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CEO INSIGHT: L. Kevin Kelly

An Executive Recruiter's New Strategy

While some companies avoid making big changes during recessions, L. Kevin Kelly, the CEO of executive search giant Heidrick & Struggles, sees the downturn as an opportunity to restructure his business and position it for growth when the economy rebounds.

Over the next five years, Heidrick & Struggles will change its strategy dramatically. While executive search is currently more than 95% of Heidrick's business, search will shrink to 50%. Leadership advisory services will expand to roughly 40%, and developing new technology tools for consultants and clients will become the remaining 10%. With a debt-free balance sheet and $183 million in cash as of the last quarter, Kelly is looking to acquire companies with expertise in topics ranging from executive retention to succession. He is also providing additional training for his consultants cross-selling their new services and investing in closed technology networks for top executives.

Staff Editor Aili McConnon sat down with L. Kevin Kelly to talk about Heidrick & Struggles' new direction. Here is an edited version of their conversation.

How is the executive search industry evolving?

What keeps me up night is not Russell Reynolds, Korn/Ferry, Egon Zehnder, and Spencer Stuart, our direct competitors, but what is going to happen to this industry. We have a 55-year-old business model, and how many companies do you know that survive given a 55-year-old business model? How do we do something that is more transformational?

When it really [hits home] is when you look at all of these technologies today that can potentially disintermediate a search firm. Not at the high-end CEO and board level, but what's going to happen at the lower echelon of search—in the $300,000 salary range—with the advent of companies like LinkedIn?

When it struck me was a year ago when I was sitting here in New York and NASDAQ came out and said they are going to launch, which provides a matchmaking service for candidates and boards of directors. They're charging $350 per candidate.

We took a step back and said, "How do we stay at the forefront of change?"

How are Heidrick's clients driving the new direction for the firm?

We went out and interviewed 65 clients. They said, "You're not aligned properly with us." One of our clients said "Hey, we gave away $60 million in search fees last year." We were happy with our [share], because it was a big client, until they told us they had $60 million to give out and we were just another vendor.

What types of leadership advisory services are you expanding?

You can't pick up a newspaper today without seeing organizations that don't have proper succession planning in place. It's a major issue. What we're trying to become over the next three to five years is more of a leadership advisory firm, not only focusing on the acquisition of talent at the senior level, but also focusing on helping them develop their own employees and retention [strategies].

Forty percent of executives who join firms from the outside last only 18 months. How do we as a firm help reduce that and help them with that turnover?

What role does technology play in your new strategy?

We are using technology as an enabler. We made an acquisition last year of a company called Visual Careers which is a combination of Facebook and LinkedIn for executives. Why we're different is you can go to Facebook, LinkedIn, or MySpace, but they're not vetted by a consultant and anyone can log on. We are building communities of CFOs, CIOs, CMOs—basically a secure platform of executives.

I went to our direct competitors and said, why don't we collaborate on something? My idea was to take the Heidrick database, open it up so a candidate can go on there, update their own rÉsumÉ, receive compensation information, a lot of intellectual property we have as a firm, take an assessment so they are aware of their strengths and weaknesses, and then they have access to Heidrick jobs across the globe. We want to be able to deliver candidates to our clients more efficiently. So I actually went to our direct competitors and said, is this something we should do together? They weren't interested. One of them said it will never happen in our industry.

What are the opportunities in a downturn?

On the client side, some are looking at this as Armageddon and doing whatever they can to cut costs and hang onto whatever hope they have going into 2009. Others—and this is the route we're taking—are saying we want to use this as an opportunity to right-size our business, to put the structure in place that will enable us deliver our vision over the next three to five years. That means looking at whether we have the right people in place and looking to upgrade them.

We're learning from our sins of the past. In 2001, we just cut, cut, cut. We didn't invest in growing the business.

In today's virtual world, do we need the number of offices we have? We made a fundamental shift in practices 18 months ago. It used to be that this industry thrived on generalists. You could do a search for health care one day or the industrial practice the next. We are very specialized now. Consultants in a Tysons Corner [Va.] office no longer work for clients in the Tysons Corner area. They're working for clients throughout North America. We are going to reduce our real estate costs by 30%. We're trying to go more open-plan.

How are your clients reacting to the downturn?

In a booming market, you will see clients who say, "I want one managing director and five senior vice-presidents." Now you're seeing they may let go of six or seven people, but they will still hire at the senior level. I've had three conversations with CEOs at the end of last year and this year, and they have said this is a once-in-a-lifetime opportunity. You also have a couple of examples of CEOs who wanted to retire, but given the markets they pushed that off a year.

When you have a long-standing client relationship with banks such as Washington Mutual and Merrill Lynch (MER), what happens when they are incorporated into other banks?

We're spending a lot of time advising senior executives on their own integration into a larger organization and their own careers. It's more of a sounding board until they work through who is going to stay and who is going to go.

What's your outlook for 2009?

It's going to be a tough year. Historically, organizations tend to fire way too much and hire back. The industry is going to continue to change, and we want to be on the forefront of that. You go through a year like 2008 and we're finding management paralysis. Given the uncertainties out there, managers don't want to do anything.

Are you able to acquire companies you wouldn't have in the past?

A lot of organizations just don't have cash. We're on solid footing. We can put the strength of our balance sheet to use. Simultaneously, our clients be they Russian, Middle Eastern, or Asian, are using this as an opportunity to grow and capture market share. They couldn't recruit talent before from major corporations and now they can.

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