How are the blue chip Executive Search firms faring ? A look at KFY

Korn/Ferry International's third quarter, ending 31 January 2009, shows the impact of the crisis. Their 10-Q filing of 12 March 2009 reveals that a company with a sterling brand and top notch service can't buck the trend. They barely eeked out a profit, and effectively posted a loss taking into account restructuring charges - mostly covering severance payments for 400 employees (16.8 Mio USD) and asset impairment charges (15.3 Mio USD). Futhermore, demand for the services of the company nose-dived in the last 8 weeks of calender year 2008.

Let's look at below table - fee revenues by region, figures (in thousand) that are self-explanatory.

		Three Months Ended								Nine Months Ended
		January 31,								January 31,
		2009				2008				2009				2008
Fee revenue:
Executive recruitment:
North America		$	66,978			$	94,812			$	252,649			$	276,988
EMEA			30,423				46,292				122,499				133,072
Asia Pacific			13,591				25,322				56,181				72,639
South America			5,650				6,617				20,063				19,184
Total executive recruitment			116,642				173,043				451,392				501,883
Futurestep			19,568				28,113				79,851				80,483
Total fee revenue		$	136,210			$	201,156			$	531,243			$	582,366

During the third quarter of fiscal 2009 global economic conditions significantly deteriorated, which caused a material decline in the results of our operations. Fee revenue decreased 32% in the third quarter of fiscal 2009 to $136.2million compared to $201.2million in the third quarter of fiscal 2008, with decreases in fee revenue in both segments. The North America and Europe regions in executive recruitment experienced the largest dollar decreases in fee revenue.

The US and EMEA market had the biggest declines in USD fee revenue, while Asia Pacific the largest % drop.

Furthermore, the Company stated in its outlook that it experienced a 33.5% decline in the number of executive search engagements opened compared to a year ago and the average fee billed per engagement decreased by 16.6% compared to the prior year.I believe the worst is yet to come, as the US and Western Europe provide a high share of total USD revenue. The 10-Q for Q4 2009 will be most revealing - if the number of assignments undertaken by KFY remains at the level it was the last week of 2008, there is no light at the end of the tunnel yet.

What will they do - "the glass half full'

Our strategic focus for fiscal 2009 centers upon increasing market share and further enhancing the cross-selling of our multi-service strategy. We plan to continue to address areas of increasing client demand, including Recruitment Process Outsourcing (“RPO”) and Leadership and Talent Consulting (“LTC”). We plan to explore new products and services, continue to pursue a disciplined acquisition strategy, enhance our technology and processes and aggressively leverage our brand through thought leadership and intellectual capital projects as a means of delivering world-class service to our clients.

But what might be required - "the glass half empty"

The Company has also taken steps to align its cost structure with anticipated revenue levels. The Company plans to take further steps including a reduction of work force and possible consolidation of premises in the three months ended April30, 2009 to align our cost structure with anticipated revenue levels and currently plans to incur $10million to $13million of expenses to implement these steps. Continued adverse changes in the Company’s revenue, however, could require us to institute additional cost cutting measures, and to the extent our efforts are not quick or deep enough, we may be required to obtain additional financing to meet our needs.

In summary, KFY anticipates further trouble ahead, and realises it cannot escape economic reality. Some sectors paying particulary high fees, such as Investment banking and financial services, are no more there. The operations in London, New York and Frankfurt especially. On the technology side, there are mass lay-offs in Silicon Valley, from house hold names like Google, Microsoft and Amazon.com. Senior KFY partner Adam Charlson compares what is going on in Silicon Valley with Corporations preparing for a "nuclear winter".

 Reality will probably prove to be between the boom times of yesteryear, and the nuclear winter brought up by Adam Charlson.