Anatomy of a start-up
Can a powerful database replace the 'black art' of personnel recruiting?
| EXECUTIVE SUMMARY
THE COMPANY: Career Central, in Palo Alto, Calif.
THE CONCEPT: Eliminate the recruiting-industry middleman. Use database technology to help companies find M.B.A.'s more cheaply than they could using headhunters and more efficiently than they could using want ads. Then do the same with other types of other personnel, such as software engineers.
PROJECTIONS: Losses of $2.5 million in 1998 on $4 million in revenues. Profits of $12 million in 2000 on $35 million in revenues.
HURDLES: Attracting enough M.B.A.'s to sustain an adequate candidate pool. Delivering enough well-matched hires to prove system's value. Establishing a name just as on-line recruiters of all kinds are proliferating.
Jeffrey Hyman was not happy. It was 1995, he was soon to receive his M.B.A. from Northwestern University's Kellogg School of Management, and he craved employment at a young high-tech company. Problem was, on-campus recruiting featured the usual fare of manufacturing and consulting Goliaths. "Four hundred companies came to campus," Hyman recalls, "and I didn't want to work for any of them."
After several months of cold calls, costly flights to the Bay Area, and missed classes, Hyman finally landed a job at software maker Intuit--"by pure luck," he says. But the process had been an ordeal. Once at Intuit, moreover, Hyman discovered there was a flip side to the same problem: Intuit didn't have the resources to mount a serious presence on business-school campuses. That made hiring top-notch M.B.A.'s difficult.
The problem gnawed at him: How could M.B.A.'s and the companies that needed to hire them be brought together? "This is an enormously inefficient market," Hyman remembers thinking. "The recruiting industry has not changed for 100 years. Technology has not been applied."
And who better than he, mused Hyman, to apply it?
In one sense, Hyman's timing could scarcely have been better. The amount of money spent on headhunters in North America has been growing at an annual clip of 17%, jumping from $3.5 billion in 1993 to $6.5 billion in 1997 (and vastly outpacing employment growth), according to Kennedy Information LLC, publisher of Executive Recruiter News. With businesses struggling to find skilled workers--and increasingly recognizing the real cost of a bad hire--recruiters have become valued problem solvers.
Yet the industry continues to be highly atomized. Of the 4,330 executive-search firms in North America, Kennedy reports, fewer than 15% generate revenues of more than $2 million. The 10 largest search firms (including market leaders Korn/Ferry International, SpencerStuart, and Heidrick & Struggles) constitute barely 11% of the market. Plus, to hear Hyman tell it, a headhunter in 1998 carries on in much the same way a headhunter in 1948 did--which in the most basic sense is true. Head-hunting still tends to involve a Rolodex, a phone, and the task of jawboning someone into working for someone else.
Highest on the industry's food chain are the retained-search firms, which typically charge one-third of a position's first-year salary. Theirs is a full-service menu: background checking, wooing of candidates, and consultative screening for that elusive "right fit" are all included in the prix fixe. The average retained recruiter performs 16 searches a year.
Next come the contingency-search firms. In contrast to their more exalted brethren, who focus on positions that pay upwards of $100,000 a year, contingency recruiters feast mainly on the below-$100,000 crowd. They charge a commission of 20% to 30% but, as their name suggests, receive zippo if none of the candidates they serve up get the nod.
The next level on the executive-recruiting food chain is a long way down (and not even included in the $6.5-billion assessment of the search industry): newspaper classifieds. Employers pour another $6 billion down this funnel every year--enough to mean the difference between red and black ink for many newspapers. This approach to recruiting is far cheaper than using headhunters, of course, but it's also far more scattershot. While employers end up with a thick stack of rÃ‰sumÃ‰s to pick through, relatively few candidates are likely to meet their specifications.
Now enter the Internet. Scanning the estimated 225,000 sites that list job openings, one could be forgiven for thinking that the entire recruiting industry had migrated on-line. Well-trafficked sites such as the Monster Board, CareerMosaic, HeadHunter.net, Jobtrak, and Online Career Center offer giant searchable databases of rÃ‰sumÃ‰s and job openings. (According to John Sumser, publisher of Electronic Recruiting News, revenues from on-line employment classifieds will total $450 million this year, accounting for half of all Internet advertising revenues.) Yet Hyman notes that many of those sites resemble little more than electronic versions of the classifieds section.
Hyman's M.B.A.-style analysis left him with this conclusion: the industry was a bifurcated one, with high-priced recruiters on the one hand and cheap print and on-line advertising on the other. "It was clear," he says, "there was nothing in between."
To exploit that gap, Hyman officially launched Career Central (nÃ‰e MBA Central) in June 1996. Its mission: to bring together M.B.A.-holding job candidates and the companies seeking them. Deceptively simple in conception, Hyman's business model identifies not one, not two, but three sets of customers.
First, there are the job seekers, consisting of both graduating M.B.A. students and alumni already in the workforce. They pay nothing. To register, they take 20 to 30 minutes to fill out a "member profile" on Career Central's Web site, providing detailed information about their experience (degrees, job titles, languages spoken) and their desires (salary expectations, company size, willingness to travel, preferred geographic location). Their profiles reside on Career Central's database.
Then there are the business schools. They pay nothing, either. By signing on, they simply agree to distribute Career Central's Web address or registration diskettes to their students and, often, their recent alumni. What's in it for them? They look cool for offering their graduates improved access to companies that, as Hyman himself could attest, aren't easy to find.
Finally, there are the employers. They pay. However, they're not granted direct access to Career Central's database of candidates. Rather, for a fee of $2,995 per search, they submit their specifications to a "recruiting search consultant" at Career Central, who then queries the database on their behalf.
And it's here that Career Central's slick automation takes over. The candidates on the database who match the employer's specs--and whose own desires match the opportunity--are automatically sent E-mail informing them of the job opening (a process the company calls "JobCasting"). If the JobCast titillates their interest, they send a reply E-mail with a rÃ‰sumÃ‰ attached. Career Central's software then automatically detaches and prints the rÃ‰sumÃ‰s.
Within five business days of their request, employers receive a packet containing the rÃ‰sumÃ‰s of at least 10 qualified, interested candidates. If they don't--if Career Central can't find enough candidates--they pay nothing. (Once the rÃ‰sumÃ‰s are shipped, Career Central exits the process: unlike executive recruiters, it leaves interviewing and background checking to the employers and exerts no pressure to make a job placement happen. "We're Switzerland on this deal," declares vice-president of sales Skip Sanzeri.)
Underpinning Hyman's system is a series of assumptions. The first assumption is that headhunters, for all their full-service frills, really spend most of their time identifying and tracking down qualified candidates. By that logic, headhunters don't provide much more than Career Central does. "We're providing 80% of the value for about 10% of the cost--and in five business days," says Patrick Burns, Career Central's vice-president of strategic alliances. "We'll lead you almost to the lake to drink. You just have to walk the last 20 yards to quench your thirst."
A second assumption is that job hunters want confidentiality and control. The problem with posting a rÃ‰sumÃ‰ to a Web site is that the whole world--including one's current employer--can see it. Hence Hyman's decision to forsake the Web for E-mail: candidates can decide on a case-by-case basis which companies should get their rÃ‰sumÃ‰s.
A third assumption is that, to be of real value, a recruiting service has to reach what is oxymoronically known as "the passive job seeker"--the employee who is satisfied but wouldn't mind hearing about a dream job. (Newspaper classifieds typically reach a more disenchanted lot.) Here, again, the virtues of E-mail prevail: Career Central's system is a "push" technology if there ever was one, delivering job opportunities to candidates' desktops without the candidates' even asking for them.
That's presuming, of course, that candidates have taken the time to fill out Career Central's member profile in the first place. Cindy Lundin, Career Central's director of corporate marketing and a Kellogg graduate herself, claims it's not unreasonable to expect even passive M.B.A.'s to make that 20- or 30-minute up-front investment. "M.B.A.'s will find a great job on Monday," she says. "On Tuesday they want to know if there's something better out there."
A fourth and final assumption is that employers crave speed. An executive recruiter might take two or three months to present a list of candidates. "We can JobCast a search in half an hour," boasts Hyman, "which is faster than a headhunter can even go to the bathroom." And instead of having to wade through the piles of low-caliber rÃ‰sumÃ‰s that a classified ad would yield, employers presumably end up with a small batch of on-target ones, saving still more time.
As most of Hyman's M.B.A.-wielding talent pool would know, the 1990s have spawned a buzzword for the kind of strategic play Career Central represents: disintermediation. Use technology to remove the traditional middlemen (headhunters) between buyers (companies) and sellers (M.B.A.'s). It's a play that perfectly suits that popular Silicon Valley conceit--that there ain't a market around that a little silicon can't render more efficient. "Listening to Jeff," says Lun Shin Yuen, an eight-year Intuit veteran and database wizard who became Career Central's cofounder, "I really couldn't punch any holes in the concept."
Today, Hyman and Yuen work in a low-slung, standard-issue office building honeycombed with cubicles, in Palo Alto, Calif., just a mile down U.S. 101 from their former employer. Of the nearly 70 employees buzzing about (Hyman hired 6 of them off Career Central's own database), most are veterans of one high-tech start-up or another.
In one cubicle, Jonathan Hart, one of 11 "recruiting search consultants," is conducting a search. It began when he spoke to a hiring manager at a client company by telephone, translating her plain-English specifications (for a marketing vice-president) into a computerized query. The database returned a list of 81 potential candidates. Hart sent each of those job seekers an E-mail about the opening, and now the E-mail responses are beginning to roll in. "You can see the numbers moving," notes Hart, his eyes flicking across an on-screen tabulation of "yeses" (as in, "Yes, I'm interested in that job") and "nos." The final tally of yes responses is 13, and so 13 rÃ‰sumÃ‰s are printed out and overnighted to the client.
A successful search--or so Hart hopes. There's always the possibility that the client will balk at those 13 candidates and insist that Hart redo the search with slightly different parameters. "Waffling costs us a lot of money," says Hyman. "The business model wasn't built to be profitable redoing a search 20 times." He says he's sometimes had to draw the line with especially finicky clients: "It'll drive you out of business if you're too nice."
Such "massaging" is necessary about 20% of the time. And another 10% of the time, Career Central is unable to net those 10 qualified, interested candidates at all. That situation is another money loser: it means Career Central doesn't get paid, even though it has already incurred most of its variable costs, which total $1,200 per search.
Hyman says that 150 business schools, including all the major ones, are working with Career Central. The company's literature lists among its clients such whiz-bang technology companies as Amazon.com, Marimba, Cellular One, and PeopleSoft, as well as blue-chippers like Bank of America, NestlÃ‰, Toyota, and Andersen Consulting. More than 50,000 M.B.A.'s--about 85% of them graduates already in the workforce--have registered in its database. (That's out of the roughly 1 million M.B.A.'s U.S. business schools have churned out over the past 12 years.)
Other numbers are rather less impressive. From December 1996 to August 1998, Career Central performed about 700 searches, resulting in 100 job placements--a placement rate of 14%. Until recently, a placement was a rare enough event to occasion a minor celebration in the Career Central offices, though Hyman is shooting to boost the rate to at least 30% by the end of 1999, and ultimately to 50%. While most placements have been in the ranks of middle management (average salary: $90,000), a few have been executive-level positions: the company once placed a vice-president at E*Trade.
"I was going to make it into a war room or something," Hyman is saying, gesturing dismissively around his all-but-vacant office, "but I haven't had time." One of his few wall adornments is a soiled place mat, attractively framed, bearing the scribbled words "$1 million in 1997" and six signatures.
That's the revenue goal the team of founders set for themselves back in June 1996. They didn't make it: 1997 revenues checked in at $560,000. The company projects revenues of $4 million for 1998, $12 million for 1999, and $35 million for 2000. Losses, meanwhile, were approximately $550,000 in 1996 and $600,000 in 1997, and the company projects a loss of $2.5 million in 1998. But Hyman hopes to catapult quickly into the black, earning profits of $3 million in 1999 and $12 million in 2000. His rationale for such optimism? Once Career Central's placement rate improves, he figures he can raise prices. He's also eyeballing expansion opportunities in Europe and Asia, and the possibility of using his sales force to sell ancillary items, such as subscriptions to career-related magazines.
Much of this year's loss was due to a twist in strategy. Abandoning its exclusive focus on M.B.A.'s, over the summer the company changed its name from MBA Central to Career Central and launched two new services: one for software developers, another for marketing professionals. Hyman doesn't rule out the possibility of entering other niches to further leverage, as he puts it, the company's existing technology base.
Success or failure, of course, will hinge directly on how many searches Career Central can sell and complete. Subtracting the $1,200 it costs to perform each search, and the fact that 13% of sales currently come from "subscriptions," whereby customers receive a 20% discount for buying searches 10 at a time, Career Central makes a gross profit of $1,717 on each search. Overhead expenses are currently running at $4.7 million annually ($700,000 for engineering, $1.3 million for marketing, $2.7 million for selling, general, and administrative expenses). To reach breakeven, then, Career Central calculates that it needs to conduct approximately 1,750 (successful) searches a year. Hyman hopes to perform 1,500 this year, and 4,500 next year.
For now, anyway, Hyman can draw on a war chest flush with cash to try to hit that mark. Following three earlier rounds of venture-capital financing that totaled $5.1 million, last August Career Central closed on another $9.3 million from IDG Ventures, Arthur Rock & Co., Allen & Co., SoftBank Technology Ventures, and Technology Crossover Ventures. "That should last us until the endgame or going out of business," says Hyman. "I can't imagine pissing through $10 million. If we can't figure it out with $10 million, we're not going to make it."
Curiously, about 5% of Career Central's business has come from the very group it wants to render extinct: headhunters. Some high-priced recruiters, it seems, have quietly been using Career Central's $2,995 service as a cheap means of finding candidates--sort of like the San Francisco restaurant once discovered to be purchasing freeze-dried food, tarting it up a bit, and serving it to patrons at gourmet prices. Or so it seems to champions of Career Central's approach.
Hyman clearly finds the irony delicious. "They're middlemen on the verge of extinction," he declares of the old-fashioned, Rolodex-flipping headhunters. "Those guys are gone. History. Toast. Stick a fork in 'em."
But before Hyman and his band of technologists can fire up the hibachi, a few things have to go right.
"The biggest challenge to this company is that we have three different customer sets, whose needs often conflict and only one of whom pays us," Hyman says. And indeed, the company suffers from a classic chicken-and-egg syndrome: to attract clients, it needs a robust database of job seekers; but to attract job seekers, it needs a strong list of clients. In fact, Cindy Lundin, originally in charge of drumming up new job candidates, once bore the informal title of "chicken-coop director." The solution, initially, was to give away free searches to clients in exchange for the right to use their names on Career Central's client list. That practice has tapered off, but the challenge remains to expand both constituencies simultaneously. "If the balance gets out of whack," says Lundin, "it'll be a problem."
On the chicken side, Hyman says, he'd like to grow the database of job-seekers by a factor of five over the next 12 months. Besides its relationship with business schools (Stanford's career center distributed the registration software with a letter touting it as "a valuable service designed specifically for M.B.A.'s"), the company has formed a strategic alliance with on-line job board CareerMosaic. A partnership with several International Data Group publications, including Computer World, has resulted in an aggressive advertising campaign. And to encourage existing members to update their profiles via Career Central's Web site and thus remain lifelong members ("If they don't update, we lose them," notes Hyman), the company distributes a monthly electronic newsletter full of career-management tips.
On the egg side, a nationwide sales force of 25 finds paying clients. The sales job can be difficult, notes Lundin, "because we're offering something brand-new. We can't say, 'We're the best x that's out there.' " And hiring at many companies is decentralized, with departmental hiring managers, not the human-resources department, responsible for the decision. A study completed in August by the publisher of Electronic Recruiting News reported that, out of 2,620 recruiting professionals polled, 13% were aware of Career Central's existence.
That same study reported that Career Central ranked in the bottom quartile of the top 45 electronic-recruiting services, in terms of both overall customer satisfaction and quality of results. "On a score of 1 to 5, nobody gave them a 5 out of 5 on any of those metrics," says John Sumser, the study's author. "And you've got to have at least some of those, or else you don't have a word-of-mouth campaign."
Oh, and Career Central also faces a bit of competition. One industry analyst estimates that fully 60% of recruiters have established some sort of on-line presence. Barbara Ling, author of The Internet Recruiting Edge, notes the explosive growth of niche sites, such as the one for African American M.B.A.'s. Korn/Ferry International, the world's biggest search firm, has launched its own Internet initiative, FutureStep, with even fancier database- matching technology. And perhaps most scary of all, two giants have moved into the on-line recruiting space--Excite, with its purchase of start-up Classifieds2000 Inc., and Amazon.com, with its acquisition of Junglee Corp., a maker of "spidering" software that automatically sifts through job postings on company Web sites and deposits them in a job bank.
Finally, Career Central's success to date has been built on a sizzling economy and job market. What happens when those cool off? "Executive searches are very expensive. We'll start to look like a value," argues Hyman. "And we get a flat fee, so when salaries drop, revenues won't. Plus, if we're smart, we'll use a downturn to acquire a ton of job candidates.
"It's going to happen," he says. "I don't lose a lot of sleep over it."
Jerry Useem is a senior writer at Inc.
NAME: Jeffrey Hyman
PERSONAL FUNDS INVESTED: in the low six figures
EQUITY HELD: about 15%
SALARY: about $60,000--"only enough to get by. The money can do more good by leaving it in the company."
PREVIOUS JOBS: product management at Intuit; sales and marketing at Black & Decker
What The Experts Say
Man Jit Singh, chief executive of FutureStep, an on-line recruiting venture of Korn/Ferry International and the Wall Street Journal
A 14% placement rate--I chuckled when I saw that number. And I did some quick math. If you're paying $2,995 per search, that works out to a real cost to clients of $21,500 to make a placement. And since the average salary of each placement is $90,000, that comes out to a 24% commission, which is almost precisely what a contingency recruiter would charge. Except in this case, you have to do all the work, all the screening, yourself. That changes the economics of using Career Central dramatically.
I also think Career Central is attacking the wrong problem. With the connectivity of the Internet, finding rÃ‰sumÃ‰s is becoming the easy part--a commodity. The hard part is assessing the data. And Career Central performs a low-end keyword match and does little in the way of assessment. It's Kmart: you get it off the rack and see if it fits.
Margaret Riley Dikel, publisher of The Riley Guide, a primer on Internet job searching
I wish these guys well, and I think their niche approach is smart, but I think they're setting themselves up for some unexpected pitfalls. For instance, this notion that they're providing 80% of what a retained executive-search consultant provides--it's far less than that. Identifying a list of candidates is actually a fairly quick process. Where headhunters really earn their money is wooing candidates to the altar, which in a labor-shortage environment is becoming particularly difficult. Recruiting, as they say, is still something of a "black art." The people at Career Central may know technology, but it doesn't sound to me as if they really know what a headhunter does.
As for Hyman's comment that he "can't imagine pissing through $10 million," he should take a look at Intellimatch. It had all sorts of exclusive technology that set it apart, a database of 300,000 candidates, and $10 million in venture capital. And it declared bankruptcy last January--$2.3 million in debt. Building a brand in this market is not cheap.
Paul Hawkinson, publisher of The Fordyce Letter, a search-industry newsletter based in St. Louis
The concept is certainly not new. The only new ingredient is the Internet, and that doesn't necessarily make for a more tasty cake. Back in 1960, there was a company called Careers Incorporated. It used computers to do the same sort of discounted rÃ‰sumÃ‰ generation. The model has replicated itself at least a dozen times since then, and I don't see any of those companies still around.
The fallacy in all of these types of operations is that they view the process as merely slot filling rather than problem solving. Most managers fail not because they can't do the work but because they don't fit in with the company's culture. So as Bill Vick, the founder of Recruiters OnLine, has said, recruiting remains a contact sport. Career Central may call its employees "recruiting search consultants," but they're still just coding clerks who don't have the foggiest notion about a company's personality, or culture, or the fact that its CEO won't hire anyone who's taller than he is.
I have no doubt Career Central is going to put together some glitzy brochures and turn some heads. And it will even find some customers, because the rapid turnover among HR professionals makes them a relatively easy target for Career Central's services. But for Hyman to say that the traditional headhunter is "toast" is a reiteration of a forecast that I've heard for decades. Surprise--recruiters are still around and will be for decades to come.
Michael Messier, vice-president of human resources at Open Market Inc., a four-year-old software company based in Burlington, Mass.
The price is low enough, and with Career Central's money-back guarantee, it's a decent value proposition. The worst that could happen is that I'm not happy with the service and I ask for my money back. But I'd caution Hyman about his statement that the recruiting industry hasn't changed for 100 years. It's clearly not true. I started my career in the early 1980s as a headhunter, when it was basically file cabinets full of rÃ‰sumÃ‰s. Now at least 75% of large recruiting firms have some kind of sophisticated rÃ‰sumÃ‰-retrieval system such as Resumix or Restrac in place. Those are databases into which you can fax or E-mail or scan hundreds of thousands of rÃ‰sumÃ‰s and then use optical character recognition to sort by relevance. Technology has been applied.
William Egan, partner at Burr, Egan, Deleage & Co., in Boston
Hyman has built something of value here, but it might be of more value as a wholesale, not a retail, operation. Hyman looks at the fact that many headhunters are using his service and seems to take it as proof of headhunters' impending obsolescence. But I would think that headhunters are actually grateful for, not fearful of, the existence of Career Central. It allows them to cheaply outsource their front-end task of finding candidates and focus on their real value-creating activity: the personal element. And the personal element is something Career Central will never be able to offer if it sticks with its arm's-length "Switzerland" approach, which I think makes for a pretty incomplete retail concept.
So Career Central might consider becoming a wholesaler to executive-search firms. That, of course, would require a less-ambitious conception of itself--realizing it's an evolutionary provider of efficiency rather than a revolutionary new business model. And if headhunters were to become his new clientele, Hyman might have to tone down the "stick a fork in 'em" rhetoric a bit.