A former recruiter looks at the industry in Japan asking the question, has the bubble burst?
By Alan Malcolm
With the need for strong, foreign executive recruiters having been created through the demand to move high-caliber professionals, often within tightly knit industries, a lot of the demand has come on the back of strong financial optimism and forecasted growth.
Over the past few months, we have seen this optimism exit somewhat hastily, ‘stage-left.’ One question on the lips of the pessimistic labor market followers is “what will this mean for the hundreds of recruiters who have come across substantial business and new found riches in the Japanese recruitment market?”
To be better equipped to answer this question, we need to understand that under the umbrella of the recruitment sector there are a number of very different types of operation.
The playing field
The first is the typical Japanese recruiting model, where job-seekers at all levels and in a broad spectrum of industries register with an agency (Recruit Agent, JAC Japan et al) who will then introduce suitable (or depending on the caliber of the consultant involved, not so suitable) positions at their client companies. In this industry, candidates are abundant but from experience I must admit that many of these candidates receive little in terms of demand for their services from client companies. With an increased focus on social networking both on and off line, businesses are now able to further utilize their present people resources to lure new employees (the ‘friends get friends, good people bring good people’ ideal). This ‘middle-ground’ of the recruitment industry, for so long the bread and butter of many placement firms, is becoming less and less lucrative. Revenues are still high for operators in this sector but the smart players have already been moving to explore potential new markets and sustainable revenue sources. One potentially huge market, leveraging off Japanese business custom, is the new graduate arena. Some of the major players have already moved in this direction and we are now seeing larger corporations such as Toyota effectively outsourcing their entire new graduate recruitment process to industry professionals. This is definitely a huge sector of the market and demand is high, however, logic suggests a greater workload for a much shorter margin per unit, worlds away from the doublebreasted suits and hotel lunches of the executive recruitment world. In late 2007, we saw a number of other moves by the large Japanese players, with JAC Japan launching an international division in April, focusing on foreign companies and providing better service for bilinguals on both sides of the process. In December, industry giant Recruit Agent purchased previously foreign-owned and operated executive search firm CDS, which illustrates how typically low-to-mid market, domestically-focused companies have identified the profit potential of the executive-focused foreign market sector. It is interesting to consider however, how much of a threat these firms will be for the foreign ones. Tony Rodriguez, President of Asia specialist recruiters, ICPA, told us “I suppose there might be more domestic competition but the foreigners were here first and people know what we can do. For example, we were voted best recruitment firm by Microsoft HR, beating off Recruit.”
The pioneers of the foreign side of the industry in Tokyo, many of whose company names are well known throughout the local expat community and beyond, are still moving people around at a solid rate. Unfortunately, for many of their reputations, much movement continues to occur within their own ranks. These businesses grew out of IT and later finance industry booms and have spread their wings wider as more and more companies have come into the local market—they recognized the need for hard-nosed dealclosing recruiters to fill the void left by the inadequacies of the ‘situations vacant’ column. It is often speculated that there were only a handful of original candidate databases in Tokyo and these have adopted a migratory nature and lead to new operations of varying sizes popping up all around the city. Some of the more successful individual recruiters and companies have been products of some of this original crowd. We may well see more and more of these good operators bought up by larger entities (see below) or continue to see success—through the guile and business sense of their proprietors, revenue statements clearly show that someone is on to something good and through good practice sufficient future-proofing is evident.
Economic downturn will hit many of the foreign operators who have been riding the back of product demand without maintaining high levels of business ethics and professionalism. Global hiring freezes and the potential for continued economic pessimism will mean that the recruitment process will be considered more from a cost management rather than an ‘at any cost’ approach. A good market is not always perceived as bringing only good for any industry, as many people who have bought property anywhere across the globe will be able to tell you. True professionals prove their value to clients and as industry leaders in slowing and declining markets. For Rodriguez of ICPA, it is simple: “the people who can get good people are the ones who will survive.” People will always be moving and there is still significant resistance to change amongst the Japanese business community to justify paying for hunters and convincers. In the past, companies have paid for high-level executive recruitment—placements that had a direct bearing on the future of the business. This developed into a company wide recruitment service through trickle-down and growing candidate databases. It is foreseeable that economic downturn could bring a return to the days of old.
The large global contingency firms (Korn Ferry, Russell Reynolds and so on), although not considered as competition by many of the foreign operators here, should continue to operate as they have done until today (with considerable brand establishment and global backing). However, sometimes without the on-the- ground in Tokyo intimacy with the market, and sometimes too much laurel-resting and reliance on regional and other out-of- Japan resources, these companies have one true threat, particularly to their higher end searches: the true professionals. These good business operators (and the recruiters whom I consider the real gems of the industry) are the sector-specific boutique operators who continue to flourish. The boutique operators who have really developed a name for themselves and are successful have one common trait, the people are as important, if not more important, than the money. The focus is not on closing the deal at all costs. To these true heroes, swimming amongst a pool of sharks, making a placement that will gain themselves professional credibility, gain the placed candidate upward mobility and the client company satisfaction and increased profit potential is the real reward. By placing a high-level executive and ensuring their continued happiness, a recruiter has the potential to develop a relationship exceeding anything based on brand power or corporate clout.
Even in a recession, demand for professional services still exists and money must be spent, the key will be with whom to spend it and on which particular searches. I know where I would spend my money and I am looking forward to seeing a tighter market improving the overall quality of the Tokyo recruiting industry.
Recruitment Industry Investor
Chairman and CEO, IA Global Inc
Why have you decided to acquire recruitment companies?
We decided to invest into the human capital industry for a number of reasons. Firstly, we believe that the revenue growth potential and margins available from the various elements that make up the entire human capital industry are very attractive. Secondly, our other two areas of focus, that is business process outsourcing (BPO) and B2B Services are people intensive, therefore owning the supply or value chain, would be accretive to our overall earnings results. Thirdly, the business models in the human capital industry are easy to understand, monitor, value, and have unlimited scope for enhancement and efficiency gains. Finally, there are other unseen benefits that we derive from having a deep and wide spread involvement in the recruiting and human capital space. These benefits are considered trade secrets and therefore not up for comment in the public domain.
You obviously don’t think the bubble has burst. Why?
No, the “bubble,” if such a thing exists, has not burst. Rather we believe that in Japan and China, specifically, that “bubble” is still inflating. In Japan there are cultural, age demographic, and workplace norms that suggest that the market will continue to remain buoyant. In China, the demand for skilled, on spec staff, exceeds the supply.
Which companies have you acquired?
We have completed minority investments in Slate Consulting and Gplus Media, publishers of portals such as Gaijinpot, E-Central and other information websites. We are in the process of closing majority ownership investments in the outsourcing division of Linc Media and Espirit Inc. We are in active discussions with a number of other companies that fit into the general human capital industry, both in Japan and other Asian countries.
How in line are your operations in Japan with the global market?
We feel that elements of our business in Japan are pushing the edges of the envelope in terms of validating new business models. IA Global Inc is focused on the whole Asia Pacific region, thus “global trends” outside of the region don’t generally attract our attention. So long as the economies of Asian countries continue to expand and prosper, we don’t have any interest in the problems of the US or Europe.