What is the real cost of recruiting?

May 18, 2017

I work with early stage software companies ranging from those with only a few dozen employees to those with a few hundred. Each will say that they are part of the talent war and are struggling to find qualified employees to fuel their growth. Yet, most companies have not quantified the cost of recruiting, the cost of attrition and the cost of making a bad hire. They all know these costs are real but most do not adequately bake them into their business plan or alternatively allocate an expense and resource plan to avoid these costs. Like any other business problem, if you do not appoint a business owner; develop strategy and tactics; allocate a budget and resources; and measure and review results; then the chance of resolving the problem is low.

People talk about the cost of recruiting in terms of the cost of recruiter fees which are quantifiable or the cost of a bad hire, which often is unquantifiable or too painful to contemplate, but is this the total cost of recruiting? During a discussion with former colleague whose career has been in executive recruiting, I articulated my views on the actual cost of recruiting and how to change the language of recruiting into more meaningful business metrics.

Consider an example of a 500-person company that needs to grow by 100 employees. That’s 16% growth over the next 12 months. Factoring in attrition of 12%, then they will need to hire 60 people just to stay even. Therefore, the real number that they will need to hire is 160 people. When I ask my clients about how many people they need to hire, they articulate the number of new positions they need, but rarely do they factor into their calculations or budget for the number of people they will need to replace.

Let’s assume hiring the 160 people will be staggered throughout the year. If, on average, it takes three months to fill a role, then the company will have 40 open jobs on their website at any time. For some of these jobs, the company is hiring ahead of the curve and don’t really need the people until around the time they are hired. For other roles, the company will be reacting to something unplanned and are behind the hiring curve.

When this happens, there is an opportunity cost of not having the job filled. Assume, on average, the salary cost for each position is $10,000 per month fully burdened. Isn’t it a reasonable assumption that at a minimum, the company expects that each employee will produce value more than their cost. If not, why would the company ever hire that position?

 Assuming the company expects employees to contribute value equal to double their burdened cost, then the opportunity cost of leaving an open headcount unfilled for a month is $20,000. If half of the 40-open positions are unplanned or behind the hiring curve, then the company is incurring lost opportunity costs of $200,000 per month or $2.4 million dollars per year. 

Therefore average days to fill an open headcount is an important metric to measure and track. 

Cost of recruitingNow consider your candidate funnel metrics to fill the 160 open positions. If it takes 10 screening interviews to get a candidate worth interviewing and 10 candidates to hire one employee, then for the 160 open positions, 16,000 screening interviews are required. At 30 minutes a screening interview, this is 8000 person-hours at a recruiter cost of $40 per hour or $320,000.On top of this, if each screened candidate is interviewed on average by two hiring managers before being shortlisted, hired or rejected, that is 3200 hiring manager interviews. If the hiring manager interview is 60 minutes and the cost of a manager is $80 per hour, then add another $256,000 in cost of recruiting.

This totals to $576,000 in recruiting costs.

Realistically, this cost is conservative because on average only 85% of offers are accepted, and often when an offer is rejected, instead of making an offer to the second candidate on the list, the recruiting process starts all over again thus increasing the number of hours of screening and hiring manager interview hours.

What is the impact if you could increase the quality of the applicants applying so that you only require 5 screening interviews to get one qualified candidate and improve the hiring and interviewing process to only need 5 qualified candidates to make one hire? Using the above math, the total cost of recruiting effort drops from $576,000 to $208,000 or a savings of $368,000.

So, the other two important metrics are the ratios of applicants to qualified candidates and qualified applicants to hires. 

If you consider the examples above, the pressing question is if you are a company looking to hire people this year, do you have a real recruiting strategy, have you properly budgeted the manpower, resources and costs that it will take to meet your hiring plan and are you measuring the reviewing the right dashboard metrics to ensure you are on track and improving?

If not, is your budgeted operating plan realistic?

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