Korn/Ferry Posts Loss, Will Cut 500 Jobs

Executive search firm Korn/Ferry International said Monday it suffered a first-quarter loss and will cut 500 jobs, or about 20% of its work force, the latest sign that the recruiting business is being hit hard by the slowing economy.

The news by the Los Angeles-based recruiter followed an announcement two months ago that rival Heidrick & Struggles International of Atlanta would trim its payroll by about 300 jobs, or 13% of its work force.

It was also the second round of layoffs for Korn/Ferry, which earlier this year announced about 60 job cuts, primarily from Futurestep, its online middle-management recruiting arm launched in 1998.

Korn/Ferry, the world’s largest executive search firm, said demand for senior executives fell 11% in the first quarter. Other search firms are reporting that assignments are down 20% to 40% from record levels a year ago.

“This is certainly the most difficult period that executive recruiters have faced in a decade,” said Joseph Daniel McCool, editor of Executive Recruiter News. “The news out of Korn/Ferry is similar to what’s being reported by large and small firms across the board. The real difference is Korn/Ferry has public shareholders in the equation.”

Korn/Ferry Chairman Paul C. Reilly, who started June 30 after serving as chief executive of global operations at KPMG International, said business began to slide last fall as companies held positions open and initiated layoffs.

“Our revenues have been significantly affected by the severe economic downturn,” Reilly told analysts Monday. “The trends in June and July surprised all of us.”

In an interview, Reilly said he saw signs of trouble within his first week on the job.

“It’s not what I expected to do in my first 30 days,” Reilly said. “I was in the job a week, and I didn’t know the size, but it was clear to me something was going on, and we needed to look at it. The question was how much and where.”

Reilly said he took a 10% pay cut and imposed the same on 11 senior-level executives to send a message.

“It was important for me to say to the executive group, ‘Hey, you perform, you’ll make it back in your bonus,’ ” he said. “At the end of the day, in aggregate dollars, it’s not a lot of money. But it does send a signal of how committed we are.”

Reilly said he did not expect to have to make future cuts.

“We came off a boom, the very biggest year,” he said. “There still is a lot of hiring going on. It’s just down from what it was in an up market. It’s clear [the slowdown in hiring] is not sustainable. Companies will have to move forward.”

Korn/Ferry, which went public in 1999, has nearly 2,000 recruiters in more than 100 offices around the world. It saw revenue rise during the economic expansion to $173.6 million for the first quarter a year ago.

On Monday, Korn/Ferry revised its revenue estimate for this year’s first quarter, which ended July 31, to $114 million, down from the $130 million to $140 million it forecast in June.

Korn/Ferry’s plunge in revenue was blamed for a first-quarter loss of 5 cents to 8 cents a share, before a restructuring charge. By comparison, earnings per share hit a record 26 cents during the same quarter a year ago.

As a result, Korn/Ferry said it would integrate into the company’s core operations the back-office functions of JobDirect, a college recruiting Web site acquired last year, and Futurestep.

The layoffs and restructuring will result in a charge against earnings of about $86 million, or $1.74 per share, during the first and second quarters. The company expects the measures to save $38 million a year.

“They are feeling the pressures of Wall Street for the first time now that they are public,” said Christopher Boone, a senior analyst for e-recruiting at International Data Corp. in Framingham, Mass. “The entire business model is based on companies hiring employees. And if companies aren’t hiring employees, they aren’t making as much money. That’s the danger.”

Boone said he expects search firms to be more aggressive about moving beyond senior-level executive searches into the recruitment of middle managers; those less-profitable searches would be leveraged by building Web-based resume databases and assessment and selection tools.

“The online services are going to become a de facto part of the recruiting mix,” Boone said. “It changes the model of how they deliver the services, which is why you have something like Futurestep.”

Korn/Ferry shares fell $1.30 to close at $13.89 on the New York Stock Exchange.