Is the End of the Search Firm Admin Fee Nigh?

[Plus, an open question to the executive search industry.]

We believe it is. Executive search firms have long been criticized for charging clients with a fairly substantial fee for unspecified administrative expenses. This 'admin fee' is a percentage charge of the professional 'placement fee' and is above and beyond travel and other itemized expenses incurred on executive search engagements, and additional to the actual search placement fee.

Often a negotiating point, hiring organizations have started to push down the typical standard admin fee terms. Some have been able to negotiate a fixed fee regardless of the search firm placement fee, while the rest foot a percentage of the search firm placement fee (which seems the worse option, according to our data, by the way).

However you look at it, whether a company pays a fixed or a percentage fee, an additional admin charge averaging US$5,475 (according to our ESIX 2020 Annual Benchmark Survey), can be quite eye-watering for any organization, particularly when it's unclear what it covers. This adds approximately 3% more to the average search firm fee, which is sizable in the first place (on average US$177K). Plus, it should be noted that the ESIX Survey respondents represent sophisticated hiring organizations who manage their executive recruiting spend very carefully, so these survey numbers are likely lower than regular market data.

The root of it all

What the admin fee had historically covered - think courier, phone, fax, photocopying charges, videoconferencing fees, and so on – seems a standard part of everyday business today given that everything is digital. Typically, smaller firms don't charge an administrative fee, but it's common practice in larger executive search firms.

Through doing so, it appears these search firms are essentially charging clients for their overhead, on top of the search firm placement fee. Additionally, most, if not all, of these expenses are obsolete, no longer relevant, or their actual costs are so negligible that they can't be itemized. If this is what the admin fee is for, then it is extremely out of date — and out of touch — with today's current marketplace. Given this seems unlikely, then what is the admin fee actually for nowadays?

Regardless, many clients are starting to find it unreasonable, and the market is demanding more transparency. Furthermore, there is inconsistency between regions in the requirement for clients to pay this fee, and rumor has it, even between offices of the same search firm.

This begs the following questions:

• Why do firms keep charging an admin fee on top of direct expenses and the placement fee?
• Will small firms start to eat large firm marketshare if they are unwilling to change admin fee policies?
• At what point will clients say no, and more importantly, could we be looking at the demise of the admin fee anytime soon?

There's light at the end of the tunnel

There is some good news: According to the ESIX 2020 Annual Benchmark Survey, the administrative fee charged by executive search firms has been steadily falling over the past few years. To be precise, the average admin fee paid by respondents has declined by over 40% between 2015 to 2020, from US$9,727 to US$5,475.

Conclusion, and an open question

The admin fee has been a hot button issue in the executive search market for a while, with most clients finding it a frustration, if not obsolete. Thankfully, the executive search industry has responded and the fee has fallen significantly in the last five years. However, are corporate clients prepared to wait another five or so years before the search firms get rid of the admin fee altogether?

Or, perhaps those search firms that continue to charge such a fee can help us understand why clients should continue to pay it? If so, we look forward to hearing from you.

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Simon Mullins facilitates ESIX: Executive Search Information Exchange (www.ESIX.org), a corporate peer networking group with more than 90 member organizations from multiple industries and geographies, whose representatives meet regularly to build and discuss best practices around executive and leadership recruiting. This article is based on Simon's own experiences and ESIX research, and does not necessarily represent the views of the ESIX membership.

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