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Is the Business Model for the Corporate Recruiting Department Fundamentally Flawed?

Jun 8, 2006

In this article, I’m going to make the case that the underlying organization and structure of most U.S. corporate recruiting departments are fundamentally flawed. In fact, in many ways they resembles the worst performing business model of them all – a not-for-profit, government-funded, bureaucratic monopoly. Worse, unless big changes are made, companies who use this outdated model will never find enough top people to meet their business needs. As a starting point, let’s use this definition of a business model from investorsdictionary.com:

A business model (also called a business design) is the mechanism by which a business intends to generate revenue and profits. It is a summary of how a company plans to serve its customers. It involves both strategy and implementation. It is the totality of:

  • How it will select its customers
  • How it defines and differentiates its product offerings
  • How it creates utility for its customers
  • How it acquires and keeps customers
  • How it goes to the market (promotion strategy and distribution strategy)
  • How it defines the tasks to be performed
  • How it configures its resources
  • How it captures profit

Since most corporate recruiting departments aren’t profit centers, some would contend that this definition doesn’t apply. I’d counter with the idea that not being a profit center is the root cause of the problem. When a business department is considered overhead, the goal is to reduce expenses, not maximize performance. So, right away, the rules of the game are tilted against success. How many corporate recruiting departments have enough resources to do their jobs properly?

As a profit center, they’d be able to easily justify the extra resources needed on an ROI basis. We can get some clues on how to better organize and structure the corporate recruiting department by comparing it to its competition: third-party recruiting agencies and executive search firms. Contingency agencies are quite similar to corporate recruiting departments in some respects. Contingency recruiters have lots of requisitions to handle, and they have to move fast. Third-party contingency recruiters don’t spend a lot of time with their clients, so sending in candidates is often hit or miss. But, this is where the similarities end.

Contingency recruiters are in business to make money, and the good ones make lots of money. And, they pay their good recruiters much more than corporate recruiters make. The reason they can afford to do this is their business model. Consider this: The key to success in contingency search is the ability to move fast, present decent candidates, hope a few get hired, and then pay their recruiters a small base and a good commission for making placements. So, this is a low-risk, high-profit business. To make it even better, recruiters at contingency firms can cherry-pick their assignments. They don’t have to work every requisition or job order. This makes life much easier. They only need to work the assignments in which they have a pipeline of candidates.

Developing that pipeline of candidates is easier, too. Good candidates like to work with good recruiters at contingency firms since they’ll then be able to look at more than one company. Specialty recruiters at contingency firms have it even better. They can maximize their performances by further developing a network of high-demand candidates in a narrow, high-demand niche. Recruiting networks (e.g., Hireability.com) provide contingency firms with another competitive edge over corporate recruiting departments. By sharing fees, assignments, and candidates, they can close more deals more quickly. In comparison to well-run contingency firms with strong, well-trained specialist recruiters, corporate recruiting departments don’t stand a chance. The only reason they survive is their monopoly power. They control the budget for outside fees and prevent the competition from showing them up. Our surveys indicate that hiring managers – the ultimate customers here – would prefer to use strong outside agencies, but are prevented from doing so by their internal recruiting departments. Adding a little capitalism and competition might help here. Now, let’s examine the retained executive search firm’s business model in comparison to the traditional corporate recruiting department. In fact, many corporate recruiting departments came into existence with the idea that they could provide executive search-like quality candidates at a much lower cost. Few have been successful on this comparison. As a business model, retained executive search firms make lots of money, and the best retained executive recruiters earn executive-level compensation.

However, this model is fundamentally different than corporate recruiting. For one thing, retained recruiters handle very few assignments – two or three at any one time is not uncommon, with five or six being the maximum. Not only do they specialize by function, but they also have a team to help conduct research, source, recruit, and screen candidates. Their fees are high – along with the expectation that candidate quality will be exceptional. This is all justified by the idea that they are recruiting for people who will hold high-impact, strategic positions. Dealing with high-quality candidates at all levels requires much more interaction with the recruiter and candidate. So, for retained executive recruiters, there’s a need to minimize the number of assignments handled at any one time to ensure high quality candidates and very high acceptance rates. The relationship with the executive recruiter and the hiring manager and hiring team is also very strong – more like a partnership, with executive recruiters treated like consultants.

There’s also the expectation that these recruiters will spend more time together reviewing the job requirements, discussing candidates, and negotiating the terms of the offer. The recruitment process outsourcing model is a hybrid of these two traditional third-party recruiting approaches. The competitive edge here is the use of economies of scale to reduce administrative costs, coupled with strong consistent processes. The RPO model also allows for more specialization by the individual recruiters, increasing candidate quality while handling more searches of the same type. RPOs can also add specialists for sourcing, research, and networking to build pipelines. This improves their ability to deliver higher-quality candidates more quickly. In comparison to these three business models, here’s where traditional corporate recruiting departments are at a disadvantage:

  • Corporate recruiters handle too many requisitions for too many different positions. The only way a corporate recruiter could handle the requisition load is by allowing more specialization or by providing more research support.
  • All external models use some form of low base and high commission for their recruiters. This provides an incentive to make placements, not just process paperwork. A number of U.S. corporations are now moving to this type of model.
  • High-quality candidates need more time either with the recruiter or with the hiring manager. If the recruiter doesn’t have the time for this effort, hiring managers must take up more of the load. If managers aren’t willing to do this, then they need to accept the fact that they will be hiring less-stellar people. To offset this, companies could create an internal executive search group devoted to handle jobs where managers have justified their need for an “A” player.

If hiring top talent is not getting easier at your company, you might want to examine your corporate recruiting department’s underlying business model. As a starter, you might want to proactively add external competition to the mix and eliminate the monopoly power now held by HR. This alone will shock your corporate recruiting department into action. Here are some ideas on how to do this:

  • Bid all of your jobs to outside firms. For multiple positions of the same type, why not let the corporate recruiting department compete based on quality and time to fill – not cost – with two or three third-party firms? Then, rebuild your internal recruiting department based on the model that works best.
  • Don’t let the corporate recruiter assign work to the external firm. Create a small team to farm out these jobs, and put this group in head-to-head competition with the internal teams.
  • Let external firms spend more time directly with the hiring managers. Don’t put up a roadblock here. This is a power grab that creates inefficiency by seeing more resumes and wrong candidates than needed. Corporate recruiters should also spend more time with their hiring-manager clients. If managers don’t perceive their recruiters as partners in the process, they won’t respect their work or judgment. Retained recruiters are more efficient because they have this partnership status. So, you’ll need to force this relationship.
  • Use more third-party recruiting networks. These firms are willing to cut fees almost in half for the chance to present their best candidates who are now looking. For a 12% fee, you might get a great candidate in a day or two on a contingency basis.
  • Narrow the focus of your corporate recruiters by function and build a high-powered sourcing department. If corporate recruiters become functional specialists, they’ll have more job knowledge, be more credible with their clients and candidates, and be more involved in the critical stages of the search process (first formal interview through closing). This will increase their productivity and personal satisfaction. A strong sourcing team using CRM and drip marketing allows for the building of strong pipelines of potential candidates to handle future needs more quickly.

If your investment in new tools and better technology has not resulted in better candidates more quickly, the cause might be a poorly-designed business model. Converting the corporate recruiting department into a profit center might be the fundamental change needed to make the team more assertive and results-driven. Competition is the key to business success for all third-party recruiting departments. Why should the corporate recruiting department be held to a lesser standard?

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