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How LinkedIn Is Eating the Recruitment Industry

by Oct 24, 2012, 5:17 am ET

Software is eating the worldMarc Andreesen

Marc Andreesen believes software is eating the world. In a seminal Wall Street Journal article, he argues the next 10 years will see every industry vertical disrupted by software, with incumbents replaced by fast-growing online companies.

Retailing? Amazon. Movie rental? Netflix. Video games? Zynga. Marketing? Google and Groupon. Telco? Skype and Apple. Recruitment?

Andreesen claims LinkedIn is the natural successor. The “fastest growing recruitment company in the world,” poised to eat the $400 billion recruitment industry. But this story is more subtle than the typical “disruptor beats incumbent.”

LinkedIn’s early growth was fueled almost entirely by the recruitment industry. Without recruiters, an IPO would never have been possible. But recruiters are now at the mercy of LinkedIn. Every new member, every new feature, erodes the traditional value proposition of third-party recruiters: proprietary access to talent.

This is not a “young-pup-eats-old-dog” jungle story. The relationship has more in common with high-school biology:

A parasitoid is an organism that spends a significant portion of its life history attached to or within a single host organism in a relationship that is in essence parasitic; unlike a true parasite, however, it ultimately sterilizes or kills, and sometimes consumes, the host.

But “LinkedIn Is a Parasitoid Sterilizing the Recruitment Industry” seemed a really unsexy title.

Why LinkedIn Needed Recruiters for an IPO

LinkedIn could not have IPO’d without the buy-in of the recruitment industry.

Recruiters were the biggest driver of initial revenue, as the early adopters of premium accounts to access information on potential candidates. In 2009, over 40% of LinkedIn revenue came from Premium Subscriptions.

The company has since diversified, and currently generates more than half its revenue from Hiring Solutions. Included here are job ads, career pages, and corporate recruiting products.

Of course, recruiters are not the only users of these products. But they were the early adopters of both Premium Subscriptions and Hiring Solutions. No recruiters = no revenue for LinkedIn.

Now External Recruiters Are Hooked on LinkedIn

Ninety-three percent of recruiters use LinkedIn for recruitment, up from 78% two years ago.

This statistic alone doesn’t prove recruiters’ dependence on LinkedIn. It’s less about LinkedIn as a “source of hire” (which is reported as low as 3.5% in some surveys), and more about where and how recruiters are maintaining their core asset: networks of people.

In the good old days, the biggest perceived asset of recruiters was their “little black books.” But these books were simply a tool for maintaining the real asset, which was their network of contacts.

As technology evolved, black books were replaced by big candidate databases. For many years, these databases became the secret sauce. They were expensive to buy and maintain, both in human and dollar terms. A big database could not be replicated easily by a client. It was a big factor in justifying crazy-high fees … it was a key selling point.

Now, proprietary databases are becoming increasingly irrelevant for most external recruiters.

Today, LinkedIn is the living, breathing database for most recruiters. Recruiters depend on LinkedIn to build, maintain, and contact a global network of potential candidates.

How do we truly know recruiters are hooked on LinkedIn?

Flip that question around. As an employer, would you engage a professional recruiter who had only a handful of LinkedIn connections? Didn’t think so.

Recruiters are heavily reliant on LinkedIn for professional relevance and effectiveness.

How LinkedIn Erodes the Traditional Value of External Recruiters

Here’s the punchline. Every new LinkedIn user. Every new feature. Every new connection you make, and company you follow. Every new piece of information LinkedIn collects. It all erodes the traditional value of external recruiters.

If this sounds threatening to some in the industry, it should! Simply consider LinkedIn’s primary objective: To connect talent with opportunity at massive scale.

Sounds like the type of statement you’d read on the websites of many recruitment agencies.

Conflicting purposes? Check.

So how does LinkedIn erode the traditional value of external recruiters? There are two fundamental reasons why companies turn to recruiters:

  1. To access talent they can’t find themselves; or
  2. To simply outsource the recruitment process.

Most of the value is in the first point: proprietary access to talent. Anything else considered a “value proposition” of external recruiters is just a sub-point to this. Industry connections; global reach; skills of persuasion. It’s all about access to talent.

And now, access to talent is becoming democratized, thanks to LinkedIn.

Companies are learning they can bypass recruitment agencies by directly accessing LinkedIn products themselves. And LinkedIn is releasing products, like Talent Pipeline, designed to make this easier.

With every new member, and every new piece of information, these products become more valuable to employers. For example,

  1. Pfizer reports up to 40% of its candidates come through LinkedIn.
  2. Accenture plans to hire 40% of 50,000 new staff through LinkedIn and Twitter.

Do you think these companies will go back to paying sky-high fees for someone else to find these candidates? Bersin reports half of all U.S. organizations decreased agency spend though 2011. Consider what LinkedIn itself says on this point:

“We believe our solutions are both more cost-effective and more efficient than traditional recruiting approaches, such as hiring third-party search firms, to identify and screen candidates.”LinkedIn S1 Statement, 2011

LinkedIn won’t completely remove the need for external recruiters. Recruitment is an inherently people-driven process, and many employers still want to outsource parts of this process. However, we are witnessing a massive shift in value away from traditional proposition provided by recruiters (access to talent), toward online tools that are now accessible to anyone.

Where to for recruiters? Innovators vs. Ostriches

The answer for recruiters is not simply “be better at your job.” That’s like telling a high-street travel agent to renovate their storefront, to compete with the likes of Expedia.

Travel provides a useful analogy. Travel agents haven’t been completely “eaten” by software. They still exist. You might still use to a travel agency to book a very important trip — your honeymoon for example. But they are completely irrelevant for the majority of purchases.

In travel, there’s been a massive transfer of value away from the high-street, to more efficient and better ways of booking online.

In the same way, technology is unlikely to entirely consume the recruitment industry. Hiring requires people at its core. But models will change. Employers and candidates will continually search for more efficient ways of hiring, utilizing all the tools available to them. LinkedIn is only one.

The recruitment industry is split into two camps on this question.

The Innovators: Those who recognize the existential challenges facing their industry, and are adapting. They are investing heavily in social media, new business models, and other areas that employers cannot easily do themselves (including sophisticated sourcing techniques, using LinkedIn and other networks).

This will drive a very interesting period of rapid innovation in recruitment tools and processes.

The Ostriches. Those with their heads in the sand, claiming “everything is OK!” while forcefully arguing in blogs and conferences about the right of professional recruiters to an unchallenged monopoly in the business of talent.

A common reaction from this camp about the impact of LinkedIn is, “People said the same thing about job boards.” That’s true. But job boards were in the business of replacing newspaper classifieds, bringing job ads online.

LinkedIn is in a very different business. It has much bigger ambitions, and a track record of execution. LinkedIn is eating the recruitment industry. It’s going to be an interesting ride.

This article is provided for informational purposes only and is not intended to offer specific legal advice. You should consult your legal counsel regarding any threatened or pending litigation.

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  • Vivek Khanna

    LinkedIn (or whoever is the then leading – flavour of the moment- technology solution) will surely replace the recruiter. But that will happen only on the day all other human jobs are replaced by automation. The recruiter will be the last to turn off the lights….. till then keep recruiting.

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  • Albert Porsche

    LinkedIn is one of the emerging social media which is really getting its roots in every industries such that its just making its dependencies on the recruitment market. As most recruitment creeps in means the most revenue depends on the hands of the industries. Linked In is just establishing its hands due to this firm support only and obviously it is working good and will definitely go ahead to be a industrial coverage. It is the new era of recruitment with new policies involved and closing the market for the external recruiters present.

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  • bill josephson

    Are most of you responders to this piece serious?

    How’s business for most of you? Plenty of quality fillable positions to work on? Companies agreeable to working with you? Fee resistance? How often do companies need your services? Billings/production up? Relatively easy to do business?

    We always have had till 2001 really two things to worry about in our business. One, competition. Two, government policies worsening the business climate/recessions.

    In 2001 we started worrying about globalization, offshore outsourcing to primarily India and China. And in the past 5 or so years it’s now technology/social media/LinkedIn.

    Advantage we always had was an ability to access passive/invisible candidates our clients couldn’t including calling into their direct competitors. Those advantages and days are on the road to ending. Technology will enable more and more professionals to become visible and allow companies greater and greater access to them requiring less need for we 3rd party recruiters.

    If you think having a book of contacts will make you special exempting yourself from the massive cost cutting underway in ever single industry, you’re a God Damn ostrich.

    One day, as happened to me, your contacts will say, “Gee, Jack/Jill, my budget got slashed for recruiting,” or “We now have a team of 10 internal recruiters to fill our openings wanting to give them a shot,” or “we’re unable to use recruiters for the forseeable future,” or “We find we’re able to find good candidates on our own,” or “Business is off, we have a hiring freeze,” or “We’re laying off.”

    You all decide what the cause is. My business has been off for years and I’ve been at this since 1980. Maybe if the economy was great and companies had too many reqs for their Talent Acquisition team to handle things would get better–but does anyone see that happening in the near term?

    Is it because of President Obama’s anti business policies? Competition? Globalization? Or Technology?

    But seriously, how are you really doing?
    And are you really confident about recruiting’s future?

  • Peter Macdonald

    Couldn’t agree more Bill. Its a combination of all those factors but I believe technology ultimately will sound the death bell for the external recruiter. Then I believe it will be the accountants turn to be fearful for the same reason.

  • bill josephson

    Peter, IMO everyone’s going to feel the impact of technology.
    Accountants, Healthcare, I/T, Law… go into a major food market and half the cashiers are gone as we can “self check-out” ourselves allowing the bar code “gun” to read the merchandise bar code. Go into a fast food drive through and the order can be taken from one person in a different location, or voice recognition automated system.

    I believe those who for some reason haven’t yet been impacted don’t see anything, technology hasn’t adversely touched them.

    When it does, they’ll be howling.

  • Eddie Cullen

    You are incorrect in your assumptions and philosophy. LinkedIn and the Recruiting industry go hand-in-hand. Linkedin can only survive with the recruiting industry because that is where their revenue streams primarily come from at the moment. Also there are 175 million working Americans in this country and only 76 million are on LinkedIn. Not to mention the bogus profiles of inexperienced technology. When someone comes along to disperse recruiting then LinkedIn will follow suit almost immediately with an uncontrollable downward spiral. Someone will create a platform that wipes them both out simultaneously. Also they won’t be able to stop it. The funny part is its a lot closer than most people realize. I can’t wait either.

  • Eddie Cullen

    You are incorrect in your assumptions and philosophy. LinkedIn and the Recruiting industry go hand-in-hand. Linkedin can only survive with the recruiting industry because that is where their revenue streams primarily come from at the moment. Also there are 175 million working Americans in this country and only 76 million are on LinkedIn. Not to mention the bogus profiles of inexperienced technology users. When someone comes along to disperse recruiting then LinkedIn will follow suit almost immediately with an uncontrollable downward spiral. Someone will create a platform that wipes them both out simultaneously. Also they won’t be able to stop it. The funny part is its a lot closer than most people realize. I can’t wait either.

  • bill josephson

    Sure, internal corporate recruitment will survive.
    I’m talking about technology making 3rd party recruiting becoming redundant and obsolete.

  • Eddie Cullen

    I agree. Great point Bill. I think my passion for how we can change this economy prompted my response. I could not agree more that 3rd party recruiting will become redundant and obsolete.

    Internal corporate recruitment will definitely survive. I just feel 3rd party recruiting is disrupting the flow of effective productivity at work.

    I invite you to connect with me on LinkedIn and check out my passion for education and effective economic change.

  • Rob Dromgoole

    “The reports of (LinkedIn’s) death are greatly exagerated.” Mark Twain said it. @Eddie, LinkedIn has just started. Today 230-million profiles, in a few years they’ll hit a Billion. The Golden Age of LinkedIn and recruiting is only beginning. Why you’d want them to fail I don’t get. We only help one another. The more successful LI is, the more it helps enable the success of our profession.

    3rd party recruiting will always have it’s place. To think they’ll die is rediculous. Truth is most inhouse recruiters can’t cold call anyone. Until they can, 3rd party recruiting is permament.

    LinkedIn is well positioned to help depict a macroeconomic picture of what roles are open and what skills and competencies are needed to fill them. In my opinion I see a future where LinkedIn becomes the BLS data analtyics wearhouse of the working world. It’ll show the pulse of what’s happening.

  • Eddie Cullen

    Hey Rob, you make some valid points in your argument, but it’s the typical Plato Cave’s analogy with LinkedIn and 3rd Party Recruiting. We accept what we know because we can’t see what is better.

    Now you see LinkedIn COULD have been the pulse of what’s happening, but they went too macro too quickly and the result is 60 million college kids think LinkedIn is a joke. There is no substance to the site. It’s just made for third party recruiters and making their life easier. In Jeff Weiner’s book, the Start Up of Me, he openly admits to disliking academia even though he adamantly speaks passionately about in some YouTube clips. He contradicts himself often when he speaks about the validity of education and networking with professionalism. Also there are 230 million profiles and I am taking a wild guess in saying half of those profiles have 50 connections are less.

    I would love to see the activity numbers of every user. Its just like Coursera, these new massive online courses are supposed to be great right? Well there average enrollment for a class is 50,000 people and you know what their average completion rate is? Less than 5%. Its shocking and actually humorous.

    Now Jeff Weiner saw the money, and did not develop his idea from the inside out instead he took the easy way toward the riches. He went macro first over micro. This is the wrong approach. He also never made preparations about the prospect of 3rd party recruiting actually becoming instinct. When it does, LinkedIn will go under with recruiting.

    When was the last time you read a biography or did some research about the philosophical approaches of Jeff Weiner? I would be scared if I just accepted his approaches because he doesn’t account for a lot of different varying factors.

    3rd party recruiters water down the process with cold calling, spam and template messages, and their only drive is the end goal: The Commission. They have no conceptual understanding of the actual professional skills they are recruiting for and they have the tendency to place people in the wrong positions. This in turn decreases productivity in the work place because people are ineffective in their jobs.

    Now A recruiters are usually exceptional, but when you take generation Y kids right out of college who are forced to recruit because there is not enough jobs to support their real professional desires their thoughts become clouded by the end goal: The commission. What happens? B and C recruiters destroy the workplace.

    Abraham Lincoln once said, “If I had six hours to chop down a tree, then I would use four of them to sharpen my axe.”

    Someone is sharpening their axe, and they are going to chop down LinkedIn and 3rd Party recruiting with one swoop. No one will be able to stop it because it will happen in one quick motion.

  • Rob Dromgoole

    Start up of Me was written by LinkedIn’s FOUNDER, Reid Hoffman, not Jeff Weiner. Considering that students make up 28% of the profiles, college kids do not take LI as a joke.

    You may disagree with LI’s strategy, but they were just ranked by Forbes as America’s fastest growing technology company.

    Successful 3rd party recruiters don’t suck. They’re great at what they do. Commission works wonders because if you suck, you’ll fail. It weeds out those who can’t cut it.

    That said I don’t USE those recruiters because I don’t HAVE to. But they’ll be fine.

    By all measures LI is successful and only getting better.

  • Eddie Cullen

    Yikes, I should of checked the author’s name before I started running my mouth. I would never question LinkedIn’s success. They have been very successful, and have promoted the thought process of social networking in the professional world. I am thankful for that.

    Now students may make up 28% of the profiles, and yes I teach and coach at Fordham University. College kids do think LinkedIn is a joke. They are also fearful to create profiles because of the judgment they will receive from professionals in the industry for awhile.

    So you are defining the success of a recruiter based on how much money they make right? You billed X amount so that makes you a great recruiter. I would love to see recruiters given commission based on how productive the candidates they place into certain roles are. Now I bet the billing numbers would look a little different.

    Recruiters are judged on quantity and not quality. Rob, what do you think would happen if recruiters were judge on candidate productivity rather than the quantity of placements?

  • bill josephson

    I know of several companies calling directly into other companies for candidates.

    LinkedIn, through technology, will make almost everyone transparent–easy to access directly.

    The issue I have is no matter how good a 3rd party recruiter is, unless internal recruiting is too busy to track down candidates or they have too many reqs to fill rendering them overwhelmed I ultimately don’t see what role 3rd parties will provide internhls can’t making 3rd partids obsolete.

  • Bill Mitchell

    Hmmm, as an Executive Recruiter for 30 years now, I can clearly see some problems with the LinkedIn model, many of which have already been stated, but I will add a few.

    For one, since LinkedIn must find creative new ways to make money through premium fee structures, they have begun offering higher exposure not based upon quality experience, but fee paid. That means that while the hiring company may believe they are seeing the “best” candidates prioritized by the “most” qualified, they are actually seeing the candidates who paid the most to be seen.

    I also believe that there will be some blowback from companies forbidding their valued staff from being on LinkedIn at all. If I owned an IT consulting firm whose very survival depended upon the quality and consistency of my team, would I want my 20 best people advertising themselves on LinkedIn? No I would not and I would forbid membership as a condition of employment.

    As the above becomes more prevalent, the “best” candidates will become fewer and further between on LinkedIn. Would you rather go through 1,000 names of “low-hanging fruit” or 3 extremely qualified non-looking candidates from a recruiter? Would you rather have a recruiter marketing your opportunity to a candidate and negotiating on your behalf or be competing against the thousands of other firms just like yours pursuing those same gems off LinkedIn? And how much harder does LinkedIn make retaining top people when they are in an “always looking for the better deal” environment? Another reason for companies to forbid membership.

    No, LinkedIn is new and exciting but has many many pitfalls. I can see a wave of companies prohibiting employee membership rising for obvious reasons.

    Outside recruiting isn’t dead, not by a long shot.

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