The search and staffing industry is a classic tale of early visionaries that created an entire worldwide industry that exceeds one-half trillion dollars annually. In the executive search area, firms like McKinsey and Booz Allen were some of the earliest. Heidrick and Struggles were Booz Allen alumni who started their firm in 1953. Spencer Stuart was a partner at that firm until he left to start in 1956. Ironically Egon Zehnder joined Spencer Stuart and left to start his firm in 1964. Korn and Ferry worked at Peat Marwick and left in 1969 to form their firm.
In the middle management and professional recruiting space, legends like Sanford Rose started his firm in 1959, and Alan Schonberg started MRI in 1965. Schonberg was a pioneer of contingency recruiting. William Kelly started Kelly Services in 1946 as WW2 accelerated contract help. Robert Half started his firm in 1948 and not only grew an incredibly successful franchise business, the firm ultimately bought back its franchisees to become one of the global leaders today.
However, the origins of our industry created models and paradigms that have evolved, reflecting the needs of an ever-changing market. Some answers made sense historically; the top retained firms came out of the management consulting industry where the issues identified were people. Mid-management search/recruiting came out of the applicant-paid fee employment agency business, and as pioneers in that market shifted the financial responsibility from the candidate to the client.
The contract business was developed to be of service when someone was out sick, or a short-term need arose, hence the word “temporary.” Candidates who needed skills assessments had to come in locally to get tested; data processing (information technology) candidates needed to test their skills just as administrative candidates had to prove how many words per minute they could type. Senior-level roles were handled by those who could fly to meet candidates in person. Most mid and junior positions were local because long-distance phone calls were simply too expensive compared to the fees generated.
Today, we have labels for contract, temporary and interim, and we generally call that staffing. We refer to lower permanent roles as perm/permanent or direct hire/hiring. We think of mid-management recruiting as contingency recruiting/search. We refer to executive permanent roles as retained search or executive search. We label it RPO, or recruitment process outsourcing, when a client wants to hire under a different structure, not through traditional models. We think of functional roles (Accounting and Finance, Information Technology, Human Resources, etc.) as a local business, yet industry roles (Financial Services, Life Sciences, Transportation, etc.) are appropriate for nationwide placements. The origins of our industry show us how different areas were founded. However, those distinctions eroded over time. Over the years, we have challenged these paradigms and always from the client’s perspective. Think of these as examples:
- Isn’t interim the same thing as contract staffing? Why do we label based on the level?
- Why do I have to be local to place a CPA, but is it’s ok to be located anywhere to place a pharmacologist?
- Why does it have to be local for a contract front-end developer but not for SAP contractors?
- Why do some firms or recruiters think labeling ourselves by our fee agreement (retained, contingent, etc.) is rational or required?
We now see models and labels that still exist, not because of a logical rationale but because disruption would be too messy and expensive. In the early 90s, I wrote articles about a new label of called “Client Focused Search” firms. Simply put, a firm could customize its process, relationship, and terms around the unique individual needs of each client and even each hiring need. The urgent and critical nature of the role would determine the fee structure, not simply the level. The need would determine if it was temporary/contract/interim or permanent/direct/search. I was so passionate about this, that we trademarked “Client Focused Search” in 1994. We abandoned it this past decade when we realized that thousands of firms were using this as their label, and that many of them were clients with whom we trained and consulted. The shift in perspective and tearing down inaccurate labels were far more critical.
As the industry has evolved, it has consolidated in most areas. We see small staffing firms acquired by regional players acquired by national ones. We see giant holding companies owning a variety of organizations operating under many unique brands. We see mergers on both small and large scales. The executive search industry has had a flurry of merger and acquisition activities over the years. Those two markets have even consolidated. Both groups have started and grown massive recruitment outsourcing businesses, and HR technology businesses are even integrating with these firms.
- Kelly and Korn Ferry, so different in their origins above, now both own and operate very successful RPOs with Kelly OCG and Futurestep for Korn Ferry, who now also owns Lucas Group
- Allegis Group, the largest firm globally, owns Aerotek and Major Lyndsey Africa
- Recruit owns Indeed, Glassdoor, RGF and Staffmark
There is one segment of this massive world that has remained relatively untouched. The barriers to entry are low, but the obstacles to growth are significant. This is the world of niche professional and mid-upper-level management search specialists. We can label this as placing $75-300k salaries for definition purposes only. Salaries lower than this bar are probably handled by staffing firms’ direct hire/perm divisions, and those higher are handled by executive search firms. There are exceptions, of course, and many of these firms compete with staffing firms on the lower end and executive search at the higher end.
Why is mid-management labeled “recruiting” and not “search?” 99% of mid-management firms search and, yes, headhunt. They are searching for the best possible candidates to fill their clients’ roles – some of the best true search specialists in the world are at these firms. So really, the world today is staffing and search. Staffing is anyone who handles the active market of candidates who apply from emails, postings, ads, etc. Search is anything where specific candidates are identified and approached for interim/contract or permanent roles. For the most part, search firms run on a professional services model, and staffing firms run a sales management model. However, some in the executive retained world shunned this middle group of recruiters until they hired them and they became their most prolific producers. They are also ignored by many in staffing as they are seen as too entrepreneurial and “high-maintenance.”
Over the years, we have seen private equity, venture capital, and strategic capital pour into the staffing and executive search arenas, but not much in the mid-management world.
99% of firms are small and known only by their associates, competitors, and markets. There are many reasons this world has never been aggregated. There are understandable issues and why investors have avoided this robust section of the market:
- It is the most fragmented. There are over 20,000 of these firms
- Half of these 20,000 are solopreneurs or otherwise known as lifestyle recruiters
- Many of the firms in this space started with an industry executive specializing in their field. Some still hold on to the irrational belief that only lawyers can place lawyers or accountants place accountants. I think it simply makes people feel better about the investment in their degree. Do you need to be a pharmacist to place a pharmacist, or what about surgeons, actuaries, bankers, and software developers?
Most firms in this space were started by a recruiter who left another firm to do it themselves. They say things like, “I have always wanted to own my own business,” but of course, the actual translation is “I get more percent” on my own. Thus, the vast majority of the owners of firms in this space are recruiters who find themselves owning a business. They grow and navigate without a roadmap if they are solid producers. They are usually so busy “working in” their business they never have time to “work on” their firms. Conversely, many staffing firms start with people who want to build a business to scale. The same is true for RPO and some executive search firms.
There are publicly traded firms in the staffing and executive search world but none in the US in that middle space. A $3-5M firm (search revenue plus gross margin for any contract/interim) with a dozen+ staff is in the top 2%-3%. This is in part by owner choice but also for many reasons. Compensation models are old and antiquated. Retention strategies are based on fear and guilt more than a true value proposition for many. Some are a sheer cult of personality firms that fall when the leader departs. Many don’t know what EBITDA, PE multiples, or proformas are, much less care. A pitch deck is to attract clients, not capital. Business plans are usually relegated to adding up the production goals of all producers. Hiring plans are a reaction to needing more clients or candidates. Operations role value may be discounted based on the insecurities and ego of the producing owner.
Most all owners favor distributions over investment. Budgets can be how to spend as little as possible while generating as much as possible, versus building a true business. Many are too reliant on a couple of key producers or clients. Their financial reporting can be a mess. Their risk exposure financially, legally, and structurally are relatively unknown or discarded as issues for others. This is the world I have lived in for well over three decades and trained and consulted in exclusively for two decades. From that experience, I can summarize that greed, lack of education and business acumen, high egos, and even low EQ abound.
This world also has many capable, successful, eager, willing, and hungry to grow. Many have done so despite a lack of capital, resources, and outside help. What if just 5% of the industry was truly capable of executing a plan if someone would help them create it, execute upon it and invest in it?
Look at this illustration; 5% of the total market would be 1,000 firms with:
- 250 being a start-up or sub $250k as they are still in year one
- 250 being growth firms between $250k-1M
- 400 are firms doing $1-2M who need that capital and resources to get to the next level
- 95 firms are between $3-5M who have plateaued, but with a change in models and approaches, could scale
- 5 firms are over $5M who can get to 10, 20, or even 30M+
If those thousand firms averaged one million in growth within a few years, the growth alone would be ONE BILLION DOLLARS IN REVENUE. Many of these firms average 20% margins; cut the revenue in half, and you still have a market cap in the billions.
Imagine if owners of those firms were not trying to sell to exit right away, but rather take on strategic advisors and capital to ignite their business growth. How do they get the attention? Their deal size is too small for M+A firms. Even business brokers look at this world with little optimism. PE Firms, VC firms, and banks all avoid these grains of sand in their minds. The TSA collected $76k in loose change at NYC area airport checkpoints in 2014, but imagine the interest in picking up $76k in loose change one coin at a time. Our mid-management industry represents loose change to most PE and VC firms, and the effort does not justify the result. Even the major ATS, CRM, and HR Tech providers view this group as high-maintenance with an absurdly high customer acquisition cost followed by churn.
There is a massive opportunity to grow something never done before, and it will just take one massive example of success. The firm that enters this acquisition space will need the resources, infrastructure, and expertise to help those entrepreneurs build their firms. They need capital to invest in growth and equity structures to entice participation. They will need to help educate this market while also showing them what is possible. The focus must be on the clients and candidates the firm serves and the recruiting/search professionals that the leadership of those search firms serves.
Who has the track record of doing what others said can’t be done? Who has grown their firm to $3M, $5M, $10M, and even $20M+ in revenue? Of those with that track record, who wants to spend their energy helping others do it? Who wants to invest their capital and equity in those people? Who can create a vision, enroll others in that vision, navigate around the loud talkers and find the eager and passionate do-ers? Who is more interested in investing in the brands of others versus building up their own personal brands and egos? Who is that crazy to pursue this IDEA?
We are! We will be doing this as a natural evolution of our track record with Kaye/Bassman International, Next Level Exchange and Sanford Rose Associates International. In the formation and launch of Starfish Partners, we have created an ownership platform for this previously overlooked market. This platform will allow owners to scale, and monetize their business value. This will provide opportunity for independent search firm owners to participate and share in the equity of an entire family of companies, not just their own.
This will require vision, proper leadership and a track record of success. Most of all, it requires the right people.
There are incredible opportunities for the right firms and partners. We are hunters. We will find them. They can find us too at:
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