Placement Agencies vs. Executive Search Firms: How You Pay Determines How You Play

In the early days of the recruitment industry (which wasn’t all that long ago), it was easy to distinguish between the two very distinct types of recruitment firms – placement agencies and executive search firms. Placement agencies were used for hiring junior and clerical staff, and executive search firms were retained to recruit executives.

As the world of business became more sophisticated and specialized, so did the service offerings of placement agencies. In addition to providing junior staff, placement agencies began to recruit for highly specialized technical professionals such as engineers, accountants and IT professionals.

Two Different Business Models

As placement agencies have been migrating up into the more senior markets, the terms they use to describe their service offerings borrow heavily from the world of executive search. But the placement agency industry runs on an entirely different business model than the executive search industry, and the economic drivers of their model dictates that they can’t actually offer true executive search, regardless of what their marketing materials might suggest.

The Value Proposition of Placement Agencies

The value proposition of a placement agency is that they have qualified applicants that are immediately available for interviewing. They make extensive use of job postings and networking sites to acquire their stock and are constantly triaging and assessing applicants to ensure that they have an adequate supply of ready product. The applicants they represent are usually very active in the market, so agencies need to aggressively market their services to ensure that they have a constant stream of orders to match these applicants with. Since placement agencies work on a contingency fee basis (usually non-exclusive), they can’t afford to spend too much time or effort on any one assignment. Most placement agencies make best efforts to ensure a good fit but they are limited by the applicant pool available to them at that time and the pressure to get resumes to the client quickly.

What It Means to Work on a Contingency Basis

Working on a contingency fee basis means that the odds of being paid decrease as a function of time. A placement agency is incented to try to fill a job order quickly and then move on. It doesn’t make economic sense for an agency to invest a lot of time and effort into any one job order if the client is just as likely to hire from a competing agency. If a placement agency is given an exclusive assignment, they will make the extra effort to tap into their database and do research on sites like LinkedIn in order to do some actual headhunting on the client’s behalf. But since there’s still no guarantee of payment, there are limits to how long and how hard an agency will be willing to work on a contingency assignment.

When to Use a Placement Agency

The advantage of using a placement agency to hire junior and mid-level staff is they are much better than their clients at sorting the few good candidates from the flood of applicants that answer virtually every job posting. Not only that, a good placement agency doesn’t just rely on postings to fill their clients’ jobs. They keep tabs on all their best candidates from previous assignments and can quickly tap into their network to supplement their short lists. If a placement agency is going to be successful on a non- exclusive assignment, they will usually produce the right applicant within one or two weeks of receiving the order. If the agency is working on an exclusive basis, they should be able to come up with a short list within a month at most. If the hiring authority isn’t getting results in those time frames, they should think about broadening their search efforts.

The Value Proposition of Executive Search Firms

The value proposition of an executive search firm is that they have sophisticated research and recruitment capabilities that allow them to conduct searches across the country or across the world. High end executive search is a high cost / high service / low volume business. Their fees are based on 30%-35% of total remuneration with add-ons and charge backs that can take the overall fee to over 40%. Search firms spend considerable time and effort to acquire their clients and they work very hard keep these clients happy. Executive recruiters are usually very experienced professionals and the focus of their efforts lies in making sure that their research and recruiting result in the best executive and cultural fit for their client. Since search firms are always paid (and paid very well) they focus on quality of results, not volume of work.

In theory, when a company retains an executive search firm, they should reasonably expect close to a 100% success rate since they’re paying the full bill. However, various industry studies put the success ratio of fully retained executive search firms at closer to 70%, suggesting that not all executive search firms are created equal and that selecting the right firm is critically important.

Caveat Emptor

Companies should be wary of executive search firms that claim to able to recruit for middle market assignments. Executive search firms may claim that they treat every client and assignment the same way but their business model drives them towards big ticket searches that pay enough to justify the time and effort required to properly execute on them. Not only do searches in the middle market generate much smaller fees they can take more effort than senior searches simply because there are more possible candidates to survey.

Different Doesn’t Necessarily Mean Better

Executive search versus placement agency is simply a choice between business models. Neither one is inherently “better” than the other, they just serve different parts of the market. A company’s success with an outside recruiter, whether placement agency or executive search firm, isn’t just a function of choosing the right one to work with. Success in using an outside recruiter is also a function of using the right kind of firm for their recruitment needs. The key to working with any outside recruiter is to remember that how they get paid determines how they actually work and what you should realistically expect from them.