Law of 3, innovation and decline of job search firms

“Slower hiring, falling commissions, force over 7,000 job search firms to shut shop”
-Hindustan Times, November 26, 2013.

Above news in Hindustan Times should not surprise anyone who has in some way been associated with job search firms (yours truly worked with two such firms in early 90s).

Early 90s was golden era for placement agencies. Indian economy had opened up and India business houses started diversifying into every possible sector (concept of core competence was yet to make sense), this resulted it lot of business of agencies. Euphoria lasted till recession in 1998.

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Next wave was IT and Dotcom boom. Lot of placement agencies mushroomed during this phase. Some were façade for illegal activities of HR managers, where placement agency was front to recruit candidates for their own company and to collect commission.

Job search became lucrative business due to high commission (8.33% to 30% of annual cost to company), in addition to this some even charged retention fee. There was no problem of getting manpower to work for such agencies. Indian universities ensured unlimited supply of MBA graduates/Industrial Psychologists, who were available at a cheap rate. High commission and low manpower cost ensured good margins.

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But good times don’t last for ever. Innovative ideas and Jagdish Sheth’s global law of 3 changed everything.

Online job portals and social media (LinkedIn, Facebook etc.) provided cheaper and more reliable options to placement agencies, plus organisations started putting pressure on their in-house staff to hire on their own.

Globalisation resulted in global executive search firms getting into Indian market (BRIC is future!) and started eating into business of local agencies, besides they were better equipped to hire staff from global pool. Some agencies got into more reliable model of supplying temp manpower (which ensured recurring revenue as against one time placement fee).

It is predicted that in next 5 years- 5 billion people will be connected, so new models, which we can’t foresee now, will emerge.

Generalist recruitment firms without tie-up with global agencies or having additional source of revenue through supply of temp manpower are not likely to survive. As per Jagdish Sheth’s law of 3, there are always three major competitors in any free market within any one industry. Others will survive only if they get into niche segment.

Even if economy improves it is unlikely that any of these 7000 will reopen in fact more and more agencies will face closure if they continue to remain generalist recruitment firms.

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