Search Firm Takes Unique Client: Itself

By naming an outsider as chairman, Korn/Ferry International rocked the headhunting world, which has traditionally taken its leaders from the top of its recruiting ranks.

The world’s leading executive recruiting firm had followed that pattern until it appointed Paul C. Reilly, then chief executive of global operations for the accounting and professional services firm KPMG International.

Reilly, who also serves as Korn/Ferry’s chief executive, had never been a professional recruiter.

“I was a bit surprised,” said Joseph Daniel McCool, editor in chief of Executive Recruiter News.

Breaking the recruiting world’s leadership mold was widely viewed as a sign that Korn/Ferry was ready for change. In placing high-level executives, major search firms have won unparalleled access into corporate America. However, their official influence has been limited to executive staffing.

Reilly’s experience and skills suggest that Korn/Ferry is interested in leveraging its chief asset--these close ties with corporate directors and senior executives--into new lines of business, from management assessment to executive coaching.

Search firms typically collect a fee equaling a third of the new hire’s first-year salary and bonus, and that’s where their business ends.

“These big search firms know that as soon as they walk out the door, there’s a legion of human resources consulting firms and management consultants that are coming in right after them,” McCool said.

“There is a tremendous amount of business that executive recruiting firms could win over,” he said. “That’s the prospect out there that’s looming. They are kind of scratching the surface.”

After Korn/Ferry helped lead the industry to record revenues last year, demand for executive searches has fallen off with the economic slowdown. Revenue for its fiscal quarter ended last month was projected to be down, and the company has cut jobs. But the long-term outlook for recruiting looks golden.

As baby boomers begin to retire over the next decade, the labor pool will contract with smaller succeeding generations. Shortages are expected to be most severe in senior-level and skilled jobs, further enhancing the value of firms in the human-capital trade.

Over the last three decades, the search industry has been transformed from scores of small, regionalized and niche boutiques into an industry dominated by a few large, multinational operations that offer specialists in sectors ranging from energy to entertainment. Los Angeles-based Korn/Ferry has been at the forefront of these changes.

In 1970, a year after its founding, Korn/Ferry opened a New York office and launched the industry’s first specialty practice in real estate. The next year, Korn/Ferry planted its flag in Houston and Atlanta. In 1993, Korn/Ferry introduced videoconferencing to allow long-distance face-to-face interviews, and in 1995 it began developing an international software network to facilitate its searches.

The firm went on an acquisition binge in the 1990s, buying up smaller firms around the country, and in 1999 it was the first U.S. search firm to go public. During the tight labor market created by the economic boom of the last few years, the intense competition among big U.S. recruiting firms pushed them to extend their reach to Europe, Asia and Latin America.

Korn/Ferry has nearly 2,000 recruiters operating out of more than 100 offices around the world. Korn/Ferry’s revenue last year reached $653.8 million, up 30% from the previous year.

Korn/Ferry is not without challenges, including maintaining its lead in the intensely competitive core search business, and a flagging stock price.

Earlier efforts to extend the Korn/Ferry marque have had mixed results. In 1998, the company launched Futurestep, an Internet-based search service for middle managers that has yet to turn a profit.

With its purchase last year of JobDirect, Korn/Ferry entered the college recruiting market. The additions to its traditional executive recruiting service enables the firm to offer clients the full range of corporate hiring needs, from summer interns to senior-level executives.

Korn/Ferry, like the industry, is still very much evolving, and the biggest changes may lie ahead, according to analysts and insiders.

“The search profession is going to change dramatically,” said founder Richard Ferry, who stepped down as chairman but remains active in the company’s high-level searches. “Korn/Ferry needed to find someone who understood the firm today and had a vision of where the firm could go in the future.”

Enter Reilly. In addition to his KPMG pedigree, the most important asset Reilly brings to Korn/Ferry, said observers inside and outside the firm, is his experience managing a far-flung professional work force that provides corporate clients with an array of services.

The choice of Reilly shows the directors were more interested in management acumen than recruiting skills, said Morgan Stanley analyst Christopher P. Gutek.

“It makes sense to bring in someone from the outside with operating- and executive-level experience in a global professional services company,” Gutek said. “Paul Reilly fits the role perfectly. What it means for Korn/Ferry going forward is No. 1, professional management--a manager as opposed to a professional recruiter.”

In the core recruiting business, the greatest growth opportunities lie outside the U.S., where market penetration is lower, Gutek said.

Reilly--who managed KPMG’s worldwide operations, including offices in 155 countries--brings extensive global connections, has a keen interest in diverse business cultures and can tolerate a punishing travel schedule.

“It’s a global enterprise, and the global aspects of the firm are going to be more important in the future,” Ferry said. “We liked Paul’s excellent credentials in terms of global business experience.”

Reilly, who took over at Korn/Ferry last month, already talks like a change-maker.

“Today, the leading firms are recruitment-based,” he said. “But I believe there is going to be a transformation of companies into what I call the human capital space--multi-product companies that will offer other services, whether they are assessment, executive compensation, human resources consulting--services that are very complementary to what we already do.”