search firms for the most critical jobs further reinforces an already weak HR image that they can’t handle the really tough, high-risk assignments. Stepping forward and becoming accountable for the most visible and high-impact recruiting jobs provides HR with an opportunity to build its internal brand image. If HR wants to increase its visibility and impact, it must change its focus toward recruiting at the top of the organization and outsource recruiting at the bottom, rather than vice versa.

Problems That Can Occur When Using Executive Search Firms

  • Using executive search might increase your turnover. Research at one major firm revealed that individuals hired through executive search firms have a higher turnover rate than executives recruited by their own internal recruiters (possibly because search firms naturally attract “actives” that are more interested in continuous opportunity and their career than in building a legacy at any one firm). In addition, exposing your executives to executive recruiters might have a separate set of turnover consequences, even though no ethical firm would use the relationships they build with your own firm’s executives during a current search to recruit them away.
  • An increased chance that the hire will be a bad “fit”. During all searches, the longer the recruiter is in direct contact with a prospect, the better they will get to know them. This longer relationship makes for a more accurate assessment and a better fit. On the contrary, if you only see the outside candidates in one or two interviews toward the end of the recruiting process, the chances of making a major hiring error increase dramatically. With an internal function, all of that “assessment time” is owned by people living in your culture, thus improving your chances of hiring someone that fits.
  • Losing candidates you never see. External recruiters create an initial list of qualified candidates that you never see, and they do 100% of the “selling” to those on that initial list. Because you’re not involved in any aspect of this initial selling, you can never know whether you are losing great candidates because these external recruiters are doing a bad job selling.
  • “Bidding” for candidates is expensive. It’s only natural that large executive search firms “shop” top candidates to many different clients. This exposure to many potential clients allows their top candidates to be bid on, like highly valuable auction goods. This competitive process gives their candidates an opportunity to accept a much higher monetary offer, which simultaneously increases the search firm’s income. This means you will pay significantly more for candidates who are externally bid on. In contrast,passive candidates you directly source might only be interested in your firm, and may be up to 25% cheaper than high-demand executive-search candidates.
  • Avoid restrictions on candidate availability. Search firms often have agreements not to recruit from their clients. This might seem to be a benefit on the surface, but it also means that large executive search firms with many clients in an industry will have a smaller candidate pool to offer you because they can’t include employees from their current clients. Even though these individuals might be willing to change firms, you’ll never know it because no one will tell you about these restrictions. Internal search allows you to recruit from literally every firm (perhaps with the exception of major customers) and thus it automatically provides you with a broader talent pool.
  • Performance issues. Failing to fill all of your open positions is a potential problem with retained firms. As a result, you need to do your research to make sure that the percentage of “unfilled searches” by your retained firm isn’t notably higher than it would be if you were to use internal search. A similar comparison needs to be done for “time to fill,” because external firms can be slower. The last but most important factor to compare is the performance of the hire (on-the-job performance and retention rates). One major corporation that did this external/internal comparison found no performance improvement, slower hiring, and significantly higher costs from external search.
  • Cost of recruiting. Some executive recruiting fees have been reduced during the recession but are still markedly higher than corporate recruiting cost per hire. If you hire a retained search firm, you pay even if they fail to fulfill the search. If you hire a contingent firm, you may pay more indirectly, in the time wasted by your managers sorting through mediocre resumes that contingent recruiters might send them in the hopes that one will “stick.”
  • Absence of performance metrics. If your CFO or CEO demands every process have performance metrics, you’re probably going to have to develop them yourselves. In my experience, external search firms are notoriously bad at providing business-impact metrics. If you don’t believe me, search their website and invariably you will find numerous “word arguments” but not a single quantified result or dollar impact.
  • New clients may occasionally get a preference. Firms that are desperate for attracting new clients may steer their very best candidates toward those clients with whom they hope to sign new contracts. If you’re a long-term client, you have to include that risk as part of the equation.
  • You may select the wrong firm. Unfortunately, there is a wide variation in the “quality of service” delivered by search firms. If your vendor assessment process is inaccurate, you could be stuck with a weak firm. In contrast, if you build your own internal function yourself, you have more assurance that you will have an excellent team.

Next week I’ll expand on this topic with an article that focuses on developing a plan to bring executive search inside. If your organization has done this and you have lessons that you would like to share with your colleagues, please feel free to send me a note via email and I’ll make sure your learnings are incorporated.

About Dr John Sullivan

Dr John Sullivan is an internationally known HR thought-leader from the Silicon Valley who specializes in providing bold and high business impact; strategic Talent Management solutions to large corporations.

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