When your private equity firm or portfolio company is in the market for a C-suite executive, there are several directions you can go to find the best talent. You can choose to use your own network, knowing that your results will be limited. Or, you can choose to extend your pool of talent by partnering with an executive search firm. Even if you know your own network has strong candidates, including those candidates in a full search process will ensure you’re pulling from the widest pool of available talent. Many executive search firms will also work with you on a carve-out fee in case the successful candidate does end up being selected from your own network.
While partnering with a search firm can give you access to a wider selection of qualified C-suite candidates, it’s essential that you ask a potential search partner the right questions before you engage them. When private equity firms and portfolio companies vet an executive search firm, a key umbrella question—essentially, “What factors or restrictions will limit my access to the best candidate pool?”—often goes unasked. Another way to phrase this might be, “Are you conducting similar candidate searches to mine with other clients at this time?” Failing to ask this and other key questions can lead to slow outcomes and disappointing results.
This particular question relates to what the market generally calls “off-limits restrictions.” If your candidate access is restricted because of an executive search firm’s process or policies, how do you ensure that you have the broadest access to a candidate pool? (Spoiler alert: You don’t.) Asking the right questions will arm you with the knowledge to help you avoid adverse selection in your search, and will go a long way toward ensuring a successful search process (and creating a lasting partnership between you and your search firm).
What Adverse Selection Is—and How It Can Impact Your Search Experience
The term “adverse selection,” sometimes referred to as “anti-selection,” was coined in the insurance industry, but it extends to many industries today, including the candidate and hiring market. Adverse selection happens when one party in a business negotiation or transaction—either the buyer or seller—has information the other party lacks, specifically around risk factors related to the negotiation. This creates an asymmetrical playing field and unfair advantage for the party with more knowledge, and it often leads to poor decision-making from the buyer or seller.
In the candidate-search experience, when a private equity firm or portfolio company engages a search firm, the “negotiation” is the candidate search, and the “risk factors” involve the other clients and candidates the search firm is already engaging with. The imbalance of knowledge on behalf of the “seller,” or search firm, happens when other clients are given preference or opportunities that you’re not, coupled with a lack of transparency about it. Adverse selection can be detrimental to private equity firms and portfolio companies that (rightly) expect access to the best pool of candidates for their hiring needs.
The Early Firm Gets the Worm
There are only so many potential candidates for a search. Not unlike the NFL draft, first-round picks for candidates generally offer better options than the later rounds. And in house-buying, getting an exclusive viewing of a house before it goes on the market will likely give you the best opportunity to assess whether it’s the right fit and allow you to be the first to put in an offer. The same is true for recruiting.
To understand this concept in action, let’s say you’re seeking a candidate for a CEO role, and your search firm partner is already conducting searches with three other clients for a similar CEO role. They must first carve out the candidates they’ve already engaged for other clients, which means that as the fourth client they take on for this search, you’ll likely experience adverse selection. Only after the search firm’s first client has passed on a candidate can that candidate become eligible for another search—meaning that they may never trickle down to your candidate pool.
The bottom line? Adverse selection means you’re getting short-changed on talent. If you don’t ask your search firm upfront about their policies regarding this type of situation, you may not even be aware this is happening. This restriction can have a real impact on the quality of candidates you’re getting, which is why it’s so important to make sure you’re fully aware, at least in a broad sense, of the other searches your search firm is leading and how that may affect your own search.
Questions to Ask a Potential Search Partner to Avoid Adverse Selection
1. “How do I ensure that I’ll have the greatest candidate access?”
Madison Gunn stands by a policy of transparency: we believe our potential and current clients deserve to know if we’re already engaging with a client on a similar candidate search. If it turns out we are, we won’t take on their search until our current search has concluded. In this spirit of transparency, we recommend that you ask a potential search firm the following questions (in addition to the one above) before starting a partnership. These questions can help you make informed decisions upfront about the search firm you choose so you don’t find yourself in a position of adverse selection.
You have a choice between working with a generalist or specialist search firm. Though there are benefits to both types of firms, determining which type has more benefits than negatives for your needs will depend on a number of factors. A specialist firm will say that because they know your market well, they have a built-in network of candidates in place that’s aligned with your goals, and that they’re able to quickly tap into that network as needed. These have the potential to be strong advantages, but you must determine whether these advantages outweigh the negatives of partnering with a specialist firm.
These potential negatives may be uncovered by asking these follow-up questions:
“Who else is the firm conducting searches for at this time?”
Based on that answer, you can get a better idea of your search’s access—or lack thereof—to potential candidates. When a firm only deals with one industry-specific type of candidate, for example, and is conducting multiple searches at once with your industry peers and competitors, how can you ensure that they’re able to find you the best talent?
“Which firms are off-limits because they’re clients?”
Keep in mind that the search firm, which is already working with only a small slice of the labor market, cannot approach the firms that are already clients. Would these firms be strong targets for your search if they were able to be included? If so, you may want to consider a generalist firm, which doesn’t have the limitation of a narrowly focused, industry-specific search.
2. “How often is your candidate network being refreshed?”
This question will give you more insight as to how skilled they are in the art of search, and how much time they’re dedicating to finding qualified candidates in the farthest corners of the market. In an age where advanced online search capabilities and social media tools are a natural part of our everyday lives, prior industry experience doesn’t bring clients the value it once did in the search business. Everyone is now on a level playing field, the real differentiator is how—and how often—a search firm is engaging the market.
3. “Is the lead partner fully engaged in the search? Who else would be working on my search?”
A specialist firm with a large platform may be too effective, in the sense that they become a massive business that ends up having a limited capability to serve its clients well and give them personalized service. Junior-level associates may be handling C-suite conversations and interviews that would be more effective and appropriate in the hands of seasoned professionals. Finding a firm that only takes on a select number of clients at a time can indicate that their team is comprised of professionals who are not only able to give you their undivided attention, but who are also well equipped to handle complex conversations with company executives. Dig deeper to find out who will be managing your searches, and make sure you’re comfortable with the answer you receive.
4. “Does the fee structure ensure that client and search firm goals are aligned?”
The search business has a pretty traditional fee structure, and it doesn’t often change. In order to best align your goals with those of your search firm partner, seek a fee structure that gives the search firm an incentive to successfully find the best candidate for you and close the search. Propose a stipulation that the final retainer is not to be paid until your candidate is hired. If the search firm balks at this proposal, it’s likely a red flag. This small change should help you find a search firm partner who’s willing to invest their time along with you to get to a successful solution, and confident in their ability to successfully and efficiently close the search. It also helps to validate that they can be trusted to have your best interests at heart.
By starting with these four questions, you’ll be setting yourself up for success with a partnership built on mutual trust, understanding and respect. Remember, the right search partner will treat you, as a client, the way they’d wish to be treated. This means they’ll complete your candidate search before taking on another candidate search with similar parameters—and conversely, if they’re already doing a search similar to yours, they’ll refrain from taking yours on until that one is completed. They should represent your portfolio company and your private equity firm in a way that elevates your reputation, while giving candidates a great experience. Laying this groundwork at the start will establish expectations upfront and set you up for the best possible outcomes.
For a deeper dive on the questions you should be asking a potential or currently retained executive search firm, check out our blog post here.