By Scott A. Scanlon, CEO Hunt Scanlon Media
For more than a decade, steady growth has been a way of life at ZRG Partners. Earnings alone, without taking on debt, carried the Rochelle Park, NJ-based executive search and human capital management firm a long way as it won more clients, acquired operations, and made inroads into new territories. But as the mid-sized firm followed its customers around the globe and entered the European and Asia Pacific regions, new challenges inevitably arose. Increased complexity and fixed overhead would alter the dynamics of the firm, which serves clients in an array of business markets, including aerospace & defense, consumer, cybersecurity, education, financial services, healthcare services and solutions, industrial, life sciences, non-profit, private equity & venture capital, and technology.
Too many executive recruitment firms, CEO Larry Hartmann and his team knew, have run aground because they were unprepared and lacked the capitalization needed to meet the tests and opportunities that come with explosive growth.
That was a mistake that ZRG Partners was determined to avoid.
Early this year the company secured funding from Northcreek Mezzanine, a lower middle-market private equity firm in Cincinnati, to help fuel its continued strategic growth. “We were fortunate to grow significantly in past years without outside capital but we knew that to continue to expand we would require a bigger balance sheet and more options so that we could consider opportunities as they surfaced,” says Larry.
A Market Gap
The first mission was to add extra liquidity to ZRG’s balance sheet. Next, the firm wanted to use its funding to tackle needs and opportunities in the markets. ZRG was already adding three to four managing directors a year but now began bringing aboard even more. It also looked to make more acquisitions. In 2014, ZRG bought New Directions Search, outside of Chicago. The firm also executed a couple of successful team lift-outs. “All of this has been self-funded,” says Larry. “Now we can consider additional strategic deals that help us broaden our market coverage. Liquidity allowed us to take advantage of some industry speed bumps that occurred in 2015, including bringing in some great talent – because we put our fundraising in place. The timing worked out well for us.”
Two main triggers drove ZRG’s approach to accelerating growth. One was the market gap between the top five search firms, the boutiques, and the global networks of franchises that work to support clients globally. “There are, however, very few company-owned, one P & L, mid-sized search firms,” says Larry. “The list grows even smaller if you consider global mid-sized firms. We have been finding that clients appreciate less ‘hands off’ issues and more flexibility that many boutiques offer, but they still look for search firms that can partner with them and handle work around the world. Additionally, larger clients have been shrinking their search-partner lists in order to work with a smaller number of search partners and so now we fit that need.”
The second factor revolved around ZRG becoming more active in hiring top managing directors in a number of specialty sectors. “This year we have added nine senior managing directors to our team and will continue this growth annually while layering in strategic acquisitions that make sense,” says Larry.
Complexity as a Market Advantage
Oftentimes, professional service organizations that seek outside capital funding are positioning themselves for going public down the line. Larry himself was a founder and board member of Rockford Industries, a specialty finance and lending company that he helped take public on NASDAQ and that was ultimately acquired by American Express. He’s skeptical that public ownership is a smart approach for a search firm. “If you are public, you have to show growth year-over-year despite market conditions,” he says. “Shareholders drive behavior. Executive search businesses that are public have inherent challenges. In 2001 and again in 2008 search firms’ revenues suffered with 20 to 30 percent revenue drops, and quickly went from notching profits to posting losses. This will happen again and the public markets will react badly; public investors do not like volatility in a stock much less an industry. The second challenge is alignment to the most important constituent – and is that the client or is it the shareholder? While every company must balance this, I know that as a public company, shareholders garnish a bigger share of importance, especially when faced with challenges, and this can lead to poor service decisions.”
When ZRG was seeking funding, Larry remembers, a number of partners from private equity firms expressed reservations about investing in a professional services company. Many pointed out that “my assets go down the elevator every night and, for that reason, executive search is not their cup of tea,” Larry says.
Still, there are measures that companies can take to keep such “assets” in place. Some firms employ legal ploys and agreements, such as non-compete contracts and bully tactics to keep talent from leaving for other opportunities. ZRG, however, takes a different tack. “We have tried to build a business based on positive values – to attract top talent, pay at the higher end of the range and put partner income into a formulaic outcome, not subjective or based on company success,” Larry says. “Many top billers are frustrated over not having control over their income. Just consistently doing what you say you will do and not changing the financial structures with employees makes all the difference in the world in creating trust and retention.”
For ZRG, another key to keeping good talent is rooted in the firm’s passion for addressing search globally. Local work is fine, Larry explains, but when a firm is doing business in more than 30 countries, it quickly becomes apparent how complicated running such an enterprise can be. “It takes capital, it takes leadership, and it assumes that those in charge can effectively handle and manage risk,” he says. “This complexity has turned into a market advantage for us in recruiting and retaining top talent.”
Before joining the search industry, Larry viewed the field through the eyes of a user of its services and says he was less than impressed with the client deliverables. “I felt like I was paying large fees and, in return, I received CVs, opinions, and references. The value prop that the recruiter’s opinion should carry the day didn’t resonate with me, and it doesn’t today with most clients.”
Those insights helped lay the groundwork for what ZRG would become. “In bringing in more data, analytics, and technology to executive search and trying to find ways to truly have a value proposition that clients valued, we felt we would stand out in the world of recruiting,” Larry says. “If you think about it, in every part of your business you have access to strong data, but when it comes to hiring key talent it often reverts to opinions and gut feel. We have tried to address this at ZRG with some of our unique tools and our approach.”
Larry says his previous experience in raising capital and in mergers and acquisitions has been beneficial in building the kind of search firm he envisions. “While some of our deals at ZRG are certainly smaller, with less zeros at the end, the same principles have applied in terms of structuring, funding, and successful integration. Certainly my past professional experience has afforded comfort to our investors and key employees, and I know that my past board work has been insightful in guiding me ahead. I think all of it has prepared me for accountability to others.”
Scott is chief executive, editor-in-chief and co-founding partner of Hunt Scanlon Media where he oversees all of the company’s editorial content for Executive Search Review, its daily newswire briefings, and the company’s market intelligence reports. Scott oversees all news, editorial content and social media distribution initiatives for Hunt Scanlon. Scott is a renowned expert on talent management, executive search and leadership solutions strategies and he is regularly quoted by The Wall Street Journal, The New York Times, Businessweek, The Financial Times, The Economist, Forbes and other major media. Scott has authored several business and career books with John Wiley & Sons, including Navigating Your Career, which was selected as “One of the 30 Best Business Books in 1999.