Jobless Recovery Brings Hope Of Further Gains to Recruiter

CORPORATE FOCUS

By RiSHAWN BIDDLE

Staff Reporter

Korn/Ferry International shareholders haven’t had much to celebrate over the last two years.

First, the recruiting giant went through a wrenching restructuring after getting hit by both the jobs recession and the dot-com bust. Then, it found itself averting a liquidity crisis.

But recently, the company’s shares have hit new highs on encouraging news for the recruitment sector.

Shares in Los Angeles-based Korn/Ferry reached a 52-week high of $12.50 on Dec. 16, more than double its 52-week low of $5.59 reached Feb. 13. At a closing price of $12.38 on Dec. 17, Korn/Ferry’s shares were up 65.5 percent year to date.

The gains followed Korn/Ferry’s announcement on Dec. 10 of its first profitable quarter in more than two years. It reported net income of $2.2 million for the second quarter ended Oct. 31, compared with a net loss of $18 million loss for the like period a year earlier.

Founded in 1969 as a two-man shop, Korn/Ferry became the nation’s largest executive recruiter, in terms of revenues, by creating practices for specific industries. In 1998, it began moving downmarket, launching an online recruiting division called FutureStep that targeted middle managers. It expanded into college recruiting two years later by acquiring another online recruiter, JobDirect.com.

With costs from these ventures and a recession cutting into fees from its historical recruitment business, Korn/Ferry ran up a string of nine unprofitable quarters.

To turn things around, it shut down JobDirect, then turned FutureStep then losing $1 million a month from a dot-com to a more conventional recruiter. It began focusing on large-scale hiring projects, such as a contract it signed with the Securities and Exchange Commission in October to recruit 80 new accountants.

Korn/Ferry also halved its workforce to 1,400, jettisoning top executives such as James Boone, president of the Americas and its chief financial officer. It took other cost-saving measures, such as eliminating two of its three e-mail systems and subletting more than 400,000 square feet of excess office space.

“We were cutting costs before anyone else and we got criticized for it,” said Korn/Ferry Chief Executive Paul Reilly. “But now we’re in position for growth while everyone else is still cutting.”

Rough landing

Reilly found himself in cost-cutting mode upon joining the firm in June 2001 after running accounting giant KPMG’s international operations. More than a year later, he had to seek a rescue after the company breached covenants on its $100 million line of credit. It found a white knight in private equity firm Friedman Fleischer & Lowe, which bought a $50 million package of debt and preferred stock convertible to an 11 percent stake. According to its SEC filings, Friedman Fleischer hasn’t yet converted any of the shares.

From here, Korn/Ferry is betting on corporate expansion in sectors such as financial services and tech, as well as replacement of positions that went unfilled during the recession.

In the last six months, the company picked up 31 new “senior client partners,” including Amy De Rahm, a financial recruiting specialist it lured from rival Spencer Stuart.

The company is also looking to expand its presence in Europe, where it gets 23 percent of its recruiting revenues. Reilly spent part of last week in Frankfurt, Germany looking for new recruiters.

But many parts of the European market are still reeling from recession. Germany has seen a string of bankruptcies, including the collapse of the aviation outfit Fairchild Dornier.

Another cloud is an economic recovery that has been short on job growth, leaving Korn/Ferry and its rivals, including Spencer Stuart and Hedrick & Struggles, fighting it out with boutiques and one-man shops.

There’s word that some recruiters are cutting their employer-paid fee, normally about 33 percent of a new hire’s total compensation package, to 25 percent and lower in some cases.

“A guy working out of his home can cut his fees more than a Korn/Ferry could ever possibly do,” said Ron Anderson, a partner with San Francisco-based recruiter Anderson McGinley.

Reilly said Korn/Ferry hasn’t cut its fees to lure new business, although its fee revenue has been on a downward trend. Revenues for the third quarter were $82 million, down 4.3 percent versus the like year-earlier period. He attributes the decrease to the company’s smaller size after the restructuring.