In Recruiting, How Important Is Cost Per Hire?
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The document discusses the importance of cost per hire (CPH) in recruiting, arguing that it is often a misguided metric that can detract from the quality of candidate selection and hire. It emphasizes that a balanced recruiting strategy should consider cost, agility, and quality, with a focus on the long-term impact on business performance. Ultimately, investing more in recruitment can lead to better hires and improved organizational outcomes.
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In Recruiting, How Important Is Cost Per Hire?
- 1. In Recruiting, How Important Is Cost Per Hire? October 7, 2015
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- 6. David Green Vice President About David Green: David is a Director / Vice-President at Cielo, and works with international organizations to design talent acquisition programs that drive growth and competitive advantage. David advises businesses on effective ways to leverage data and develop strategies that produce the best business outcome while also aligning with talent strategies and business priorities. He also blogs, speaks and chairs conferences within the talent and people analytics space. About Cielo: Cielo is the world’s leading pure-play provider of global Recruitment Process Outsourcing (RPO) solutions. Cielo leverages its global reach, local talent acquisition expertise and customised solutions to help clients achieve a sustained advantage and outstanding business outcomes through their talent practices. uk.linkedin.com/in/davidrgreen linkedin.com/company/cielo-talent cielotalent.com
- 7. I believe cost per hire is a misguided means to judge recruiting department performance. For one, it rewards the wrong things and ignores quality of candidate and quality of hire. For another, it’s for too tactical and narrowly focused. Worse, improving costs could degrade quality. Lou Adler
- 8. ① Put Cost Per Hire (CPH) in context as part of an overall discussion on ROI ② Examine how the importance of CPH depends on the talent you need to hire ③ Highlight the components you should use to calculate CPH ④ Demonstrate how a low CPH can actually be more expensive in the long run ⑤ Look at the potential impact on the business Agenda
- 9. What is ROI in recruiting? Quality Cost Agility Agility is the measurement of the speed at which the resourcing function’s strategy and activities are capable of responding to changes in business demands True Cost of Hire is a complex calculation including team costs, operational cost of line management, marketing spend, and supplier costs Quality drivers sit across a number of measures e.g. candidate & hiring manager experience, new hire attrition, new hire performance, source of hire, employer brand NPS, conversion rates The Perfect Balance? Difficult to achieve, but then, it is not often the target. Business drivers inevitably lead to a weighted model with importance of Cost, Agility & Quality dependent on what talent you are hiring
- 10. Cost per hire varies by role 10 Importance of cost per hire decreases Importanceofcostperhiredecreases Delivering quality hires consistently … is perceived as the most important strategic function of talent acquisition for all stakeholders (C-Level, Business Unit Leaders and Talent Acquisition Leaders) - Cielo, Talent Acquisition 360 Research
- 11. Calculating cost per hire Cost Per Hire = ( )∑(External Costs) + ∑(Internal Costs) Total Number of Hires in a Time Period ① External Costs • Advertising & Marketing • Background & Eligibility Checks • Campus Recruiting • Consulting Services • Contingency to Regular Fees • Drug Testing • Employee Referral Awards / Payments • Immigration Expenses • Job Fairs / Recruiting Events • Pre-Hire Health Screens • Pre-Screening • RPO Fees • Relocation Fees • Sign-On Bonuses • Sourcing Costs • Travel & Expenses – Candidate • Travel & Expenses – Recruiter • Technology • Third-Party Agency Fees ② Internal Costs • Cost of Recruiting Staff • Cost of Sourcing Staff • Internal Overheads • Non-Labor Office Costs • Recruiting L&D • Secondary Management – Cost of Time for Events • Secondary Management – Cost of Time for Recruiting ③ # Hires Total number of hires in a time period • New hires • Backfill due to attrition
- 12. What are the characteristics of an optimized recruiting function? 12 New-HireTurnover TimetoFill(inDays) 18% 16% 14% 12% 10% 8% 6% 4% 2% 0% 60 50 40 30 20 10 0 17% 10% 44 55 Cost per Hire $3,258 Cost per Hire $6,465 Level 1 – Reactive Tactical Recruiting Level 4 – Optimized Talent Acquisition Mature recruiting organizations spend more by hire But, maturity brings better quality of hire and increased agility What is the potential cost impact? Source: Bersin by Deloitte, 2014. • 2x Spend per hire, equates to: • 40% Less New-Hire Attrition • 20% Faster Time to Fill
- 13. Let’s take a look at 2 similar companies Example
- 14. Meet Smart Inc. and Dumb Inc. 14 Smart Inc. “Optimized” Talent Acquisition function o Average CPH = $6,465 o Average new hire attrition = 10% o Average Time to Fill – 44 days “Reactive and Tactical” recruiting function o Average CPH = $3,258 o Average new hire attrition = 17% o Average Time to Fill – 55 days …now let’s compare based on cost, quality & agility measures SMART $1Bn Turnover 10,000 employees 1,000 annual hires Avg compensation = $50k DUMB $1Bn Turnover 10,000 employees 1,000 annual hires Avg compensation = $50k DUMB
- 15. Who has the higher cost per hire? Quality Agility Cost
- 16. Smart Inc. spends 2x more on hiring than Dumb Inc… 1,000 1,000 $6,465 $3,258 $6,465,000 $3,258,000 +$3,207,000 -$3,207,000 Cost Per Hire Number of hires per annum Average Cost Per Hire Total Annual Cost Per Hire Difference – Smart Inc. vs Dummy Inc. NB: Average Cost Per Hire figures taken from Bersin by Deloitte SMART DUMBWhat impact does this extra investment have on quality?
- 17. Who has better quality hires? Cost Agility Quality
- 18. Low quality hires can significantly impact the business First year turnover is a good indicator of quality of hire… Source: Telegraph.co.uk reporting on 2014 Oxford Economics Study Source: PwC Saratoga Avg cost of replacing a departing employee is $48,982 Avg cost of turnover for new hires is 1 to 1.5x the annual pay of the departing employee What impact does this have on our example? … turnover is expensive
- 19. 40% less new hire turnover equates to $4.4M 1,000 1,000 10% 17% $6,250,000 $10,625,000 -$4,375,000 +$4,375,000 Cost of First-Year Attrition Number of hires per annum First-Year Attrition Rate Total Annual Cost of Y1 Attrition Difference – Smart Inc. vs Dummy Inc. NB: First-Year attrition figures taken from Bersin by Deloitte 100 170 $50,000 $50,000 Number of Y1 leavers Average Annual Salary 1.25 1.25Cost of attrition – salary multiplier SMART DUMB What is the impact of agility as measured by time to fill?
- 20. Who has better quality hires? Cost Quality Agility
- 21. 20% faster time to fill equates to $2.5M SMART DUMB $1Bn $1Bn 10,000 10,000 44 days 55 days $20,000,000 $25,000,000 Lost Opportunity – Time to Fill) Total Annual Revenue Number of employees Average Time-to-Fill Lost Gross Opportunity Revenue NB: Average Time-to-Fill figures taken from Bersin by Deloitte $100,000 $100,000 $455 $455 Average annual revenue per employee Average revenue per employee day (220 days) 1,000 1,000Number of annual hires $227 $227 $10,000,000 $12,500,000 Average cost per employee day (220 days) Total salary saved for Open roles $50,000 $50,000Average annual salary $10,000,000 $12,500,000 -$2,500,000 +$2,500,000 Lost Net Opportunity Revenue Difference – Smart Inc. vs Dummy Inc.
- 22. So, is it smart by name & smart by nature? 22 Cost Quality Agility +$3,207,000 -$3,207,000 -$4,375,000 +$4,375,000 -$2,500,000 +$2,500,000 -$3,668,000 +$3,668,000 The Results Difference in Cost Per Hire Difference – First-Year Attrition Difference – Lost Opportunity/Time to Fill Total Difference – Smart Inc. vs Dummy Inc. SMART DUMB Despite spending 2x more on its recruiting program, the actual cost to Smart, Inc. is $3.7M less per annum than Dumb, Inc. $3.7M
- 23. Excelling at recruiting leads to positive business outcomes… 23 Other Topics: Mastering HR Process; Global people management and international expansion; Enhancing employee engagement; Providing shared services and outsourcing HR; Managing diversity and inclusion; Managing change and cultural transformation; Actively using web 2.0 for HR and managing associated risks; Strategic workforce planning; Delivering critical learning programs; Managing corporate social responsibility; Transforming HR into a strategic partner; Health and security management; Managing flexibility and labor costs; Restructuring the organization; Managing work-life balance; Managing an aging workforce Source: Boston Consulting Group 1 2 3 4 5 6 Delivering on recruiting Onboarding of new hires and retention Managing talent Improving employer branding Performance management and rewards Developing leadership 3.5x 2.0x 2.5x 1.9x 2.2x 2.1x 2.4x 1.8x 2.1x 2.0x 2.1x 1.8x Economic Influence is Discernible in all HR Topics but is Most Pronounced in Six… Revenue growth Profit margin The impact that the most capable companies achieve over the least capable companies Topic in which most capable and least capable companies were compared
- 24. ① A balanced recruiting strategy is an optimized blend of Cost, Agility and Quality – the balance varies depending on the talent you are hiring ② If you are going to measure cost per hire, make sure you include all the relevant external and internal components ③ Investing more on recruiting can improve quality of hire, increase agility and consequently be less costly in the long run ④ Excelling at recruiting can have a significant and positive impact on business performance ⑤ Within HR, recruiting is arguably the function that can provide the best return on your investment Key take-aways
- 25. If you can’t measure it, you can’t manage it. Peter Drucker
- 26. David Green Vice President uk.linkedin.com/in/davidrgreen Let’s connect! LinkedIn Talent Solutions offers a full suite of tools to help you find, attract, and hire top candidates. Contact us to learn more. Call 855-655-5653 or visit linkd.in/1TMUc7Q cielotalent.com