How LinkedIn Is Eating the Recruitment Industry

Oct 24, 2012
This article is part of a series called Opinion.

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 part of a series called Opinion.
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