Last week, CorTalent and Keystone Executive Search announced a merger to form a new firm called Strategic Talent Partners. The merger marries two of Minnesota’s largest talent firms, whose complementary specialties will create a new firm that will jump into the state’s top five in size, with broader service offerings across executive search and leadership solutions.

This merger is the latest in a wave of consolidation occurring within the talent solutions industry. Strategic investors and private equity firms alike are growing their exposure to the sector given its attractive economics and deep competitive moats resulting from embedded client relationships. But leaders in talent recruitment say the industry has changed considerably over the years, shifting from niche services to broader, more holistic offerings.

Changes in the recruiting industry hold lessons for leaders across sectors.

Understanding the talent business

While executive search and contingent staffing solutions are often offered by the same firms and thought of interchangeably, they are vastly different business models and service offerings. Broken into various subsectors, the talent industry offers solutions such as contingent staffing (also known as interim hire), executive search, and direct hire. These three distinct solutions each have their own value-add to customers, and long-standing business models.

According to Tony Sorensen, Founder and CEO of St. Louis Park-based talent firm Versique, direct hire staffings are especially helpful for companies whose talent acquisition team doesn’t have the bandwidth to go out and fill all of their open positions.

“Staffing and recruiting agencies can fill this gap,” Sorensen said.

When a candidate gets placed via direct hire, the customer pays the firm a one-time fee of a set percentage of the first year salary.

Macroeconomic factors such as an aging workforce and what has so far appeared to be a “soft landing” are resulting in increased job creation and low unemployment rates. These dynamics result in a structural need for companies to engage staffing and recruiting agencies to keep up.

“I believe the (direct hire) industry is set for a nice run,” Sorensen said.

The executive search business, meanwhile, has not seen much evolution over the years. Designed as a high-touch process meant to help customers find chief executives, board members, and business unit leadership, the model offered to customers involves researching and recruiting prospective candidates for a role, presenting a slate of prospects to the customer, and further whittling down a short list of candidates until offering and hiring the best fit.

Partners at search firms spend their careers developing deep rolodexes of candidates that they leverage when a relevant opportunity presents itself. This information advantage, combined with specialized expertise in running a search process, is one of the primary reasons why, according to research conducted by Censuswide, 93% of business leaders would rather use executive search consultants than in-house recruitment to fill senior positions.

Given the time required to conduct a search process, firms tend to offer services on an hourly-fee and/or retainer basis. It’s also worth noting that 40% of retained searches fail to result in a hire, according to a survey conducted by the Executive Search Information Exchange. Further, the business model is facing challenges of its own. Korn Ferry, one of the biggest leaders in executive search globally, experienced an 11% year-over-year decline in its executive search business, according to the company’s Q2 FY’24 investor report.

As a result of this decline, Korn Ferry has taken strategic steps over the past several years to diversify its business. In Q2 FY’22, executive search composed 37% of the company’s total revenue. Two years later, in Q2 FY’24, that figure dropped to 29%.

One way Korn Ferry has diversified is through acquisitions in areas adjacent to the human resources space. For instance, the company has bought up HR consulting businesses, executive coaching services, and contingent staffing businesses.

In 2023, Korn Ferry acquired Twin Cities-based Salo. According to Amy Langer, one of Salo’s co-founders, Korn Ferry was attracted to Salo as a way to gain exposure into the contingent staffing sector, where Salo had been experiencing success for more than 20 years and Korn Ferry was just beginning to gain a foothold.

“Korn Ferry didn’t have a big footprint in Minnesota and is primarily known as an executive search firm,” Sorensen said, speaking as a longtime peer of Salo. “So, to acquire a firm like Salo, who has a large Minnesota footprint and is active in the contract space, was very attractive to them.”

Contingent workforce solutions are different from direct hire because in a contingent worker situation, the staffing firm acts as the employer of record, not the customer company. A professional might be embedded in a company for years, and look and act like a “normal” employee, but is paid hourly by the staffing agency, who is paid via contract by the customer. The spread between what the staffing agency gets paid, and what they pay the contractor, is how they make a profit.

“Not only did Salo have a deep connection (with their clients) and great people, they also had a recurring revenue model,” Sorensen added.

Langer says Salo was able to fill a hole in the marketplace between traditional temporary staffing — where agencies “treated people as temps” — and big consulting firms, who would take care of their people and do long term projects. There wasn’t a lot in between, where people who were quality professionals could do project-based work.

“When we started Salo, doing project-based work was unheard of for anybody who was good,” Langer said. “People would ask, ‘Why would they do project work? Can they not get a real job?’”

Nowadays, the gig economy is a core component of the American workforce. Upwork’s 2023 Freelance Forward Report found that an all-time high 64 million Americans performed freelance work in 2023, representing 38% of the entire U.S. workforce.

This workforce shift has certainly been influenced by workers’ desire for flexibility and ownership of their career. But it’s also been influenced on the demand side. Whereas companies used to worry that contract workers wouldn’t be committed, most have come around to realizing that a contingent workforce arrangement often makes more sense than hiring full-time.

“For some CEOs, using contingent staffing is a strategic imperative,” adds Langer. “How gig workers and contract professionals are seen has changed dramatically.”

Contingent staffing firms have another advantage highly valuable to their customers: speed. While it might take a client two to three months to fill a job, a firm like Salo can fill them within four to five business days.

Investors are circling

Talent firms, particularly those with contingent staffing specialties, boast a highly attractive business model featuring low to non-existent capital expenditures, embedded client relationships, and recurring revenue models – not to mention an ability to scale quickly. These dynamics have attracted interest in the sector from both strategic acquirers (Korn Ferry, for example) alongside private equity firms.

The private equity playbook often, though not always, consists of using debt to finance a purchase of a business. Once acquired, the private equity firm will attempt to optimize performance of the business, while using its cash flows to pay down the debt before again selling the company five or so years down the line. The private equity firm hopes to realize gains upon the sale of the business by selling it for more than what it paid. But even this isn’t a requirement, as the use of debt at purchase and paying it down throughout the holding period allows the firm to realize a gain, even if they sell the business at the same price.

It’s not unlike the concept of “flipping” homes.

The common use of debt in private equity transactions requires consistent revenue from the purchased business in order to be able to pay off the debt. The lack of consistent revenue is why a high-tech company that invests heavily in R&D, exhibiting both high potential and high risk, isn’t an attractive purchase for a PE firm. However, human capital management companies such as executive search and contingent staffing have characteristics inherently ripe for PE investment.

“I’m getting calls all the time from private equity firms asking if we’re interested in talking (about selling),” Sorensen said. “They’re interested in a variety of services, but especially the direct-hire staffing model that has blue chip, Fortune 500 clients continually hiring over and over. That’s attractive due to the recurring revenue model.”

Twin Cities private equity firms have been intrigued by the sector. Minneapolis-based Shoreview counts executive search firm Diversified Search Group among its portfolio. Since the initial investment in 2019, they’ve added on six new companies to become one of the fastest growing executive search firms in the country. This is an example of a “buy-and-build” strategy, where an acquired company now backed by a private equity firm can expand quickly.

Sorensen says this is why a business owner would be open to accepting a private equity investment. “You have owners that want fast growth, but lack the capital that private equity has. Owners need people that know how to scale, grow, and sell companies.”

However, there are challenges that come in any acquisition, but particularly in a talent firm where what matters most is culture and people. Langer attributes Salo’s early success to their holistic focus on the employee experience at a time when staffing agencies treated their people as temporary and disposable.

“That was our secret sauce,” Langer said. “We could get great people because we treated them like great people.”

Sorensen says the main challenge that hopeful investors must overcome is maintaining a strong culture and growing at the same time. A prevailing perception of private equity is that it’s all about the almighty dollar and never about culture, but Sorensen says that narrative isn’t always true.

“Founders of talent firms have spent their entire career trying to leave a legacy, and building a culture that works not just for the owners, but works for the employees, their clients, and the community,” Sorensen said.

What does consolidation mean for customers?

Sorensen says that the way customer relationships are developed in the industry is changing. Talent firms used to be viewed by customers as a transactional partner, but now, talent firms are trying to develop deeper relationships with those that fit their ideal customer profile: CEOs, CFOs, CHROs.

“We want to be the one source for all of the key initiative hires,” Sorensen said, reflecting a change in strategy from focusing on one niche service, such as executive search, to a broader suite of solutions. “That’s how we’ll win long term.”

Langer says that increasing consolidation could go both ways for customers. On one hand, consolidation could decrease competition, which might have negative repercussions. But this likely will not be the case, given the standardization of pricing across the industry and low barriers to entry for new firms if prices were to become exorbitant. In a more positive outlook, she says clients could benefit from talent firms with different specialties coming together.

“Each firm might have a little bit of a special sauce, and then coming together could be a stronger team to be able to support the client,” she said.

Sorensen believes this was the rationale behind the merger of CorTalent and Keystone Executive Search to create the new Strategic Talent Partners. Prior to the merger, they both worked with privately-owned and employee-owned companies, but varied in the organizational levels they focused on. Keystone Executive Search focused primarily on C-level talent, while CorTalent has done a few organizational levels down: think director, vice president, and other leadership roles. Together, they should be able to add additional value to client relationships and be more of a one-stop-shop for leadership recruiting than before.

“Mary (Nutting, Owner & CEO of CorTalent) and Mike (Frommelt, Owner & CEO of Keystone Executive Search) joined two forces that both have a great name in Minneapolis,” he said. “Now they can go into companies and offer a full suite of services versus just being able to help them in one small little niche.”

As customers demand a more holistic suite of services and private equity enters the fray to execute profitable buy-and-build strategies, it’s inevitable that further consolidation will occur. But among all this change, there will always be a need for great people at great companies. Talent firms aren’t going anywhere.