Korn/Ferry International knows what it’s like to be in the doldrums and plans on not being there again.
After the dot.com crash, Sept. 11 terrorist attacks and the global economic recession that followed, the world’s largest executive search firm saw its margins fall and its stock plummet more than 80 percent.
Today, the Los Angeles-based company has largely recovered, but more importantly it’s taken steps to broaden its business model. The senior-level executive search specialist not only has improved its middle management search capabilities, but ramped up its human resources consulting services to help clients better utilize the executives they already have.
“One of the most important things is that they’re diversifying,” said Mike Carney, an analyst with Aperion Group LLC. “Even though executive recruitment is still the largest part of their business, they’ve been very effective in developing other services they can sell to those same clients.”
Korn/Ferry is now considered well positioned in its industry to capitalize on low unemployment, an expanding global economy and an aging executive workforce all combining to create one of the tightest hiring markets ever for top talent.
The middle-management recruitment unit, Futurestep, focuses on professionals and managers with salaries in the $75,000 to $150,000 range. It’s taking advantage of a trend among companies that are attempting keep their human resource expenses down by outsourcing more of their recruitment efforts.
The company expects to build on that by expanding its leadership training business. Korn/Ferry used part of its healthy cash flow in August to acquire for $24 million Lominger Ltd., a provider of research-based leadership development tools for individuals and organizations. The company plans to train its own development consultants in Lominger’s behavioral-based analysis methods.
Another new business line is a compensation and benefits consultancy that aims to help directors avoid pitfalls in compensating their top executives, which has resulted in several high profile scandals this year.
“We’re trying to look out 10 years and transform the firm from being a world class executive search firm to being a truly diversified H.R. solutions firm,” said Chief Operating Officer Gary Burnison, who is also chief financial officer of the $1 billion market cap company.
Referral business
Futurestep is striving to reach what has been an underserved niche: large companies that need to hire a lot of managers at the same time for an expanding division or new overseas office, said Tobey Sommer, an analyst with SunTrust Robinson.
While there are plenty of search firms able to perform the task in their home county, few have Korn/Ferry’s contacts in more than 36 overseas markets. It also means potential cross referrals.
“A referral to Futurestep can come from one of their executive recruiters (and) a several-month project can translate into high-level executive assignments later on,” wrote Sommer, in a recent research note.
With middle-management recruiting a $15 billion to $20 billion business globally, the company has the opportunity to add hundreds of millions of dollars to its bottom line, Burnison said.
Korn/Ferry’s reinvention has not gone without a hitch, though.
Its reputation and profit margins took a hit a few years ago when it signed up more Futurestep clients than it could handle. The unit, which was started seven years ago but wasn’t ramped up until the economic downturn, took in good revenue from initial signing fees, but then failed to meet client deadlines.
“In 20/20 hindsight we probably took on too much business and promised clients more than humanly possible in the required time frame,” Burnison said. “Now we only take on the business we know we can handle,”
The company at times also fell victim to circumstances beyond its control. Burnison recalled that Futurestep scored a large claims adjustor recruitment contract early last year only to have many of their best prospects tied up in the Gulf Coast for months in the wake of Hurricane Katrina.
Even so, the company’s stock, at $26.64 a share, is up more than 33 percent over the past year as EBITA (earnings before interest, tax and amortization) margins have stayed above 15 percent for the second consecutive fiscal year.
For the fiscal 2007 first quarter ended July 31, the company reported net income of $13.7 million (31 cents per share), up from $11.6 million (27 cents) a year earlier. Revenues were up 25 percent to $161 million and in every industry and geographical area.
But even analysts who are complimentary about the company’s recent performance are cautioning investors that there may be little upside left in Korn/Ferry’s stock.
While the company is globally well-positioned with an extensive office network across Asia and Europe, SunTrust’s Sommer, who has a neutral rating on Korn/Ferry shares, doesn’t expect profit margins improving much further.
Aperion’s Carney is more optimistic, seeing the pending loss to corporate America of retiring baby boomer execs as a significant growth market for the company’s flagship business. In addition, booming overseas markets such as China and India, where Korn/Ferry has a strong presence, have an even greater shortage of experienced executive talent.
“Even a cyclical slowdown or recession isn’t going to reduce the secular demand for companies to employ a recruiter for every single executive opening,” said Carney, who is maintaining his “buy” rating for now.
