Companies dig deep to bring new execs on board

Newsroom 06/07/2009 | 16:27

A top management reshuffle during times of crisis may be a need for some companies or come as a surprise and additional hassle for others, but in each case, most management changes cost companies money. Several local and foreign companies active in Romania have changed people in top positions since the beginning of the year, and some are in the process of recruiting new staff for executive positions.

Management reshuffles come at a cost…

A company can take the cheaper way of promoting managers from within, or the more expensive one of hiring an executive search company to do the job. “The expert professional service may be pricey, depending mainly on the difficulty of the assignment, with minimum fees between EUR 30,000 and EUR 50,000, which usually represent one third of the annual gross salary package of the candidate to be recruited,” Dana Patrichi, managing director of executive search firm Alexander Hughes, tells Business Review.
But, she adds, “Executive search […] is worth much more than it may cost and this is why more than two thirds of our activity is repeat business.”
Head hunter George Butunoiu outlines a slightly lower price range. “The fees of executive search firms I think have stayed at similar levels to last year, from EUR 10,000 to EUR 30,000. The highest ones are exceptions,” he tells BR.
In a tougher business environment, some companies have started to put pressure on executive search firms to cut fees. “I have heard of clients pressing recruitment or executive search companies to reduce tariffs or even work on a success fee. None of our clients have asked us to do this, which makes me confident we will get through the crisis with a similar business level to last year,” says Butunoiu. His executive search firm posted EUR 750,000 in turnover last year.
Other firms are also feeling the pinch. “We have indeed been stimulated to become more innovative due to the drop in business volumes, but our fees have always had fair margins, maybe among the lowest on the market, even thought our fees are in the highest quartile. I like to interpret the quality of our clients (mainly blue chips), the size of the roles we are given to fill and the high amount of repeat custom as a sign of very good value for money […], and as a consequence we have not needed to lower fees,” Radu Manolescu, managing partner with K.M. Trust & Partners, tells BR. According to him, a standard search costs around a third of the first year's gross cash compensation of the hired executive and normally applies to professionals with packages above EUR 75,000 a year.
“The fee for executive search is set between 25 and 100 percent of the annual salary where the search is conducted internationally for leaders of multinational organizations, like the CEO of a bank or insurance or telco company,” says Joerg Keplinger, managing partner at Williams and Partners executive search firm. For lower level positions, replacement costs 30 to 40 percent and for executives, 50 to 60 percent of the annual salary, he adds. “This includes the costs of the change, the hiring, search, introduction and training costs until the new person is at the same performance level as their predecessor,” says Keplinger.
However, the high prices do not always reflect the quality of the service, according to pundits. “What amazes me is that most selection and recruitment firms charge almost the same fees as top executive search firms and get away with it. I believe we will see less of this in the future. It was too easy before the recession and inexperienced firms earned exorbitantly high fees without having the right qualifications to undertake this advisory role,” Ulrik Rasmussen, partner with executive search firm Pedersen and Partners, tells BR.
“Before October last year, the fees were around 30 percent of the annual gross salary of the position but now the executive search players have to adapt or face the difficulties. Arthur Hunt fees are flexible as we are looking for partners rather than clients. That means we count on a retainer and we consider ‘success fee' type of collaboration for asimple delivery, while executive search is much more of a relation,” says Sorin Roibu, managing director of the Bucharest office of Arthur Hunt. “The fees in 2009 are coming under a lot of pressure and in some cases are down by as much as 50 percent,” he goes on.

…but a wrong hire is even costlier
While it may seem expensive to use these services, employing an unsuitable candidate can be far dearer, say head hunters. “Hiring a wrong executive is a huge cost estimated by various sources to be between three to five times the executive's salary, plus benefits. However the damage caused by employing a wrong person for a firm's strategic position goes far beyond financial figures,” says Rasmussen.
Among the direct costs are the recruitment process, advertising and marketing, training, possible relocation and transportation costs, while the indirect expenses include lost opportunities or hidden costs such as time spent recruiting, potential employee and client turnover or loss, failed product launches, lower productivity and missed deadlines both during the search process and in the first few months after the start of the contract, he outlines.
The candidate is also affected. “There are risks not only for a company in hiring a wrong executive, but also for the executive him- or herself. Offering a new exciting opportunity, transferring a person to a new environment or even a new geographical location can have serious positive, as well as negative consequences for the manager and his/her family,” says Rasmussen.
Dana Patrichi agrees that a mistake can be expensive. “The cost of a wrong hire is immense. And we are not talking just about the cost of the recruitment itself, like fees to consultants, use of internal recruiters or cost of advertisements, but mostly of the business costs: the huge waste of time and resources, loss of productivity for the company and, most of all, long-term drawbacks such as employee lack of motivation, confusion on the market and damaging shareholders' trust,” says the Alexander Hughes Romania head.
“Normally, the absence of a professional means that somebody else or some other department has to cover the work so efficiency decreases in one or more directions. So, in one year's time, the costs could be double or more, compared with the costs of recruitment,” according to Sorin Roibu.
Serious executive search companies are pledging guarantees for the services they offer, which extend for a certain period of time from the recruit's start date, say experts. The time frame is usually one to two years, during which the executive search firm will replace, free of charge, an executive they brought on board but who left.
Radu Manolescu remembers a case in a Western country, where an executive was appointed CFO of a Fortune 100 company. When he was appointed, the share price of that company increased by around 20 percent, making many investors rich. The recruitment fee was around $1 million, a percentage of the remuneration of the person chosen. A year and a half later he was fired for fraud and the firm's share value dropped by $1.4 billion after the news appeared in the media.
“If you had judged this during the first year, you would say $1 million for a search was not much if you consider the impact, but a huge sum if you just think about an executive search service. It was indeed huge in reality due to the final loss, yet this doesn't often happen with reputable firms – otherwise they would not remain reputable. The fee is – or should be – proportionate to the impact of the role, taking it positively of course, although mistakes can happen – everywhere,” Manolescu comments. “Romania's executives have been naturally at a lower management level than the executives at HQs or in Western countries so the impact has been much smaller.”
He believes that most local executives active in Romania are nowadays within Watson Wyatt 16/23 and 21/23 grades, where 23 is the grade of a global CEO of a multi billion USD company, but in recent years most were under 16/23. “In many cases, even though the role was of an executive on the organizational chart, in reality their impact on the business was not substantial enough for the buyer of executive search services to see why small fees are not a feature of this industry,” says Manolescu. Watson Wyatt's human capital index is used to calculate the correlation of human capital and shareholder value.

Slim executive search market, but prospects to grow
Dana Patrichi of Alexander Hughes says the firm feels very little competition from the current executive search market in Romania. “We would say that, at the most, four companies really use direct search methodology to recruit for top management positions,” says Patrichi. She puts the value of the executive search market between EUR 25 and EUR 30 million for this year. “However, this is mostly based on the realities of the Romanian market where multinationals still prefer to bring in expats as top managers, most of the time from within their corporation,” she adds.
In George Butunoiu's view, there aren't more than five executive search firms, which together make around EUR 5 million in turnover a year.
“In every country there are only a few top players. For a market the size of Romania, I would say there are no more than seven players, depending where you make the cut off, and I mean the ones who can live from executive search alone,” says Joerg Kiplinger of Williams and Partners.
Radu Manolescu sees a maximum of six real executive search firms with offices here and a potential for the market to double in terms of business value in two-three years. “For the real executive search market, adding up the fees for top and senior management and not including mid management related fees, then, at first glance, the market has an EUR 8 to 10 million potential in two-three years, but at present EUR 3-4 million is generated in Romania (I do not count here deals closed at HQ by the foreign office of an executive search firm),” he says. As more of the top 10 integrated executive search firms come, the larger the market will get, he goes on.
As opinions on the actual number of true executive search firms active in Romania vary, so do opinions on how good they are. “Even among the executive search firms and the so-called ones we see a huge difference in service standards and capabilities. For example, our firm is wholly owned and we work as one organization across 36 countries, which enables us to freely move our experts across the region. A franchise model or firms running with local profit and loss responsibilities have difficulties applying this flexibility so they are limited in the expertise they can provide,” Ulrik Rasmussen adds.
“Today we have a different market, with quite a number of Romanians in real executive roles and with a real impact on business, so services for recruiting them will be better recognized in the years to come,” said the K.M. Trust & Partners managing partner. “Of course, this is only if the services are performed by professionals who really understand businesses and business models and not mainly by juniors ‘hidden' under partners who are just selling these services without getting too involved in the delivery, juniors entering directly into executive search from school. Those days are over, although it was possible before,” says Manolescu.
Rasmussen agrees. “Many local firms pass on assignments to people without previous industry or function experience who therefore understand the client's need only in theory. We also see examples of junior recruiters doing the majority of the work and the experienced professional acts as the lead and guarantee,” says the Pedersen & Partners representative.
What should a company ask for when dealing with an executive search firm? “We advise companies to ensure that only professionals with a proper industry background or previous experience in a similar position undertake the recruitment assignments for them,” says Rasmussen. “Ask the recruitment firms to give you a list of the people working on the assignment, their role in the search and their relevant experience in terms of industry track record, training and education,” he goes on.
Radu Manolescu says companies should ask themselves how executive recruiters can stay profitable and grow despite small fees while such services require many consulting hours from senior people?
“What is behind a small fee? Who is behind the seller, what is the process in reality, how many interviews, what competences are checked, references, how adapted is the methodology to the market, what benchmarks are set?” he concludes.

By Corina Saceanu

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