Headhunters

Yesterday I had a really interesting lunch with Charlie O’Donnell. He is looking to expand his startup, Path101, and mentioned that his inbox was inundated with offers from headhunters. He couldn’t fathom their exorbitant fees. I can certainly understand the sentiment. Headhunters have an industry standard fee – 20% of the first years salary. Thats incredibly expensive in a world with monster, linked-in, theladders, and hundreds of other nitch job posting sites, not to mention vertical job search sites like indeed and simplyhired. So how do headhunters get away with those massive fees? Collusion? Cartels? Mafia-like market failures?

I didn’t give Charlie a great answer yesterday, so I thought I’d lay out my thoughts here. The first and most obvious answer is that the viability of online tools varies by industry and experience level. It could be that executives with experience in Global Operations and Logistics might not use job postings as much as recent college grads and Web Developers. That explanation has some weaknesses. It provides no structural or fundamental explanation as to why headhunters exist, and especially why they can charge such high fees. There has got to be a better reason than ‘older people aren’t web savy’ and ‘high-powered people won’t spend time sifting through job postings.’

I believe the stronger explanation has to do with the marginal product of labor. Lets assume a key executive at a large and hierarchical company quits. The projects and peopled managed by that executive will quickly lose their direction and leadership. They might be able to function independently, but they will certainly be less effective. In a large organization, and for a high level executive, this may amount to significant declines in productivity for the entire company. Thus, the cost of leaving that position open is very high. Here, a headhunter, “Executive Search Firm”, steps in and uses its contacts, specialized experience, and familiarity with the industry to quickly fill that position. They garner a large commission for providing a very valuable service by minimizing that costly leadership gap. (The contingent marginal product of labor argument is also my favorite explanation for high executive pay)

When it comes to startups this certainly isn’t the case. They are not large, hierarchical institutions. On the contrary, they have cultures that praise ‘bootstrapping’ and flexibility. Thus, the marginal productivity of a particular employee is far less than that of the corporate executive. Starups can afford to use cheap, but time intensive online hiring methods because the cost of hiring tomorrow is relatively low.

The Point

I recently attended the NYTech Meetup, a monthly industry event with presentations and speakers. This session was focused on “Social Action” startups. A nice summary of the presentations is here. The company that peaked my fancy is ThePoint. (The name of the site seems to be inspired by Malcolm Gladwell’s theory described in The Tipping Point. Gladwell defines a tipping point as “the levels at which the momentum for change becomes unstoppable.”)

The Premise

Users create campaigns on the site. For example, to raise $10,000 to build a playground at the neighborhood park. Other users can then pledge money to the campaign. However, the users are billed for their pledges only when the goal is reached. So in this case, users are only billed once the campaign has raised $10,000. This is claimed to be much more effective than asking for traditional donations because it eliminates the risk that you donate to a doomed campaign. If the campaign can’t raise $10,000, then nobody gets billed. The question is “how much is this worth to you?” rather than “how much will you help us try?” In addition to monetary pledges, the site allows boycots and other actions, such as “take all the free straws from starbucks.” However,the action is only taken after a certain number of participants pledge to join the campaign.

In each case, all probability of failure is removed and each individual pays their real reservation price for the desired outcome. A somewhat silly example is the campaign to build a giant weather shielding dome over Chicago. One user pledged $100,000 dollars because that dome would be extremely valuable to her. Despite its silliness, this example exhibits the central thesis of the point: you aren’t paying for campaigns, but for outcomes.

If successful, this could be a radical approach to collective decision making. It could efficiently value public and non-market goods such as the playground, as well as “price in” other negative externalities.

Conclusion

The future for The Point is unclear. It does face a couple of difficulties. First, it hasn’t gained a huge number of users just yet. Compete puts it at 15,000 visitors for the month of February. In order for this paradigm to take off, they will need many, many more users. However, traffic is increasing. Second, the system operates on a fairly high level of trust. Users need to believe that other participants will actually follow through with their pledges. I can imagine a number of scenarios where buyer’s remorse leads to payment collection problems. Once trust in the system is shaken, the situation reverts to a classic negative externality. However, there is also immense potential. In everything from local government policymaking, to environmental protection, to corporate benefits, this could be an incredibly powerful tool for social change. I wish them the best of luck.