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Types of External Recruiting Firms
External recruiting agencies operate under three main types: retained, contingent, and contained. They are differentiated by how they are paid and the services they provide.
All three models may be exclusive or non-exclusive. Exclusive means that the agency is the only agency you are working with and you commit to not source candidates any other way, including your own internal team. Non-exclusive means you could have multiple agencies or your own team working the same search.
In retained recruiting (our focus in this article), the recruiter charges a fee to your company and is paid whether or not your hired candidate comes from them. A retained recruiter is usually paid upfront or in installments—often 1/3 at the beginning of the search, 1/3 when candidates are presented, and 1/3 when the candidate accepts the position. In return for exclusivity and guaranteed payment, they commit to providing high-value service to you and the candidates. They proactively find candidates, get them interested in the role, vet them for cultural and technical fit, and present a shortlist of qualified candidates. Then you pick the one you like the most.
Pros of retained recruiting:
- Since the agency knows they will be paid, they can properly resource and work your search, meaning they put the right team members on the project and follow a proven process.
- Retained recruiting usually produces a superior candidate experience. Why? Because candidates aren’t getting approached by multiple recruiters for the same role, and since the agency wants a continued partnership with your company, they promote your brand and provide excellent candidate care.
- Retained recruiting requires the least amount of work from you, as the agency is doing all the finding and vetting.
Cons of retained recruiting:
- You pay the fee even if your selected candidate doesn’t come from the agency or if the role is never filled. Even if you find candidates yourself, many times they are treated as if they came from the agency while they are on retainer.
- Many retained recruiting agencies only cover more senior roles (over $200k salary per year).
In contingency recruiting, the recruiter only gets paid if your company hires a candidate they brought you. Costs are slightly lower to those of retained search, but payment is “contingent” upon the candidate being selected. It is common for contingent recruiters to spend more time sourcing candidates from their database and then sending you the resumes, and less time contacting passive candidates or doing an exhaustive interview and assessment process. There is less customer service and more work for you to do in this model.
Pros of Contingency Recruiting:
- You only pay if you hire the candidate.
- As an extension to your internal team, these recruiters bring you a wider range of candidates to interview and choose from.
Cons of Contingency Recruiting:
- Contingent recruiters are in a race to provide resumes before others do. Since they are incentivized to send the most resumes as fast as possible, it becomes your job to evaluate the resumes and assess the fit.
- Just as you don’t pay if they don’t provide, they may leave or disengage and you won’t know. Agencies are apt to walk away if they sense they won’t be successful, costing you the time spent waiting on delivery.
- Contingency recruiting usually produces a poorer candidate experience if the agency is non-exclusive. Why? Because there are many different recruiters all trying to find the same people, and they usually are not coordinating with each other. A candidate could think they are pursuing three options only to find out it’s all for the same company. Also, since the agency may not get paid for their time and work, many won’t spend the additional time properly following up with the candidate, or they may not be as sensitive to protecting and promoting your company’s brand.
- While contingency agencies may provide more resumes of candidates faster since recruiters are fighting to get their candidate selected first, don’t be surprised if it takes longer to staff these roles. Why? Because many good agencies will usually not put their best resources or fully commit their people’s time to your project since they may not get paid for whatever work is performed. Unless they can count on volume to make up for that risk, don’t be surprised if you get half the effort or lower-quality candidates.
- If the contract is non-exclusive, the hiring manager and HR experience can be frustrating or more time-consuming since they have multiple parties to align with and coordinate efforts.
Contained recruiting is a combination of retained and contingent. The agency uses a pay-for-performance model: you only pay as they deliver on the engagement. These agencies require exclusivity. You pay a portion (usually 1/3) of the projected first annual salary at the start of the engagement, and then the rest paid at certain milestones, like when a batch of viable candidates is presented or once a candidate is hired.
Pros of contained recruiting:
- You only pay as you get the value. If the agency isn’t delivering qualified candidates with the agreed-upon speed or you end up hiring a candidate not brought from that agency, you’re not stuck with the full bill.
- Since the agency gets the initial amount that shows you have skin in the game, usually they’ll immediately put the necessary resources behind the search to deliver quick results since they know they must deliver to get paid the rest.
- Contained recruiting provides all the other benefits of a retained search.
Cons of contained recruiting:
- It’s harder to find agencies willing to use this model.
How To Choose What’s Best For You
Use contingency agencies:
- When you’re less worried about the candidate experience.
- For roles in which agencies don’t have to hunt passive candidates and can use their database (90% found through LinkedIn) to quickly find candidates open to work.
- If you have enough volume to make it worth the agency’s time to give you great service.
Use retained agencies:
- For more senior roles where your brand reputation is important and you want to find candidates who aren’t actively looking. This requires the least amount of effort and time from you, as the agency’s experience in sourcing, interviewing, and assessing becomes your expertise.
Use contained agencies:
- Any time you would use retained recruiting, try to negotiate it to the contained model.
When Do You Need External Help?
In evaluating your need for external recruiting, consider the type of position and the capacity of your internal team.
Types of Positions Best Filled by Your HR Team
Your internal HR or talent acquisition team can likely fill a wide variety of positions through posting positions through your website or on LinkedIn, Indeed, or other job boards. These include:
- Most hourly positions
- Frontline to middle management (under $150k)
- Common positions that have multiple potential candidates actively looking
Is Your Internal Team at Capacity?
You should also determine whether your internal recruiting team has the capacity and capability to proactively find and contact passive candidates. Passive candidates are those who are not actively looking and therefore are not applying to your job postings.
At most companies, internal talent acquisition teams are not as much proactive recruiters as they are requisition managers. Their job is to filter applications, which means they only present active job seekers who have applied. A typical internal recruiter can handle between 20-25 job postings before reaching diminishing returns. That number decreases significantly if you want them to proactively search for and contact candidates who aren’t looking or applying on their own. For companies with small or solo HR teams, many senior-level and hard-to-fill roles may benefit from an external search firm, as they can be time-consuming and require additional expertise.
Common Scenarios in Which to Consider Outside Help
- For hard-to-fill roles that require more time and focus to proactively reach out to passive candidates (as opposed to the post and pray method).
- When your internal team is at capacity and simply doesn’t have time to make phone calls and find passive candidates.
- For confidentiality during transitions, when the incumbent doesn’t know they may be replaced and you don’t want to post a role or let word get out that you’re interviewing.
- For more senior roles or specialty positions in which a network and/or the credibility of seasoned recruiters is needed to attract talent, i.e., CEO, VPs, board appointments, or positions with very particular specializations.
The Cost of External Recruiting Help
As much as you may want to avoid paying the fees of a recruiting agency, consider the full opportunity cost of not engaging one soon enough. What’s the cost of another several weeks, months, or quarters of not having someone in that role? What’s the impact on morale and the potential burnout of the others who have to pick up that work?
Costs are anywhere from 20-40%+ of the projected first annual compensation of the successful candidate. Contingency firms are on the lower end of that scale. Retained and contained recruiters are more in the middle to the upper range and generally require a minimum amount in revenue to take on the search, i.e., $25,000. Many firms are negotiable, especially if they are trying to get their foot in the door with you.
Finally, costs depend on the type of role and difficulty level as well as the type of agency you decide to work with (retained, contingent, or contained).
What to Look for When Selecting an Agency
Factors to consider and questions to ask when choosing an agency to work with include:
- Experience. Do they have the proven experience and process to understand your culture and be able to find and present qualified candidates? For example, if you are searching for a CFO (Chief Financial Officer), how many successful CFO hires have they had in the last 12 months, and do they understand enough about that role to find and assess talent?
- Level of roles. Will they only take on your top C-suite roles, or can you build a relationship with them to cover even your senior management positions?
- Geography. Are they active in your geographic regions?
- Candidate experience. Since their work is an extension of your brand, ask how they ensure an excellent candidate experience.
- Process. How does the agency work with clients? Will they provide updates how and when you require them?
- Non-compete agreements. If the agency has a non-compete agreement with another company that could provide qualified candidates, they will not be able to proactively contact those candidates about your role: they can’t poach candidates from another company they work with. Be sure you know what candidates may be missed if you choose them, or consider having another search firm when needed.
Tips for a Win-Win Partnership and Great Candidate Experience
Tip 1: Focus On the Relationship
Choose an agency you can build a relationship with and use for the long haul. With each search, they will learn your culture and refine what you are looking for. They should feel like an extension of your team and a true partner that makes you look good.
Tip 2: Invest the Time
Invest time and thought in a robust intake call for each new search. A good recruiter will create a detailed profile and ask a lot of questions. They’ll want you to articulate the opportunity, its challenges, and the culture so they can assess candidates based on the unique challenges the role requires.
Tip 3: It’s More About the Person, Less About the Agency
When selecting an agency, care less about the name of the search company and more about the person you’re dealing with at that agency. You could have the worst experience from the most prestigious and expensive search firm or the best experience from a small, unknown brand, and vice versa. Pick someone who’s hungry to work with you, has the right experience and aims to exceed you and your candidates’ expectations. And when you find a good one, don’t let them go.
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Questions You’ve Asked Us About Retained Recruiting
Joe is the Co-founder and Managing Partner of Global Leader Group, a leadership firm that helps organizations FIND & BUILD leaders.
His purpose is to help people to lead their teams, organization, family, and even themselves more deliberately. After struggling and then growing a profitable business of his own, he dedicated the rest of his career to becoming the Leadership Guide/HR Business Partner he wished he had as a former CEO and desperately needed as an entrepreneur, manager, and dad.
Through an MBA and multiple HR/OD/Leadership certifications, combined with a decade as an HR Executive in a successful fortune 100 company, he’s proven how to build leaders internally or find and hire them externally.
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