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Strategic Review at Egon Zehnder International The Problem Egon Zehnder International (EZI) has steadily developed its reputation over 36 years. In these years, the firm carried certain values which Zehnder – the founder of the firm – thought were the building blocks of the firm and should never be compromised.
But as the search industry has undergone dramatic changes in recent years, and also internally the company leadership is being transferred to the new younger generation, there were voices raised that the firm needs to change its values, strategies and ultimately business model to advance further in the business. Members of the executive committee are thinking if strategic review would weaken the firm’s commitment to its successfully proven 36 years business model or the change is real necessary. Strengths 1) Clients First:
Considered as one of the corner pillars of the company’s distinguishing characters, is the importance to clients. Clients always came first before the firm’s interests. Hence unless clients’ interests are fulfilled, the firm would never look for its profit. To bolster clients’ interest more than the firm’s, in contrast with the industry pricing policy, EZI adopted ‘fixed – fee policy’; usually 33% of the candidates expected annual compensation. This removed the conflict between the firm’s interests in hiring most expensive candidate versus the best fit candidate.
Sometimes EZI feels that they are undercharging their clients. Clients also recognize that the flat fee encourages EZI to find the right candidates who will stay and benefit the clients in a long term. EZI hopes that this recognition will make the clients come back to EZI in future with other assignments. 2) Reputation for Quality: EZI has built its reputation in the industry over 36 years. With its high brand value and trust in clients it has developed, EZI believes that even a single assignment done with below standard work can damage their reputation irreparably.
So instead of worrying about the firm reputation, successfully completing client’s work is a better approach to sustain in the industry, the firm believes. A job well done is always its own greatest reward. 3) Going global: Starting its operations in Europe, slowly the firm grew geographically. Accordingly it selected its consultants who were also multilingual, multicultural, and highly talented in their skills. In 1980, firm took an important decision of expanding in United States. EZI was already successful in Europe and wanted to expand its operations across the globe.
Initially Egon faced some internal challenges but he was firm on his decisions which later proved to be fruitful. It also opened its offices into Asia and South America. In 1998, the firm had 58 offices in 39 countries. 4) One firm partnership concept: EZI recognized that partnership means having positive attitude toward other members and toward group’s common goals. Being a partner, one always works to find a solution to the member’s problem and doesn’t make it his own opportunity.
EZI has 122 partners, 200 non-partner consultants and 230 researchers who work from 58 offices in 39 countries; thus making it one of the most horizontal organizations for a global enterprise with minimum of coordination and leadership at the top. Since the firm is spread over 39 nationalities, managing with every cultural traditions is a big challenge the EZI has sustained this challenge through the spirit of partnership. 5) Compensation: Following a partner compensation system, EZI distributes its profits on a lockstep basis which depends on the firm’s worldwide profits and seniority.
It doesn’t pay an employee based on his/her individual performance and no commissions or performance based bonuses. This eliminates the competition in the employees themselves. Apart from salary, an employee receives equity stake in EZI and profit shares. All partners owned equal shares in the company, irrespective of individual performance, tenure or geography. Of the profit made, 60% is divided equally among all partners while remaining 40% is allocated based on years of seniority. This encouraged partners to remain in the firm for a long time and always proved profitable for them.
Also the transparency and ease of managing the profits was two big positives of the firm’s compensation system. 6) Recruitment: The recruitment process of EZI has been rigorous. It would recruit and promote local talent for all of its offices in the world. EZI makes sure that all of the candidates have significant business or consulting career backgrounds. All EZI consultants had postgraduate qualifications while many were multilingual and multicultural having worked or studied in several countries. 3 to 5 years of work experience was necessary before joining EZI, preferably with McKinsey.
In 1999, 50/270 consultants at EZI were McKinsey alumni. Candidates would have to undergo between 25 and 40 interviews at 5 of the firm’s international sites. It the candidate fails at two of the interviews, he/she would be rejected. Only 10% of the applied candidates were selected. The candidates would be evaluated on cognitive abilities, building working relations, getting things done and personal fit. After the candidate is selected, Zehnder would interview each and every individual who joined the firm. Candidates also showed their loyalty with the firm.
In 1998, of 390 consultants who ever joined EZI, 233 were still employed in the firm making average turnover rate of below 2% per year in contrast with industry average of 30% per year. 7) Working culture: At EZI, there are always two consultants working on one each search, one taking the lead and another for backup. This style assured clients that there would always be somebody to approach. This also removed the competition between the employees and prevented them from working as individual practitioners. Weaknesses 1) Organic Growth: Zehnder didn’t have any strategic plan for the firm’s growth.
It was ad hoc, as the requirement came along; the firm went on opening its offices at several places. There was no fixed strategy for its expansion. Since EZI is a partnership, it takes them a large amount of internal funding. Funds from existing operations were used to finance the offices at other locations. Effectively, it took a decade for EZI to gain momentum in reinvesting a good capital into expanding geographical coverage. The firm relied on its existing partners to lead the growth in other areas rather than acquiring local firms.
Most of their competitors in United States were growing aggressively and were in the phase of expansion, EZI in US was struggling to survive. 2) Advent of Internet: As the internet became popular, websites like Monster. com became a potential threat to the search firms like EZI and the effects were seen by the firms. Clients preferred going online for their searches instead of going to these search firms. Many competitors started their online presence to continue to be in the race. But Zehnder minimized the threat by saying that, their search is in only in the near top or top level executive board ladder.
EZI will look not only for bodies of standard skills to fill knowledge worker positions but identify, screen, persuade and propose rare individuals who can fulfill clients needs. But at the same time, the other board members of EZI didn’t agree to Zehnder. One cannot turn a closed eye to the changes happening in the industry and they proposed that EZI must adapt to those changes. Zehnder with his view on online business in 1999, may be severely underestimating the power of internet where clients can search for potential candidates from their huge database instead of relying on the personal contacts of the consultants from search companies. ) Fixed Fee Policy: Even though Zehnder knew that EZI was following an outdated billing system, he disagreed to change it to the industry standards. Typically EZI’s fees were higher than its competitors’ but sometimes, for top executives’ searches the firm felt that EZI was undercharging the customers. The fee was calculated according to the importance of the position and the firm’s best estimate of the difficulty of the work involved. Many times it happened that, the work involved was more than estimation and hence the firm lost money in those deals. 4) Recruitment process and turnover rate:
EZI’s recruitment process is highly rigorous. This one of the major strengths of EZI has now become a potential weakness of the same. Candidates have to undergo through 25 to 40 interviews and if two of the interviews have doubts, the candidate is rejected. Only 10% of applied candidates would be made an offer to join EZI. Also the firm would not recruit from its competitors. The candidates are required to have at least 5 years of experience. The firm has a very slow growth. With less than 2% turnover rate, there is not enough opportunity for the candidates to grow.
Also the candidates are highly experienced even before coming to EZI. Hence they are with preconceived notions about the way of doing business and do not entertain new ideas. This may be one of the reasons of EZI’s strong stand for its values and morals and a hindrance in the path of innovation. 5) New generation: EZI wouldn’t appoint young fresh candidates graduating from business colleges. With this resistance to young blood, it is in fact going away from potential new ideas of surviving in the new changing world.
Although it’s true that the company values old morals and beliefs, it is also necessary to adapt to the changes the way business is conducted in the demanding and changing world. 6) Reward process: One company partner concept may be beneficial in certain aspects but from another point of view, it may lead to laid back approach among the employees. If the compensation is not based on individual performance, then in that case, one might think of not working hard enough for the clients. Also the reward is given to employees just for staying in the company i. . based on their seniority rather than their performance. This might develop bad practices in new employees. E. g. the compensation for an employee who is in the firm for 1 year is $36000 while for those who have been there since last 15 years is $540,000. 7) Europe Base: Even though the firm has been going global, most of the operations are conducted in Europe. Even in 2000, more than 50% of its revenues was coming from Western Europe (23%) with second highest from North America (13%). Also it is keeping fewer offices in America than in Europe.
As a partnership company, it also has larger partners in Europe than in other countries. May be to become a truly international company, it may have to become public to support its operations across overseas and generate funding from local financial firms. 8) Strong belief: The firm has a strong belief in its morals and values. So much that it is not at all open to new ideas of doing business. Zehnder has been turning a blind eye to the new suggestions proposed by the executives. Viz. expansion in the United States and the potential threat due to web based companies.
This may work out for a while but in the long run, it is eventually hampering the firm’s growth. Management has to be lenient and flexible to adapt new changes and challenges in the industry instead of becoming rigid and strict about the operations. Alternatives One of the foremost and important alternatives for EZI could be not to take any strategic review at all at his point in spite of the stated problems above. EZI has been successful over these many years by adhering to its values and principles. With these, it has developed a good reputation in the industry and a good satisfaction in the employees.
Changing a single part of the system that has worked with the company over the years may be harmful and company can lose its competitive advantage. If it starts changing itself, there is a possibility that it may go far from its core values and hamper its brand image just for the sake of short term financial gains or short term changes in the market as per the old management. Even though it’s not in the best interest of the firm to work only for making profit, somewhere it has to think of its survival in the market and hence develop appropriate strategies.
Based on the facts in the case, it is evident that the firm is not at all caring about its expansion that aggressively as its competitors. The competitors had aggressively begun to enter the European market – the homeland for EZI – often by high-profile mergers and acquisitions and still EZI looked at mergers and public ownerships as weaknesses. No matter how much quality service EZI provides to its clients, if the competitors come up with economic solutions for searches and offer the best deals to the existing and potential clients of EZI, definitely that particular market segment would be stolen by them.
Also EZI relies solely on its clients for new business. It has a belief that, since they have provided best quality service to their clients in previous searches, they will come to EZI for their future searches too. It’s in good will of the company to develop such a trust among its clients but completely relying on them for future business might not be a good idea for survival in future. As far as US market is considered, EZI has only 58 consultants in US. It also has a very small presence in states.
On the contrary, American firms such as Heidrick and Korn/ Ferry had access to the significant capital they had raised in their public offerings and were eating EZI’s core European market along with their strong dominance in American market. In addition, EZI lost professionals to competitors and start-ups that were targeting EZI. EZI as a partnership would need a lot of internal funding to support the increase in consultants base in United States. EZI should also think of having its presence on web as a major strategy to compete internet threat. Internet has its own advantages. It is super fast, easy and hassle free.
Clients can have an easy access to the company’s data and may be for low and medium profiles, they can search their candidates online paying EZI a fixed amount of fees. EZI may think of opening a branch handling online transactions. If clients want the traditional service from EZI, it can also be done in the same way. Clients may suggest some candidates from the online database and then EZI can take care of the remaining process. One of the drawbacks of this approach may be that since the search becomes easy and cheaper online, providing their contacts online, EZI may lose its reputation slightly which it has built over these many years.
The compensation strategy of EZI can be changed moderately. Partners are given equity shares. The 122 partners receive compensation which has three components viz. salary, equity stake and profit shares. These equity stakes rise in value each year because EZI reinvests its 10% to 20% of profits back into the firm. The profit is shared among the partners strictly based on their seniority and not on the performance. This might spread a wrong message in the employees. Even though this practice promotes long term association with the firm, it may demote employees’ moral to contribute towards success of the firm after certain years.
Instead, the profit can be provided based on the value one adds to the company. This value may be in the form of finding new contacts, generating new business opportunities, providing innovative ideas for business development, etc. EZI should think of changing its barrier to hire young blood as partners. EZI always have had older people on the executive committee who have been dominating the decisions made by the company. When young executives are concerned about the changes in the industry, old people are simply ignoring them. Young generation can always have innovative, out of the box ideas which the management should be open to.
Since new American firms are invading EZI’s territory, EZI should target that as the first option to be tackled and should expand and capture the market in at least Europe region. Recommendation: Looking at the presented facts, I suggest that EZI should take appropriate measures to change its business strategy to answer the posed threats due to changing environment and to survive in the dynamic market. It should also change internally to change its compensation policy and recruitment process to allow young generation in the executive panel. Plan of Action
Looking at the immediate threats the firm might face in near future viz. the invasion of American firms with large capital and aggressive strategy into European market and web based companies, EZI should make a competent strategy. Ignoring these threats and believing in their old values will no longer help company grow in the business. These values must be changes as time changes. No matter how much these old values matter to an individual, in this case, Zehnder, those are certainly harmful for the other partners. Also Zehnder is retiring in June 2000. Also Meiland is contemplating hifting his CEO responsibilities to a next generation executive. Hence strategic steps must be taken at proper time to save the firm falling. It should not happen that the three pillars of the firm become the three best threats of the firm because they are not enforced with changes with time. EZI can use its in-house talent for innovative ideas to develop business in its home territory which is Europe. It must expand in a sufficient size that it should be able to provide its quality service to the new clients. It can definitely think of mergers and acquisitions which will help the firm expand at a pace.
The firm can use acquired company contacts and resources for itself which will save time of the consultants to develop their own new contacts. New ways of funding the new expansion must be thought of before developing any plan. According to year 2000 data, EZI revenue is $319 million which company should target to improve and that also in a quicker way. EZI can develop a completely new branch which will concentrate on its services provided online. It can develop personalized web solutions from companies like Microsoft which will help them manage their resource database online.
It can provide both services to its clients i. e. online and traditional personal services. Online services may be limited to lower and middle level executives. EZI can generate money by making the paid memberships and restricting the online searches to a specific number of hires per clients per unit time. Top level executive searches can still be operated in a traditional way as clients are more comfortable with personal services when it comes to high level talent search. Marketing of its website can be a completely another area which EZI would like to focus on.
Advertisement on internet, Televisions, Radio would make a vast difference in making EZI popular. Again, this might go against the ethics of the company. Since second highest revenue comes from United States ($74 million, 23% of total revenue of EZI in 2000), EZI should think of expanding its operations across the country. It has only 58 consultants in United States as per 2000 data. In line with Marc Schappell, head of EZI’s New York practice, EZI should target at least 100 consultants in next two years in the United States. Already EZI has developed its reputation in Europe and after coming to US, it has started attracting new clients.
It can definitely look for new local talent in US which can be easily absorbed in the culture of EZI. Respecting its policy of not hiring from its competitors, it can certainly give chance to new people which can bring varied experience in diverse domains. If EZI can provide good searches in US market, it will help develop the reputation faster in US. Hiring local talent will help its clients trust the firm since they would be talking to local people which would make a vast difference and would be an answer to EZI one of the members who posed a question while opening EZI’s first branch in US in 1980.