The headhunting industry is broken - how can it be fixed?

Hey, we are Ramón Rodrigá?ez and Andrea Marino, Co-Founders at Nova, the Global Top Talent Network.

Welcome to Talent First, our newsletter where those who believe that talent is the most important resource in the economy get together.

Every week we cover a new topic related to attracting, hiring, developing, and retaining talent, as well as the learnings from our journey building Nova.

Summary:

?? Recruiter-as-a-Service

• Why is the Headhunting Industry broken and how can we fix it through our new Recruiter-as-a-Service offering? We analyze the main contradictions and incentives misalignments of the Headhunting Industry and explain why our latest B2B service, “RaaS” or “Recruiter-as-a-Service” can fix it for small companies and startups, who cannot afford to create a dedicated recruitment function.
• Post your jobs for free with Nova. If you did not read our latest issue, you may have missed some great news for employers looking for top talent.

1. About the Headhunting Industry

If you are reading this, you probably agree with us that talent is the most determinant factor towards a company’s success. Companies typically have 2 options to hire the talent they need to thrive:

• Do it themselves, in which case they utilize tools and platforms like Nova, LinkedIn, or Indeed to source candidates.
• Externalize the process to a headhunter or a recruitment agency.

Today, we will dive deeper into the second option, and consider both executive search firms and recruitment agencies of more junior profiles under the same industry that we will refer to as the “headhunting industry”.

The global headhunting industry for permanent roles is valued at approximately $500 billion in 2023, with a large portion of this market dedicated to full-time permanent placements. Executive search firms, which focus on senior-level roles, contribute around $21-25 billion to this total. The broader recruitment industry, which includes mid-level and entry-level permanent positions, makes up the rest. The demand for specialized skills and leadership, particularly in industries such as technology, finance, and healthcare, is driving continued growth in this space.

Some of the major players in the headhunting industry include global firms like Korn Ferry, Heidrick & Struggles, Egon Zehnder, and Spencer Stuart, which dominate the executive search market and serve multinational corporations. Other notable companies in the field are Robert Half, Russell Reynolds Associates, and PageGroup, which also have a strong presence in the recruitment sector.

The traditional pricing model for headhunting services typically involves charging a fee that is around 20-30% of the hired candidate’s first-year salary. The fee structures are either based on retainer or contingency models:

• In a retainer model, clients pay an upfront fee.
• In contingency-based models, fees are paid only when a candidate is successfully hired.

2. The Perverse Incentives of the Headhunting Industry

As we just saw, the headhunting industry has long operated on a service model that charges companies based on the salary of the candidate they hire. While this may sound straightforward, it has introduced two significant problems that create a perverse incentive structure:

1. Maximizing the Candidate's Salary: Headhunters have a vested interest in recommending the most expensive candidate possible. The higher the salary, the larger their commission, which can lead to companies paying more than necessary. More often than not, the tradeoff between lower salary (with maybe slightly less experience) vs. higher salary (maybe with a bigger experience) favors the “cheaper” candidates, but you would rarely find a headhunter pushing for the “cheap” candidate.
2. Focusing on Closing over Quality: Headhunters often prioritize closing the deal as quickly as possible, rather than ensuring the candidate is the right fit for the company. This rush-to-hire approach doesn’t align with the long-term success of the client, as the cost of replacing a mis-hire is way higher than the actual salary of the candidate hired.

Even Recruitment Process Outsourcing (RPO) solutions fall into the same incentive trap, as they keep the incentive on charging per hire and putting an incentive on closing someone as soon as possible, not in finding the right candidate.

This model is thus expensive, misaligned with company goals, and doesn’t always ensure the highest quality candidate. That is why most Fortune 500 companies strive to create their talent acquisition teams and only externalize 2 types of roles:

• Highly complex, specialized roles where the internal team lacks the expertise.
• C-level roles where the Board demands a third-party opinion given the impact on the business.

3. The Alternatives for Small Companies and Startups

However, building a strong internal talent acquisition team is typically not an option if your company has fewer than 100 employees - at most you can hire 1 or 2 internal recruiters. Thus, for decades, small companies and startups have been left with two main choices that don’t really work:

A. Managing the Hiring Process Internally

? Cost-efficient: A good recruiter may close ~3-4 roles per month, thus with a cost of 1-2k€ / hire if fully staffed.

? Aligned incentives: Internal recruiters want the best talent for the company and are not incentivized by commission.

? Hard to source top talent: Since hiring isn't their core function, internal teams might struggle to find the best candidates, particularly when the company is not large enough to create a dedicated function.

? Inflexible: Managing recruitment internally can be challenging when dealing with fluctuating demand, as your recruiter/s will end up being too busy or idle.

B. Using External Headhunters

? Higher quality (with the right partner).

? Flexible: Headhunters can adapt to the company's hiring needs.

? Expensive: With fees tied to salary, the cost can quickly become prohibitive.

? Misaligned incentives: Headhunters benefit from placing candidates with the highest salary, not necessarily the best fit for the company.

4. Introducing Recruiter-as-a-Service (RaaS)

At Nova, we knew there had to be a better way. Over the past year, we’ve been developing a solution for small companies that blends the best aspects of both internal and external recruitment models. We call it Recruiter-as-a-Service (RaaS), and it’s transforming how startups hire top talent. It has all 4 benefits:

? Cost-efficient: Each hire costs approximately 3,000€, making it accessible for companies of all sizes (vs. +10k€ from headhunters).

? High-quality: We bring together the best recruiters with cutting-edge technology to find the perfect candidates, something which is almost impossible with a team of 0 - 2 recruiters.

? Flexible: Cancel anytime, allowing you to adjust your hiring needs as your business evolves.

? Aligned incentives: Unlike traditional headhunters, we don’t benefit from pushing one candidate over another. With a fixed payment structure, we’re incentivized to find the best fit for your company.

Over the past few months, we have rolled out this model in Spain, Italy, and Sweden. Check for instance how we have supported Dcycle, a sustainability software startup in Spain, in growing their team with RaaS (audio in Spanish).

We believe it’s time to challenge the outdated models and create a more efficient, aligned, and transparent way for companies to find the talent they need.

With RaaS, we’re doing just that.

Ping us if you want to learn more.

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