May 5, 2002
Headhunters Edge Toward Consulting
By Dylan Loeb McClain

The Dow Jones industrial average measures stock performance. The consumer price index measures inflation. So what does Spencer Stuart's new Human Capital Markets Index measure?

James M. Citrin, managing director of the communications and media practice at Spencer Stuart and a co-creator of the new index, said it measured how competitive the market was for executive talent.

If that seems like trying to catch a hummingbird with your hands, it probably is. "It is hard to quantify intellectual capital," Mr. Citrin said. "Nothing that I had ever seen had done it."

The Human Capital Markets Index has six components — macro–level executive supply, macro–level executive demand, micro-level executive supply, micro-level executive demand, stock–market volatility and the price–to–book ratio of the Standard & Poor's 500 companies. To these variables, Spencer Stuart assigns the letters A through F, then uses the formula HCMI = (A/B) + (C/D) + E + F to chart the market for executive talent going back to 1970. Starting at 100, the index peaked in mid–2000 at 495 and then plummeted 45 percent to 272 by the end of 2001. The index is plotted quarterly. Spencer Stuart, one of the biggest executive search firms, says it developed the index both for executives looking to hire talent and for others seeking jobs. It is now starting to use it as a marketing tool, and is showing clients how it can be useful in "thinking through and understanding their long-term executive needs," Mr. Citrin said.

"We have shot it around to a couple of clients to say that the market is not as tight as it was but it is not as loose as you might think, based on all the layoffs and rising unemployment," he said.

But there is a wider purpose to the index. It is a way of getting the word out that Spencer Stuart is no longer just an executive recruiter but aspires to grab some of the business dominated by the big management-consulting companies. For now, it is concentrating on executive-personnel consulting services, which can include training managers, assessing skills, developing their careers and identifying candidates to succeed top executives. Even beyond that, if the firm succeeds in getting its index widely accepted as the best measure of the market for talent, it will have created a branding device of incalculable value.

It is not alone in wanting to shed its image as primarily a recruiter. Korn/Ferry International is also repositioning itself as a "human capital" firm and moving into new areas. Last November, Korn/Ferry introduced a product called "Strategic Management Assessment" that is designed to help companies evaluate the skills and values of senior managers to see how well they fit their current jobs.

Why are these firms venturing into new terrain? In large part, it is because big corporations are pouring more resources into training and promoting the best and the brightest, not just hiring them. "Companies are asking, `How do my guys stack up against my competitors' guys?' " said David S. Daniel, Spencer Stuart's chief executive. "They are concerned about management assessment and management development. None of that is about search. It is about human capital."

But there are also financial pressures. Two years ago, at the end of the 10–year economic expansion and with the stock market booming, the executive–search industry had its best year ever. The last 12 months have been among its worst.

Mr. Daniel and Paul C. Reilly, the chief executive of Korn/Ferry, said their motivation in expanding their services was not financial and that they would never do anything to hurt their core business or their reputations as executive recruiters. "The heart of our business is executive search," Mr. Reilly said. "We have to make sure that is top quality."

Even if executive search firms are motivated by the best of intentions in expanding their services, some question whether they have the expertise to do so and whether they really can branch out without watering down their search business.

Neal Lenarsky, who describes himself as an executive talent agent — "a Jerry McGuire type" — and who owns a Los Angeles–based company called Strategic Transitions Inc., said many executive recruiters are highly qualified, but he questioned whether search firms were equipped to move into highly specialized businesses.

"The barrier to who becomes a search executive is pretty low, whereas succession-planning businesses are usually populated by people with Ph.D.'s," Mr. Lenarsky said. "Do the companies that have been announcing these new initiatives have the right staff in place? Are there any conflicts in getting into these new businesses?"

Charlie Gustin, founder of Gustin Partners, a search firm in Boston that specializes in placing technology executives, is another doubter of the wisdom of diversification.

"When a client is paying a $300,000 or $400,000 fee, what they want you focused on is finding the right executive that is going to fit with their management team," Mr. Gustin said. "If you try to be more than you are, the quality deteriorates."

Still, the temptation is hard to resist. Joseph Daniel McCool, editor of Executive Recruiter News in Peterborough, N.H., predicts the executive search business will bounce back, but that others would follow Spencer Stuart and Korn/Ferry. After all, he said, "The human capital market is $77 billion annually in the United States and $100 billion worldwide."

It won't be easy grabbing an extra slice of the pie, though; some heavyweight rivals will be pushing back. "These search firms," Mr. McCool said, "are starting to encroach on the areas that have been dominated by management consulting firms like Watson Wyatt, Towers Perrin and Mercer Management."