Investment banking was the main culprit behind the decline in hiring. By the middle of the year, profitability at many banks was down by more than 60% as M&A activity collapsed, leaving hundreds of well-paid investment bankers with literally nothing to do.
For the large global search firms that had expanded on the back of the boom in demand in 2000, an overall decline in economic activity was also disastrous. Like the investment banks themselves, global recruitment firms had raised their cost base to levels they found they could not support.
Throughout the year, a spate of redundancies was announced at Heidrick & Struggles, Korn/Ferry International and TMP Worldwide. The extent of the downturn took most headhunters by surprise, and many had only just completed acquisitions when they found they had to start letting people go.
Heidrick & Struggles and Korn/Ferry in particular wrestled with internal restructuring and cost-saving exercises. These were designed both to placate shareholders in the face of collapsing stock prices, and to reposition the firms to better survive the downturn.
It became apparent during the year that the enormous investments made by the global search firms in internet recruitment had not, for the most part, paid off. Operations were consolidated and folded back into the mainstream business. Only TMP Worldwide, which has seen great success with its internet recruitment arm Monster.com, chose to integrate its recruitment operations around it.
But the rethinking within TMP led in October to the departure of Steve Potter, head of executive search, brought in by the company two years ago with the acquisition of his financial services headhunting boutique Highland Search.
Potter says that his departure mainly reflected 'a difference of opinion in the way that executive search fits into TMP's overall strategy'. He was replaced by Andrew Simpson as president of the search division in Europe.
The global search firms faced speculation throughout the year about their ability to survive independently. Although TMP Worldwide reiterated its commitment to executive search, rivals insisted that its search division had been up for sale, and may yet again appear in search of a suitor.
There was speculation too that Heidrick & Struggles and Korn/ Ferry, which went public in 1999, might choose to go private again, and there were mutterings within the headhunting industry of the likelihood of further consolidation among the largest players.
All headhunters, whatever their size, learnt the importance of flexibility within financial services. At the global search firm Egon Zehnder, the financial services sector was expected to have more than held its own by the end of last year, but not as a result of investment banking search.
Andrew Lowenthal, head of Egon Zehnder's financial services practice in Europe, says: 'Having people who are not purely one-industry specialists and having strong relationships is very important. We have done well in insurance, private banking, asset management and private equity.'
Egon Zehnder has also been innovative in its approach to recruitment, with the launch of an active career management service aimed at the individual. It is a low-cost investment that allows the search firm 'another way of developing relationships with the right people who may not be interested in that job today, but might be in the future', says Lowenthal. It is essentially a form of 'cyber-networking' via the firm's website.
'Relationships' is a mantra that is repeated by all successful headhunters in financial services. At the Rose Partnership, the niche financial services boutique that is held up even by its rivals as having done extremely well last year, its founder Philippa Rose says: 'Some say the secret to a successful business is 'location, location, location'. I say the secret to a successful headhunting business, particularly in these markets, is 'relationships, relationships, relationships'.
'Recession is a time of focus, not diversification. We are totally focused on our core businesses.' But the headhunter was careful to diversify into both fund management and private banking some years ago, and both these practices are now said be doing well.
William D'Arcy, of the financial services boutique D'Arcy, says: 'When things get tougher you need to keep talking and communicating. We've increased our market share by being assiduous and staying close to customers as well as candidates. But it's tough out there.'
At Sheffield Haworth, group chief executive Tim Sheffield echoes the need for focus as well as diversification, and at the end of this year, has no regrets about the firm's recent considerable European expansion.
But fellow headhunter Martin Armstrong of Armstrong International is clear that this year marks a fundamental change for headhunters. He says: 'This year has been hard, next year will be even more brutal. Headhunters without a deep franchise, without a strategic opinion and without extremely conservative cash management, will not be around in 2003.'
Armstrong suggests that recruitment in financial services will never be the same again, because banks have seen how much they spend on recruitment and have found that in many cases it does not represent value for money.
It is a sentiment echoed by others. A veteran headhunter in financial services at a high-profile search firm says: 'The HR function at financial institutions is enjoying itself immensely, dealing with headhunters at the moment. They are determined to get their pound of flesh.'
But if negotiation on fees has become a one-way conversation this year, there has still been scope for the launch of new firms aiming to make money out of recruitment in carefully picked areas.
Jonathan Astbury, who launched Astbury Jones in August, has picked core areas of compliance and regulation, credit derivatives, legal and securitisation.
James Marlar, an ex-TMP partner, formerly of The Consulting Group, also launched a financial services practice this summer focusing on wealth management under the umbrella of his father's search firm, Marlar Bennett.
While all headhunters in financial services ended 2001 hoping this is a cyclical downturn, most of the larger ones have concluded that they have to get ever closer to their clients by offering a range of 'human capital' services.
With that end in view the headhunting deal of last year must be the 11m (€17.7m) acquisition of Baines Gwinner, the search, training and career management firm, by the ever-expanding recruitment firm Whitehead Mann in November.
Its larger rivals - Heidrick & Struggles, Korn/Ferry and Egon Zehnder - also spent the year honing their consultative skills, including management assessment and coaching. This year's battleground for many headhunters will be here.