True Cost of Ownership: Contingent vs. Retained

Apr 28, 2010
This article is part of a series called Opinion.

Search is expensive, exponentially so relative to the level of talent that you are seeking. A failed search is expensive; even more exponential is that cost relative to its particular need.

Let’s talk through this one. You just made a hire. For the sake of round numbers and because it is too early in my day for me to break out my Ti 89, let’s call this person a manager making $100,000 plus 15% target bonus.

Since this manager is a “specialist” and you are a busy HR leader who doesn’t have the time or resources to conduct this search internally, you called in a headhunter. And by the way, I love this term. It is so aggressive, and whenever someone asks me “oh, so you are a headhunter?” I beam with pride. I have the image of some primitive tribal warrior with shrunken heads strung around his neck. But I digress.

When you were choosing to use a third party for this search, how did you evaluate that talent?

I know: the whole reason that you decided to go outside for this one is because you didn’t have time to evaluate talent. But bear with me. There are a tremendous amount of options, and all too often hiring managers and HR leaders don’t even consider the option of retained search because “why would you pay up front when you can use five contingency firms at once that will fight against each other, and you only pay them if you make a hire?”

I understand this. If I go out to a restaurant with my family, I am not going to give the waiter $20 just because his team “has more experience or a better process.”

But this is not a steak dinner, and frankly, if you had the resources in house, you would do this on your own.

My point here is that the industry is too competitive and too saturated for anyone to claim a distinct advantage over the candidates, or end product that they can produce, through a contingency search. If you were in their shoes and you knew that you were competing against four other firms, you are going to try to find people as quickly as possible, and just like in that restaurant, when your steak is rushed it either comes out way too rare or burnt to a crisp.

You can’t afford a rushed process and or no process at all. Retainers protect your investment. They are like insurance policies. You know that when a firm is retained, you have their undivided attention, or you should. If you don’t have that level of interaction, then you didn’t vet them properly. If a competent firm has the ability to truly screen candidates out of the process rather that screen them in, you will get a better product, and it will be guaranteed (another benefit of the retainer is a one-year replacement guarantee; why do you think contingency firms don’t make that promise?).

Back to cost. You haggled all of these contingency firms and played them against each other. We are down from a fee of 33% to 25% (which, by the way, many retained firms will entertain in the right situation). $100,000 plus 15% bonus is a $115,000 first-year total cash compensation. That’s $28,750. Nearly $30,000 just to hire this guy, and you want to rush this? It isn’t just the steak that is going to get burned.

Now you train this guy, and he gets through the 90-day contingent guarantee and you start to see the warts. For a litany of reasons, this guy isn’t working out and you let him go. How much have you spent? Three months of salary plus payroll cost is nearly $35,000. A search fee of $28,750. Many estimates put the training of skilled labor at this level at nearly double the salary — $200,000, but lets call it half that because this guy wasn’t there a full year, so $100,000.

Now you have down time or lost productivity to account for the loss of new business or any number of direct impacts to the top and bottom lines of your business. And you have to conduct another search that you now have to manage more closely because the rushed search the last time created a black hole that is sucking money from your company. We are talking about hundreds of thousands of dollars that this search has cost you because it failed.

How much have you spent? What is your total Cost of Ownership? I’m not trying to berate the contingency model. There is a place for every service, and there are many contingency search firms that can perform at a very high level in the right situations. Rather, my point is that there is a better way to control costs, develop talent, and find a partner that can help you … truly help you in your process. I cut my teeth in the contingency search business and ran as fast as I could away from that model. Retained search is more difficult and it is more intense and I have to be available at all hours. But I love it! I am free to add value in a positive way by deeply understanding my clients’ problems and finding creative ways to come up with solutions with them, as part of their team. Contingency search is transactional in nature, and when you are dealing with a commodity that is as variable and volatile as human capital, give retainers a chance. The total cost of ownership is lower in the long run.

This article is part of a series called Opinion.
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