Saving $50K could easily cost you $1M
During a recent conversation, it came up that the company I was talking to had failed in Germany. Not because of the market. Because they had hired the wrong person. He had now been terminated and they were looking for a replacement.
I asked who they had commissioned to help recruit the new “right” business developer for the Munich office?
Answer: “No one! We will use our own network and Linkedin. We have very good networks, so we don’t see a need for a recruitment consultant. We may spend an additional 3-6 month finding the right candidate, but that’s OK.”
I asked if they also found the one who failed that way. The answer was “yes,” but they wouldn’t make that mistake again.
There was a moment of silence while I was thinking about the answer and the ramifications of this attitude.
Is common sense getting outdated?
I am not a recruitment consultant and wasn’t fishing for an assignment, but the math just didn’t seem to add up. Here is a summary of the conversation that followed:
"How much revenue do you expect your new sales rep will make the first year?" was my next question. Answer: "$1.6M is the target" My question: “Is that realistic starting from scratch in Germany?" Answer: "We believe so!" My question: "OK, let's assume it is realistic. What is your net profit on revenue?" Answer: "Around 10-15 per cent" My question: "What would a recruitment consultant charge you for finding the right candidate?" Answer: "I don't know." My question: "€40,000 would be my guess. How much do you then loose by waiting 3-6 month finding a candidate through your own network? And what is the probability that you will repeat the German failure?" Answer: "Executive search is expensive we prefer to use our own network"
The engagement of someone to spearhead the development of a new market is not about saving the recruitment fee – it is about making it right – the first time.
By saving $50K we will loose $100K when things go well
If we have the realistic opportunity of generating revenue of $1,6M in the first 12 months in a new market, then 3 months delay will most likely deprive us of at least $1M in revenue. There is a 3-6 month ramp-up phase. The $1,6M will have to be made in the last 6-9 months. There is always a hockey stick effect. We could easily wave goodbye to $1,0M.
With a net profit margin of 10 per cent this represents a loss in the magnitude of $100K.
Now, the famous hockey stick applies to all new hires. A new business developer in a new market will most likely have a double-hockey stick. If that is the case we may easily end up with no revenue at all in the first 12 months. If we are convinced that our value proposition can generate $1,6M in the first 12 months, then we should be in a hurry. Every minute will cost us lost opportunities.
Waiting can be very expensive when we have a proven concept!
By saving $50K we will loose $1M when things go wrong
Now let’s look at the quality side of the issue.
The German failure was caused by hiring the wrong person. I am not convinced that this was the only reason. Germany is a conservative market. The decision-making structure is complex and hierarchical. The scepticism against new “off-shore” providers is considerable. Germany is simply a difficult market to bootstrap. But lets for the sake of argument take the conclusion of my guest at face value. The person in Germany failed to produce any revenue in the first 12 months. It will take an additional 3-6 months to find a new business developer, who will then follow the revenue profile shown in Fig. 1 above.
Take a look at the illustration in Fig. 2 showing the revenue profiles of “making it right the first time” and the revenue profile of “making the wrong choice and fixing it 12 months later.”
The difference in this example is a lost revenue opportunity of $7,2M with a lost profit opportunity of $720K over the first 12 quarters.
Waiting is expensive, but making the wrong choice is an outright disaster. By saving $35K we just lost at least $720K!!
I have not included all the lost management time, which goes into identifying the issues, trying to fix the issues, micro-manage the poor performing person and finally execute the termination. Which opportunities did we miss as a consequence of diverting our attention to fix the German problem?
Is executive search really worthless?
If I were bootstrapping a new business in a new country with the realistic expectation of making $160K in net profit in the first year, then my focus would be on speed while controlling the risk. I would recruit the most capable business developer I could find. I would make sure he or she was thoroughly scrutinized in the selection process. I would prefer to have a choice of 2-3 super qualified candidates with proven track records and the profile for doing bootstrapping in Germany. Bootstrapping is the phase where we start from scratch. No reference clients, no name recognition, no leverage whatsoever. The average salesperson is typically not qualified for bootstrapping. This requires very special business development talent.
My experience with using executive search is:
- They challenge us to be more detailed in defining the profile we need.
- They help us identify the motivational arguments for making the “most wanted” candidates interested in considering our opportunity.
- They find more and better candidates.
- They find them faster.
- They run the process: We spend less of our own time.
- They take all the hassle if something goes wrong.
A precise profile
Executive search consultants want to get us the ideal candidate as fast as possible and with as little effort as possible. They want a clear profile. They will help us narrow down those profile characteristics which are critical for success in the job we are offering.
Motivating candidates to consider our opportunity is an underestimated challenge.
Why should people, who are successful in their current jobs, consider quitting and start all over with you? Just give me 3 good reasons!
If we primarily look for people who are unemployed, then this may not be a big issue, but are unemployed people our best pool of candidates for bootstrapping Germany?
We need to consider why our job opportunity is so attractive that the ideal candidates should be prepared to leave their current jobs and start with us.
Will we be able to find the best candidates for bootstrapping a business through our own personal network or with the help of an executive search agency?
Unless we already know someone who we know can do the job and that person is available, then I don’t see how we can afford to ignore the recruitment agency.
Executive search agencies do this day in and day out.
You and I don’t.
Executive search agencies will assign dedicated researchers to our project. They use Linkedin and other social media networks, but they also find candidates who are currently not looking for a job and are not responsive to casual inquiries coming through the network.
Give an executive recruiter a week or two and they will have the first qualified shortlist ready.
Identifying and motivating candidates are only the first two steps in the process. We need to screen them, interview them, choose the shortlist, run them through assessment centres, take references and then negotiate their final contracts. Who is going to do all that, when we have no resources in the country?
I would need an executive search agency to do that for me. Using my own network only would be too risky. Doing all the work myself would consume far too much of my own time. A time that I should rather devote to helping the people I already hired becoming successful.
When things go wrong
In over 30 years where I have been using executive search services, I have only had to pull the “over again please” card once. Executive search gives you a very high probability of getting the right person for the job the first time. All the executive search agencies I have used have offered a “warranty.” They make a new search at no additional charge. Nice to know, because it makes them really committed to getting it right the first time.
I can only see one good reason for not engaging an executive search agency: We can’t afford it, we don’t have the money or we simply are penny-pinching.
And that’s completely different scenarios.