Korn/Ferry And Heidrick & Struggles Look To Rebound In The Coming Year

Last month's quarterly press conference was a difficult finale for Heidrick & Struggles International chief financial officer Don Kilinski, who leaves his post at the end of this month. Just a year after the firm was riding high, he and Lynn McHugh, the firm's managing partner of investor relations, reported some of the most disappointing numbers in the firm's 48-year history. The number of searches, revenues and profit margin were all way off third-quarter totals for 2000. Prospects for a fast recovery were dim. "All of our practices produced lower revenues than they did last year in the third quarter," said Mr. Kilinski. In a subsequent interview, Ms. McHugh said that the firm expected to be "marginally profitable (in 2002)" and that it would be a "transitional year." "We are assuming that the economy isn't going to get any better," she said.

While firms of all sizes struggled amidst the floundering economy, Heidrick & Struggles and its fellow industry giant Korn/Ferry International are under particularly harsh scrutiny just two years after going public. Investors, analysts and even consultants from the firms are wondering whether the move to go public was the correct one and question when they will be able to mount enough of a recovery to boost their stock prices. (There has even been speculation, which Korn/Ferry has dismissed as idle gossip, that it has had discussions about being acquired, with TMP Worldwide mentioned as a suitor). Meanwhile, their performance is also seen as a measure of the search industry, which has been rocked harder than at any point in its history.

Both companies announced large-scale restructurings and are in cost-cutting overdrive, hoping to win points with Wall Street. They've said that they're returning to old-fashioned search tactics they abandoned when conditions were booming and trying to stay in closer touch with long-term clients. "I think it was a heady time for Heidrick & Struggles as well as many firms in the industry and I think being refocused on being the best at what we really want to do is much more important," said John Thompson, vice chairman of the firm.

Heidrick & Struggles has a solid cash position with about $126 million in reserve as of the end of its last fiscal quarter. In a "worst-case scenario," said Lynn McHugh, after the company pays bonuses and severance packages tied to the restructuring, it would would be in the "$25 to 30 million range." "On a net cash basis, Korn/Ferry has it tighter," says Thatcher Thompson, an analyst for Merrill Lynch & Co.

Moreover, the firms say there are signs that conditions are bottoming out. Still, when and to what degree they recover is murky, largely because of uncertainty about the economy. Search firms cannot change or introduce products or transform their core business the way companies in other industries can. Their results are tied to the success of their clients. The better business is across the board, the greater the demand for executives. "They're victims of unsustainable growth," says Mr. Thompson. "They hired with the expectation that the growth would last."

Mr. Thompson says that he expects business to be down over the first half of next year and that revenue will return to 1997-98 levels. He predicts long-term growth of five to 10 percent. Another analyst, Jeff Silber of Gerard Klauer Mattison, says that he doesn't expect a robust recovery before the end of next year. "It's tough to operate this type of business quarter to quarter because it's so fixed-cost heavy," Mr. Silber says.

The gloomy forecasts followed nearly a year of bad news for Heidrick & Struggles and Korn/Ferry. Both firms faced an unprecedented string of setbacks starting with the implosion of the tech and dot-com market in late 2000 that sent the economy into a tailspin, wide-scale company downsizing and budget slashing, the terrorist attacks of Sept. 11 and the long-awaited report from the U.S. Labor Department that the U.S. is in recession. Both companies, which accounted for roughly $1.2 billion in revenues or about 10 percent of the worldwide search industry business in 2000, have seen business drop about 30 percent. Both of them slashed roughly 20 percent of their workforces. Still, both firms expect business to start turning around by the middle of next year and are banking on their reorganizations to stimulate revenues.

So far, analysts and investors have been unimpressed, largely because of the gloomy economic forecast. Weekly job cuts are hovering around 500,000 and the unemployment rate of 5.7 percent is the lowest since the mid 1990s. Korn/Ferry and Heidrick & Struggles have seen their stock prices fall to their lowest levels since the firms went public.

Last month UBS Warburg lowered its 12-month target price from $18 to $8 and said that demand for permanent executive replacements won't recover until 2003. In a research note analyst Kelly Flynn wrote, "we believe it is too early to expect a near-term share price recovery for the permanent placement firms." Morgan Stanley cut its rating on Heidrick & Struggles International to "neutral" from "outperform," saying that fundamentals remain poor.

In its restructuring, Heidrick & Struggles folded its much-publicized Internet recruiting initiative, LeadersOnline, into its core executive recruiting business. The company had been reporting Leaders' revenues separately and had planned to spin it off as an independent unit that focused on low- and mid-level management recruiting. The company also consolidated a number of its offices and reorganized part of its management structure to better stimulate and track its business. The firm has also decided to shut down JobDirect, a job board that it acquired last year. "We're going to try to reaffirm our values, everyone's bullish on that," said a recruiter with knowledge of the Korn/Ferry restructuring. But the recruiter added: "People are hoping that it's going to be the resurrection but it's not going to happen. The reality is nothing much is going to happen until the economy changes."

Earlier this month, Korn/Ferry International's recently installed chief executive Paul Reilly announced his firm's long-awaited restructuring. In a recent interview with Executive Search Review's editor-in-chief James Peter Rubin he discussed the changes.

ESR: How does Korn/Ferry's recently announced reorganization change what the firm does?

Reilly: It doesn't change the services. It changes how we go to market. We've gone to market with separate products. This is talking about how we integrate those products and other products that we may expand in versus selling a transaction. If you look at other professional service firms, such as investment banks, consulting, accounting firms, they've all gone from selling services to client account management where they understand the client's needs and provide a broad range of products. So it changes from a more transactional relationship – they'll call you when there's the next transaction – to more of a continuous relationship.

ESR: How will the restructuring drive revenues?

Reilly: If you look at most clients today, they've moved to multiple recruiting firms. Some may have 30 or 40 vendors. Those clients are looking to consolidate their vendors. They want people who are more strategic partners. So the movement is to get a larger share of wallet that a company spends.

ESR: How much cash does Korn/Ferry have and how long will it last if current conditions don't improve? When do you expect to see a turn-around?

Reilly: In this environment people would love to have more money but we have adequate liquidity for what we have to do. We're through the worst of it in the U.S. is what our numbers would say. The question is when is it going to start turning up significantly.

ESR: In what regions or practices has Korn/Ferry seen an uptick?

Reilly: The not-for-profit, the biotech, healthcare have all been growing. We've seen pick-up in the industrial area. Obviously, the biggest problem has been technology. Although we're seeing a lot more activity, clearly there's a drop in the technology sector and in financial services, certain pieces of it, investment banking and retail banking have fallen off but the private banking and asset management pieces have been pretty good businesses.

ESR: Will there be any more lay-offs in the foreseeable future?

Reilly: If business turned down, we'd have to look at it again. But we've been tracking to our plans and don't foresee any.

Joe McCormack has built a reputation for recruiting homosexual executives and for his work with organizations that are involved with the gay community. While these types of placements make up about 40 percent of his business, the 57-year-old search veteran says his eight-year-old Los Angeles search firm, McCormack & Associates, has developed a wider focus.

Mr. McCormack, who is openly bi-sexual, considers the demand for gay and lesbian executives only one segment of a larger diversity market. "To characterize this firm as a gay firm is to categorize a firm run by Italians as an Italian firm," Mr. McCormack says.

McCormack helps companies that must be sensitive to certain groups based on issues of race, ethnicity, gender, age, HIV status and physical ability as well as sexual orientation, or who are looking to diversify their managerial force. It's a small but growing niche. When Mr. McCormack started his firm in 1993, most of his clients were non-profits and corporate America thought less about diversity in their ranks. Now an increasing number of companies have made it a concern. Mr. McCormack has done searches for such giants as Johnson & Johnson and Sealand Corporation. "If you want a firm of straight, white males about 40, you don't need to hire McCormack," he says. "If you want a firm with a diversity of candidates, you come to us." He adds that diversity "is a compelling message."

Despite longtime success as an executive recruiter, Mr. McCormack felt on uncertain ground when he first considered coming out professionally and founding a company that worked extensively with the gay community. He had only one client, the American Foundation for AIDS Research (AmFAR), and a sense that certain organizations, especially those created to fight the AIDS epidemic, needed more "professional management." He says that speaking candidly about his sexuality helped him win the AmFAR account and has aided him in wooing other clients.

McCormack & Associates pulls in nearly $500,000 per year and has weathered the recent economic downturn. Mike Keeley, a former board member for the Los Angeles Homeless Services Authority, which works with private organizations for the homeless in that city, says that Mr. McCormack has "great familiarity with the non-profit sector and the diversity needs of many governmental agencies."

Rhett Wickham, a consulting associate who joined the firm two years ago, says that Mr. McCormack earns clients' trust because of his passion for seeing greater diversity in the corporate and non-profit worlds. Mr. McCormack rejects work when he believes an organization is merely paying lip service to diversity issues. "Joe knows that it's particularly important to understand a company's culture and commitment so that these organizations get the right search," says Mr. Wickham, who adds: "Joe has developed a comfortable working relationship with his clients."

Heidrick & Struggles' Thompson Sees A Silver Lining In The Industry Downturn

For more than a decade John Thompson has earned a reputation as one of the search industry's leading recruiters. Heidrick & Struggles' vice chairman has helped some of the world's best-known computer, software and Internet companies, as well as top-tier investment groups fill their most-senior level positions. Dell Computer Corporation, Agilent, Google, EDS, Goldman Sachs and Sequoia Capital have been among Mr. Thompson's clients. In a wide-ranging discussion with Executive Search Review's editor-in-chief James Peter Rubin, Mr. Thompson discussed the future of his firm and the search industry.

ESR: Ten years from now, how will we look back at 2001 in the search industry?

Thompson: We will look back on 2001 as a year of retrenchment. The industry over-expanded virtually at all levels from boutique to international firms, and that included Heidrick & Struggles. But retrenchment is going to be healthy for the industry because there was much more search work than there were competent people to conduct that work. A lot of those people are being washed out of the market at all levels and (the industry) is getting back to more substantial and sustainable growth.

ESR: Has 2001 been the most difficult year in your search career?

Thompson: Yes. This is my eighteenth year, and when I first got into the industry, we had a major retrenchment. This has been much more difficult because in many cases unless you were a senior partner, the faucet has been down to a drip. Individuals who were in the bottom one-third of firms found themselves on a bubble as to whether they were going to meet their numbers. Many of those people, unfortunately, have been cut. There is a silver lining to the cloud: More people are focused on making a difference rather than making a buck. People are recommitting to be very client focused and not being distracted by things that were seductive during the bull market.

ESR: Have the terrorist attacks of September 11th changed your perspective on how you approach your job?

Thompson: I listen more carefully to executives when they talk about how they are going to rate their personal and professional life. While I have always tried to coach and counsel perspective candidates, I think I am more sensitive to it today. I am more sensitive to my family circumstances and the notion of not taking for granted that you are going to be around next week or the following week.

ESR: Do you see recruiters changing their methods significantly in 2002? Will these changes be permanent?

Thompson: At Heidrick & Struggles we are putting more emphasis on business development planning. There are going to be other changes in focusing on quality – in reference checking, helping our clients make an informed choice. Consultants who may have become over-leveraged are probably going to examine that process to make sure that the members of their staff are well trained, and in who is doing the calling, who is doing the candidate/client management. There is going to be higher quality contact when perspective candidates are interviewed. There is going to be better alignment of what the candidate wants to do career-wise and how that fits with the client's requirements. Management is going to drive on strategy that is likely to enhance our brand. We are looking at placing more resources in global relationship management and account penetration. We are looking at the metrics that we use to measure our success.

ESR: More emphasis on revenues per consultant as opposed to a sum total?

Thompson: An office in New York or Tokyo or London is going to have a higher break even than for consultants perhaps in an office in Houston or Dallas or in Sidney. The square footage and lease cost vary dramatically by geography. There are other costs in various parts of the world that make them high cost offices for operations but I think we are going to be trying as much as possible to develop individual P&Ls to give those consultants feedback of how they are doing.

ESR: Knowing what you do now about the economy and other events, would you have favored Heidrick & Struggles going public?

Thompson: I was a max shareholder when we went public. I never sold a share of stock. I have a vested interest in a firm that is profitable. We had run into a situation where we were having difficulty getting enough capital to do things we wanted to do. It was also a coming of age for Heidrick & Struggles. We were 37-38 years old at the time we went public. The process brought a higher level of professionalism managing a company. Some people cringe at the quarter- to-quarter measuring. Sometimes it makes my stomach tight. On the other hand, unless you have a set of metrics that you really are going to hold yourself responsible to, a level of egalitarianism enters a firm and you run it as a collegial organization and not as a real business. The public offering allowed us to acquire some companies. Operating in the public marketplace requires a lot of discipline and management focus and the search industry in general tends to be one where most of the people in the industry are probably not known for their interest in being professionally managed, but prefer to manage themselves.

ESR: Was it a mistake for Heidrick & Struggles to take equity in start-ups and venture backed companies? Was the company's gold standard reputation tarnished on being greedy?

Thompson: Just the opposite. It indicated that we are going to be a close, professional, strategic ally of our clients. I was the first partner to take equity in a firm and I still have an equity component of virtually all of my fees. It brings immense personal identification to the project that you are working on.

ESR: Does Heidrick & Struggles have enough cash to weather this downturn and would it or has it entertained offers to be bought by other firms?

Thompson: We have the strongest balance sheet in our industry, of any of the large firms. Our firm has been run very conservatively. We want to remain an independent company and we intend to do that.

ESR: Was being assessed as the fastest growing executive search firm of the 1990s a good thing or do you regret that?

A.T. Kearney Undergoes Restructing; Adds Recruiters

Looking to cut costs while driving new revenue, A.T. Kearney Executive Search has laid off the long-time head of its Los Angeles office and one other practice leader, but will add 20 to 25 recruiters in Europe.

Kearney's new president Gene Shen said that Kearney had let go of Jack Groban, who headed the firm's Western region and chief information officer practice, and Roy Hebard, managing director of the consumer and retail practice (Mr. Hebard has already assumed the same position at Chicago-based Slayton International; Mr. Groban is currently discussing employment options with several search firms since his departure on Oct. 31. He is also contemplating starting his own firm).

As part of a streamlining that he expects to continue into 2002, Mr. Shen said that he had eliminated A.T. Kearney's three regional director positions in the U.S. and named Richard Citarella as managing director of the Americas to oversee operations in North America and Latin America. Mr. Shen said that Chuck Sweet will retire as chairman of the search division. Mr. Sweet served as president until a little more than a year ago, when he was replaced by Mr. Shen's predecessor, Brian Harrison.

Mr. Shen said that there would be more changes over the next few months, especially in light of the current economy. The lay-offs were the first major move by Mr. Shen – who has been under increasing pressure to reduce expenses quickly – since taking over in August.

UBS Warburg Bullish On Temporary Staffing Sector

UBS Warburg has taken nurse staffing outfit AMN Health Services public and has clearly bet that the temporary staffing sector, not permanent job placement stocks, is the place to be. To prove its point, the broker is upping shares of temporary staffing behemoth Manpower to a buy from a hold rating and raising its price target on the stock to $40 from $30, where it is presently trading. "Now is the right time to begin looking for opportunities within the temporary staffing universe," analyst Kelly Flynn wrote in a research note. But it's too early to expect near-term recovery at the permanent placement firms, she argues. Accordingly, Ms. Flynn downgraded Heidrick & Struggles International on October 30 to a hold from a buy after the nation's No. 2 headhunter said it was cutting more jobs to cope with weak economic conditions. UBS cut its price target on Heidrick to $18 a share from $39 a share. UBS also lowered its 12-month price target on the nation's No. 1 executive recruiter, Korn/Ferry International, to $8 from $18, saying demand for permanent executive replacements is not expected to recover until 2003. The stock has a 52-week range of $6.66 to $37.94. UBS seems to be taking its cue from the successful IPO of temporary staffing firm Cross Country, which raised $132 million recently. Cross Country, which brands itself as the largest provider of healthcare staffing services in the U.S., derives 80 percent of its revenue from providing nurses to hospitals on a temporary basis – a unique niche proving to be highly resilient to the economic slowdown. Cross Country, which closed 2000 with a small profit on more than $350 million in revenue, was brought to market by Merrill Lynch & Co. and Salomon Smith Barney.

John Thompson, vice chairman of Heidrick & Struggles International, has placed Mike Borman as president and chief operating officer of Blue Martini. Mr. Borman previously served as vice president worldwide sales, webservers for IBM. Blue Martini is an e-CRM applications provider.

Major, Hagen & Africa Places General Counsel

Andrew E. Burrows, managing director of the San Francisco office of search firm Major, Hagen & Africa, has placed James G. Potter as general counsel of Del Monte Foods Company. Mr. Potter previously served as general counsel of Provident Mutual Insurance and The Prudential Banks. Major, Hagen & Africa was founded in 1982 and specializes in senior-level law firm and in-house placements worldwide.

Howard-Sloan-Koller Recruits CFO For Dennis Publishing

Edward Koller Jr., president of The Howard-Sloan-Koller Group, a Manhattan-based search firm specializing in the publishing and advertising industries, has placed John Lagana as chief financial officer of Dennis Publishing. Mr. Lagana previously served as chief financial officer of Wenner Media. Dennis Publishing is one of the largest publishing companies, whose title range from Maxim to MacUser.

Canny, Bowen Recruits CEO For Paperloop

New York City-based executive search firm Canny, Bowen has recruited Ian Johnston as chief executive officer of Paperloop. Prior to joining Paperloop, Mr. Johnston was publishing director of several magazines, newsletters, conferences and online portals at Wilmington Publishing in the UK. Paperloop is a San Francisco-CA-based multimedia information and e-business network for the paper, forestry and converting industries. Canny Bowen is one of the oldest operating search firms in the U.S.

DHR International Completes Two Searches for PETsSmart

David Bruno of DHR International has recruited Steve Jackson as vice president of real estate and Susanne Eiselsberg as senior vice president marketing for PETsSMART, the Phoenix, Ariz.-based retailer of pet supplies. Mr. Jackson was a former vice president of real estate for Shaw's Supermarkets, and Ms. Eiselsberg is the former global brand director for Fanta of The Coca Cola Company. Mr. Bruno works out of the Phoenix office for Chicago-based DHR.

Jon McRae & Associates Retained By Averett Univ.

Jon McRae & Associates, an Atlanta-based executive recruiting firm specializing in searches for educational institutions, has been retained by Averett University in Danville, Virginia to lead in its search for a new president. Averett University was founded in 1859 and offers more than 35 undergraduate degrees.

Korn/Ferry Recruits CEO And President For United Way

Executive search firm Korn/Ferry International has placed Brian Gallagher as president and chief executive officer of United Way of America. Sally Sterling, Mike Kirkman and Gil Griffin, managing directors in the firm's education/not-for-profit/associations practice, lead the search efforts. Since 1996, Mr. Gallagher has been president of United Way of Central Ohio. The United Way of America is a national organization dedicated to making measurable qualitative impact in communities across America though 1,400 community-based organizations.

Eastman & Beaudine Recruits EVP Marketing

Plano, TX-based search firm Eastman & Beaudine has recruited Jeff Overton as executive vice president marketing of Southwest Sports Group. Mr. Overton will oversee marketing and ticket sales initiatives for the Texas Ranges, Dallas Stars and Mesquite Championship Rodeo. Mr. Overton comes from the Cleveland Indians, where he served as senior vice president and chief marketing and communications officer. Southwest Sports Group is a sports entertainment company owned by Thomas O. Hicks that encompasses the Texas Rangers, Dallas Stars, Mesquite Championship Rodeo, and KXTX-TV.

Cassie Group Recruits Ringo To Texas Biotechnology

Toms River, NJ-based search firm The Cassie Group has placed William R. Ringo on the Texas Biotechnology Corp. board of directors. Mr. Ringo also holds board positions with Suros Surgical Corporation and Praecis Pharmaceuticals and serves on the Burrill Biotech advisory board. The Texas Biotechnology Corp. focuses on development of molecular compounds related to the treatment of inflammatory disorders in cardiovascular and related areas. The Cassie Group was founded in 1985 and recruits senior-level management for the pharmaceutical, medical device, diagnostic and biotechnology industries.

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