A Holistic Approach to Hiring: How Internal, Retained and Contingency Recruiting All Play a Role In An Effective Hiring Strategy

Successful entrepreneurs understand that the bedrock of a great business is its human capital, which is why growth-stage firms (and companies of all sizes, for that matter) place such a strong emphasis on finding the right talent. But behind the somewhat obfuscated advice to “hire great people” lies a cold, hard truth: Finding those great people is hard work! Identifying, interviewing, and eventually onboarding top-tier candidates is a time-consuming, labor-intensive exercise, that’s as much an art as it is a science. And while entrepreneurs understand their companies and hiring needs better than anyone – and most are quite adept at wearing many hats – there often aren’t enough hours in the day to execute the process effectively.

One question I hear all the time from CEOs is, “What’s the best way to leverage all of the hiring formats available to me?” What they’re really asking is, “How do I maximize my time and my dollars spent?” We know how difficult it is to make those growth-stage operational and budgetary decisions; there are infinite ways to spend what amounts to a finite sum of money and time. Having spent portions of my career in all three arenas – contingency, in-house (internal) and retained, I have some expertise on the topic. I strongly believe that all three can be combined into a holistic hiring strategy The trick is figuring out just the right mix.

Go Internal Sooner Than You Think

Most entrepreneurs hold off on hiring an internal recruiter until late in the cycle. Hiring full time employees is expensive and brings with it a reasonable amount of risk, so I empathize. After all, why spend the upfront money on an additional employee if you can simply outsource the work?

On paper, that may be true. But I’d argue that it makes sense to hire an internal talent acquisition resource sooner than you think.

Let me explain the rationale:

Say you’re looking to hire 5 Engineers over the course of the next 12 months. Your inclination might be to contact a handful of contingency firms to do the work for you; why not let them hustle, with no cost to you unless they’re successful? There’s just one problem: Those firms are now working in direct competition with one another. That means they’re working fast, not smart (most of the time). You’re likely to still need to interview a high volume of candidates, as it’s now a race against the clock for them. When that happens, sacrifices are made things, like attention to detail, thorough vetting and back-channeling fall by the wayside. That means more time spent on your end navigating the flow of sub-par candidates who don’t fit your criteria.

With an internal recruiter, you’re hiring someone who’s totally committed to the process. As a dedicated employee, they witness your leadership style and experience your firm’s culture on a daily basis, which means they’re more likely to know exactly what you’re looking for. That familiarity and awareness will save you countless headaches down the road. Plus, a hard truth that many entrepreneurs overlook, is that each candidate you don’t hire is a potential brand ambassador for your firm. You want them to leave the interview saying, “Damn, I wish I got that job,” not, “Screw those guys. If working there is anything like the interview process, I’m glad I didn’t get it.” What you don’t need is very vocal, very dissatisfied candidates finding a voice on any number of social media platforms at your expense. A dedicated recruiter provides the type of structure and accountability needed to ensure a seamless process. This has a direct impact on the candidate experience, hiring for culture, and general professionalization of your talent function.

There’s another reason to go internal early, and it has to do with the all-important bottom line. To illustrate, let’s continue our above hypothetical: You’re looking to hire those 5 Engineers over the next 12 months. Contingency staffing fees range from 18-25% of base salary. Say you manage to find a well-established firm who charges 20% (the lower end of the fee structure). A typical Engineer’s base salary is around $100K. So to hire 5 Engineers on contingency, you’d have to pay your contingency firm(s) $100K in fees! (20% of $100K, times 5).

Depending on your market, you could hire a really solid internal recruiter at $60-$80K to get those same 5 hires, and I bet they’ll do it faster and with better results. Not only will you save $20-40K, but you’ll be accessing all of the intangibles an internal recruiter brings to the table (vetting, handling all first-round interviews, management of onboarding, etc.). Now you have a dedicated member of your team whose sole focus day-in and day-out is finding you the best people, and doing so in a manner that saves both time and money. This doesn’t even account for the other roles they fill in a year, how they leverage social media, facilitating new hire onboarding, etc. The economics are tough to dispute.

To Retain Or Not To Retain?

Even the best internal talent folks can’t do it all, and most will admit that they shouldn’t either. They may not have the specific network or experience to fill those key vacancies in your org chart – executive hires and specialized roles. Think of the internal hire as the hub in the strategy – getting that hire right enables you to invest in other avenues more strategically.

That’s where external recruiters come into play. But the question remains, should you go retained or contingency?

The short answer: both. To briefly clarify the differences between the two, with retained firms, a search is run more like a consulting engagement, with a target duration and ongoing fee structure. Retained fees usually run in the 27-33% range, of both base and bonus compensation. Contingency fees, meanwhile, run around 18-25% of base compensation only, and are not considered earned until the hire is made. Quite a stark difference in structure and costs, but not hard to see the behaviors incented. Retained firms typically form strong bonds with the client company by spending long hours examining the leadership team, company culture, forecasts, funding, product demos, marketing, etc., while also performing exhaustive market research. A retained firm might talk to upwards of 500-1000 people about a single search. That is the type of diligence and attention to detail that you won’t find with contingency firms, largely because they simply don’t have the time. Remember, contingency firms are racing against the clock – and each other – to make that placement.

Retained firms also typically offer longer hiring guarantees. My firm, for example, guarantees every hire for 1 year. That means that should candidate leave after 11 months, we’ll re-do the search at no cost to our client. Most contingency firms offer a 90-day hiring guarantee, with some exceptions. So retained search is more expensive, yet more consultative. Contingency is more affordable, but less involved. Which is why retained search should be reserved for those very strategic, executive hires; that hard-to-find strategic CFO, or game-changing Chief Revenue Officer. It takes a highly involved recruitment cycle and significant expertise to identify those leaders, and since those key hires can make or break a business, it’s best to invest the upfront capital in a retained firm.

The Contingency Secret

By now you may be thinking, “Internal and retained is the way to go. No need for contingency at all…”

Let me assure you, there is certainly a place for contingency firms. The relationship just needs to be managed appropriately. When it comes time to make extra hires that are out of your internal recruiter’s wheelhouse, but not senior or specialized enough to warrant investing the extra capital in a retained firm, that’s where contingency comes into play.

And there’s a secret to getting the most out of your contingency experience: Treat them like a retained firm. What I mean by this, is identify a small handful of contingency firms with expertise in your needs, and treat them like a partner. Give them exclusives, keep them up to date on your business, and involve them in your process.

It may seem counterintuitive to lock yourself into a relationship with a contingency firm. After all, isn’t the whole value of contingency that you don’t pay unless they make the placement? But think about it from the contingency firm’s perspective. They now have an exclusive. That means they’re certain to close the search (and receive their commission) as long as they find a top-tier candidate. And that scenario isn’t always the case. If a firm is racing against competitors and they identify the perfect candidate it may already be too late. Another company may have swooped in and filled the role I began my career at a prominent contingency firm in New York City, and every time we landed an exclusive, we worked twice as hard to fill that vacancy, knowing that we were guaranteed to be compensated for our effort.

The lesson here is to treat a contingency firm like a partner and negotiate an exclusive deal. Give them the assurance of remuneration for their hard work. They still have to deliver, but when you remove the yoke of a ticking clock, the results can be impressive. More than that, take the time to communicate with them as you would any other member of your firm. Update them on the status of your business, and hold them accountable for deadlines and responsibilities. The extra effort you expend in the beginning of the process will pay dividends down the road.

Conclusion

Having lived each of these settings, I really do believe that it all starts with a great internal hire; someone who will proactively lead recruiting efforts, and help shape the way your company thinks about talent. In turn, that will free up the cash to invest in retaining a firm when necessary, or paying contingency fees as needed. Regardless of whether you work with a retained or contingency firm, treat them similarly. The more you invest in the relationship, the more impressed you’ll be with the results. Strong recruiters should be capable of sharing the company story and culture with a candidate even more passionately than the CEO, but they can’t reach that level of familiarity without your help.

The aforementioned advice isn’t for everyone, and I don’t mean to imply that there is a one-size-fits-all approach to hiring. Many successful entrepreneurs discover talent by utilizing all sorts of bespoke methods. But for those who are overburdened by time and monetary constraints, and feel somewhat hapless trying to navigate this uncharted terrain, think of the above as a roadmap that will guide you.

By: Tim Gordon, Founder & Managing Partner