The executive search business has been in the dumps for a while. Thanks to the economic meltdown, companies overnight put a freeze on hiring at senior levels. Of late, the chill seems to have thawed. Companies have begun to hire people at the top and growth is back on their radar screen. Korn/Ferry is a global leader in executive search. For the quarter ended July 2009, its fee income fell over 40 per cent to $116 million from a year ago and the company reported a net loss of $14.3 million as against a profit of $15.3 million in the year-ago quarter. Its chief financial officer, Michael A Digregorio, and managing director for India, Deepak Gupta, spoke to Bhupesh Bhandari and Amit Ranjan Rai on the emerging opportunities and challenges.
Digregorio: The diversification in the business model is something that the company started about 10 years ago. Fundamentally, it was an executive search business and over the last 10 years it has diversified such that today 30 per cent of the business comes from diversified talent management solutions other than executive search. That is something that addresses the total human management and human capital needs of companies. So, beyond executive search, we are focusing on evaluating the strategic models of companies, the human resource talent that they need, assessing the skills that exist in companies, people they need to bring to the business, doing a lot of work with companies in terms of executive coaching, helping companies understand compensation models and so on. At the same time, we have done work in recruitment process outsourcing. The leadership and talent consulting side of the business has generated growth rates of over 20 per cent. How do you explain consistency in these other businesses?
Digregorio: What companies are constantly looking to do to create competitive advantages is how to make their human capital base better. So while they are not looking for new talent, they want to get an assessment of how is the executive team performing against benchmarks, how does the company’s talent match up to others. Companies are spending money internally to improve their human capital when they can’t afford to go out and spend money on new talent.
Gupta: Relate that to what’s happening in India. The search business globally dropped by about 40 per cent. Companies have sat back and said now is the time for us to focus on key people — whether the key people are there in the right spot, do they fit the job descriptions, can we coach and move them to the next level. How do we align our people with the larger strategy that we want to achieve? We in India have done a lot of work during the past eight or nine months in the leadership and talent consulting area as opposed to going and asking for search business.
The second point was on emerging green shoots in the executive search business....
Digregorio: We saw the beginning of the upturn clearly in the first quarter. The level of confirmation of new business in the last couple of months has actually increased by about 20 to 25 per cent to what we saw in March, April and May.
Korn/Ferry is known to have downsized significantly.
Digregorio: We took out over $300 million of internal operating cost. We took out about 30 per cent of the headcount and also did significant restructuring on real estate and leases. We saw significant decreases in the manpower base in most businesses. However, the one thing the company was very careful with was in the consultant area which drives our business. The reduction in our senior client partners is only about 15 per cent. That’s because the company believes that it’s this base of human capital that really drives value in the business.
You say that there is more business than previous quarters now, but what about the money that companies pay as fees? Is there a downward pressure on that?
Digregorio: It’s actually seen a little bit of downward pressure but not significant. What happens is that apart from the fee revenue, we also charge for administrative services and expenses, which is 10-12 per cent over the standard fee. We have become a little bit flexible there. We have seen during the last few quarters that there has been a little more competition in terms of the fundamental fees.
Gupta: If you measure the average fee per search done, you’ll find that there is a decrease in that average fee, but the decrease is largely attributed to the value of the business that you are doing coming down. This could be because the compensation of the individual that you are placing has dropped.
Given that your Asia-Pacific business is still in profit and the meltdown wasn’t so severe here, doesn’t it make sense to deploy more resources here than in North America?
Digregorio: If you look at worldwide revenues today on a consolidated basis, Asia-Pacific represents 14 per cent. As we look to the future and think about the needs and demands of executive talent, we do believe that the Asia-Pacific marketplace has opportunities to grow faster, in particular driven by the needs in the Indian and the Chinese markets. We are clearly looking to invest aggressively in this marketplace.
Gupta: Even during the downturn we did not let any partner or any consultant of ours go. We decided that we are going to keep our team together. What we did was take a pay cut and we went for a four-day week. We said we will reduce our costs, but we’ll stay together.
What was the extent of the pay cut? Was it limited to partners or was it across the board?
Gupta: Only partners. What we did for partners in India was unique. There can be two choices: You either reduce the number of partners or you break even on every partner. So we went into every partner’s performance and agreed to break even on each of them. As a result, we have kept the whole team together. As the markets are turning, we are well positioned to grow with it. And we have restored all the cuts.
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Are the green shoots visible across all sectors?
Digregorio: We have actually seen a fairly widespread increase across most sectors. Technology has seen an unusual jump. The amount of business in the first quarter increased 60 per cent in the technology sector. In financial services and life sciences, we have seen increases of 14 and 15 per cent. Healthcare and consumer sectors have also seen increases of more than 4 to 6 per cent. So it’s been pretty much across the board.
So when would you be at the level of business before the crash?
Digregorio: Honestly, nobody knows. The company was running at a run rate of about $800 million of fee revenue earlier. And if you base it on the first quarter, we are at about $470 million. There is no question that it will take years to get to that level.
Is the financial sector back in the market?
Digregorios: We did see a sequential increase of about 15 per cent in the past quarter. A lot of regional banks and private equity firms seem to be getting back. PE firms have been sitting on a lot of money for the last couple of years. Between them and the regional banks, we see some good things happening.
You said that Korn/Ferry has made sure that its partners don’t leave. A lot of other companies have done the same — they’ve created structures to make sure their top talent doesn’t leave. Given this scenario, has executive search become a difficult business after the slowdown?
Digregorio: Definitely, it is a challenging environment today. But we have the brand name and that is something important. When we reach out to talent as Korn/Ferry, we get a unique reception.
There is great reluctance to switch jobs during a slowdown. Is it still there?
Gupta: In the downturn what happened was that the frenzy that was there — people would move very quickly when they saw a good opportunity and not hesitate to move again six months or one year down the road — tapered down. There are fewer opportunities and people are evaluating those opportunities carefully and are more risk-averse. It has brought a lot of sanity to the process.
What is your turnover per employee? Is it back to the old levels?
Digregorio: The revenue base declined by approximately 50 per cent. The employee base has reduced by 30 per cent. In that sense, obviously there has been a difference.
Gupta: From the Indian standpoint, the profitability per employee has not changed that much because we have brought down other costs. So while people have remained pretty much the same and revenue has crashed, we have crashed our costs also.
And when do you expect Korn/Ferry to become profitable once again?
Digregorio: We have seen confirmation levels move up. We are reaching that number today.