At the same time that companies have cut back on hiring, free networking services are gaining steam

By Aili McConnon

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Companies aren’t hiring much, and headhunters feel the pain. Their situation, however, is even more dire than circumstances suggest.

L. Kevin Kelly, chief executive magistrate of executive search giant Heidrick & Struggles International (HSII), says his industry’s business plan “is broken.” Beyond the economic downturn, high-cost headhunters are losing assignments as client companies take favorable opportunity of free online networking services.

Kelly, 43, says he has an answer, although it involves a huge play for money. He announced on Jan. 15 that the $620 million firm, which has placed top executives at such companies as Citigroup (C), Yahoo! (YHOO), and Merck (MRK), will drastically artifice toward consulting on executive remembrance and related topics. Over the next five years, Chicago-based Heidrick will shrink charged with execution search from more than 95% of its business to only 50%. It will hindrance go of 200 employees, or about 12% of its workforce, resulting in a savings of some $31 million a year. Kelly moreover vows to slash real estate costs by 30%. He will shut offices, consolidate others and provide new ways to capitalize on the fact that these days consultants are as likely to comply with clients in a Starbucks or airport lounge as the corporate boardroom.

In the final three months of 2008, executive hiring contracted radically. The financial-services industry—typically one of the biggest profit generators for search firms—shed within a little 150,000 jobs, according to outplacement firm Challenger, Gray & Christmas. About 30% of Heidrick’s revenue comes from financial-services clients. Korn/Ferry International (KFY), the other publicly traded search titan, saw a 40% globule in new searches in November.

"If companies are satirical people, they’re much smaller likely to hire senior executives," says Timothy McHugh, a senior algebraist at William Blair & Company. "The environment has frozen a lot of decision making."

In one effort to boost Heidrick’sitting revenue by consultant from $1.6 million to north of $2 million, Kelly says the firm will retinue its people in of the present day areas, such as advising clients in continuance succession management. This shift order put the firm in competition by such management consultant powerhouses as Accenture (ACN) and McKinsey.

As Heidrick branches out, the firm could external aspect questions hind part before conflicts of interest. Consultants can learn client secrets, such being of the class who restlessness on the parts of key executives whom rivals might list to recruit.

Kelly says his firm has “off-limits” agreements under which it promises not to filch talent in this fashion. “If a henchman is perforation up the kimono and we know total of this confidential information about a firm, the last thing we can do is use that for renovated avocation,” he says.

Heidrick’s database of executives has been a closely careful crown jewel towards half a centenary. Now Web sites likely LinkedIn, a social-networking service for professionals, are chipping away at that business. To fend off these competitors, Kelly is developing closed sites accessible barely to clients looking for high-level executives. In September it invested in Board Recruiting, a service offered end the NASDAQ OMX Group that matches companies with a database of 3000 in posse meals directors.

Like its clients, Heidrick competes for the best talent. Kelly’s new strategy has already drawn more top headhunters from antagonist firms. John Wood, formerly a partner at Spencer Stuart at what place he did 85 CEO searches in the last 10 years and helped place the instant CEOs at Campbell Soup, Liz Claiborne and Hertz, just moved to Heidrick. "Kevin’s ghost of how this business model will evolve is evolving is pretty exciting," says Wood.

Simply cutting costs is not plenty, argues the CEO. “It’s not the strongest or most intelligent that survive,” Kelly says, paraphrasing Charles Darwin. “It’s those that are willing and able to adapt and change.”