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Referral Recruiting: Duh!

by
Hans Gieskes
Jul 14, 2010, 5:00 am ET

It has been interesting to note the recent re-emergence of referral recruiting ventures and ideas. Duh, everybody knows that (employee) referrals have been the No. 1 source of hires forever (as indicated by CareerXroads), and that according to professor Granovetter’s groundbreaking research in the early 1990s, close to 60% of people say they have found their current job through some form of referral. No-brainer, especially with the adoption of social networks like Facebook, LinkedIn, etc., right?

However, between the late 1990s and today, many companies have tried to automate/extend/improve the referral recruiting process: refer.com, jobster, h3.com, zubka, YorZ, KarmaOne, Jobvite, and dozens of others both in the U.S. and Europe. All have failed or moved away from any referral recruiting focus, and in the process perhaps as much as $100m in VC money has gone up in smoke.

Why? No doubt many of the new entrants will back-up their fundraising efforts with the proverbial “But this time it’s different…” statement, so let’s pause just for a minute and consider why I think to date a lot of smart people spending huge amounts of VC money have failed to crack so obvious an opportunity.

Here are some of the key lessons learned from all that cumulative failure:

I — Perhaps the wrong opportunity was targeted: rather than trying to make everybody a productive “referral recruiter” we should have focused on boosting output of existing referral recruiters.

  • You can take a horse to the water, but you cannot make him/her drink. Only 4% of people are actual “connectors” (see Malcolm Gladwell, The Tipping Point), perhaps proven by fact that fewer than 4% of LinkedIn’s members are in “500+” category. No wonder that in traditional ERP programs only a fraction of employees actually take part and score (multiple) rewards. It’s great that hundreds of millions of people have a LinkedIn or Facebook account, but 96% of them will never become successful networkers regardless. So all these referral recruiting solutions are wasted on the majority of employees/people.
  • “Dude, where’s my network?” Even though most people would never consider making referrals for total strangers, they do expect a referral recruiting solution to come with a large built-in network of high-impact connectors! Crazy? Most people have never heard about Dunbar’s Number, which simply means that in spite of boasting to have 7,000+ LinkedIn connections you still only can have meaningful relationships with about 150 people. Referral recruiting solutions which broadcast referral reward opportunities to the Web will not yield (good) referrals, as people only make referrals for people with whom they have at least a minimal relationship or strong affinity. Successful users need to have a good network plus networking skills to start with. Your own network plus your own social standing will always outperform any hired or public social network.
  • Unfortunately, in most corporations recruiters are part of the HR organizations (and not procurement, where they should be). HR organizations are often more focused on risks rather than opportunities, and hence worry too much about allowing non-employees to make referrals/earn rewards, about recruiters doing cool stuff on Facebook, etc. Why worry endlessly about a $5,000 reward to fill $100,000 job when after 30 days you’re going to give the job to contingency recruiters anyhow and pay a $20,000 fee?  The real opportunity for referral recruiting solutions is with hiring managers in organizations without HR departments, as they don’t worry about all the silly stuff. Think about it: 6 million U.S. companies do not have an HR manager, vs. maybe 125,000 companies, tops, which employ HR staff?
  • Maybe as many as 70% of all jobs filled by the $8 billion executive search/contingency recruiting industry come from referrals, so one could argue that search fees are in a way referral rewards being paid to the middle-man and not the actual referrers. Given that headhunters usually are excellent networkers and true connectors, if they had embraced these new referral recruiting solutions, these solutions would have been wildly successful in improving their productivity and thereby making their customers even more dependent on them. But do the reluctance to perhaps share a modest portion of their fees with their networks, and fear that referral recruiting solutions could make their customers also good at referral recruiting, make them stay away from referral recruiting solutions?

II — Perhaps the psychology of the actual referral process was not fully appreciated: it’s not about money. It’s not about technology. It’s not about being cool.

  • Real “connectors” make incredibly prudent and balanced decisions when it comes to referring a job or a candidate: they will only make a referral if they truly believe they’re doing the right thing for both people on each side of the referral. Whereas a financial reward can certainly add urgency to a referral request, money will not corrupt their decision, as we saw at h3.com where $10,000 rewards never resulted in resume spam and never yielded bad candidates. It’s not about financial rewards; it’s about prudent people carefully managing their social credit balance sheet to first of all help people whose relationship they value.
  • Though it’s not about the money, creating the “right” referral reward is quite important. Employees/people who make referrals have a pretty good idea how much money they’re saving the employer. Five to ten percent of the annual salary with a minimum of $5,000 seems to work best for a position over $50,000 salary. Offering a wrong reward is worse than asking for free referrals.

III — Perhaps back-office issues were not fully appreciated.

  • If we accept that only a small fraction of a company’s employees are true connectors, and in the same light that only a fraction of our personal networks are true connectors, then it’s obvious why referral recruiting solutions advocate that non-employees should be able to make referrals and earn or share rewards. Resulting back-office issues should not be underestimated, and indeed are a genuine concern for HR managers: W-9, 1099 IRS reporting, etc.
  • The perennial complaints about ERP programs has been about the tracking of referrals, transparency for referrers and candidates, plus the adjucating of disputes as to who brought in the winning candidate first. If you reach out to the right number of connectors in a particular labor market segment, it’s quite likely that the same candidate will get referred by more than one person. (Shally Steckerl experienced this in his wildly successful H3.com search, outlined in a 2006 H3 white paper). Sophisticated tracking of referrals across multiple degree social networks is essential. (H THREE Inc./H3.com actually owns a portfolio of four patents (one issued and three still pending), and while at one point there were a dozen companies who appeared to be infringing the patent, startups do not have the funds to pursue such alleged infringements. Hence investing in patents is not useful for startups.)
  • Referral recruiting solutions will always be one of multiple recruiting tools which are deployed simultaneously, which means that all candidates will end up in an ATS system, where they will end up being treated the same way as candidates from any other source. This is wrong and upsets both referrers and referred candidates. Since referrers personally vouch for their referrals, both referrers and referred candidates should always be treated with extra courtesy.

What’s Next?

Innovation is all about keep trying to find solutions for problems, and once we realize that the problem is not how to enable all employees to become productive referral recruiters, but how to increase the recruiting yield from the true connectors we have among our employees, somebody will crack this quest for the silver bullet and create great ROI for his/her investors.

Personally, I think SelectMinds and LinkedIn have good chances of getting it right, because both can enable the connectors among our employees to easily and in perhaps a semi-automated way use their networking skills, their positive social credit balance sheet,s and their large meaningful or affinity-based networks.

As a result, there will be employees in the future who maybe have a salary of $75,000 but who make another $75,000 a year or more in referral rewards, and please let’s hope there will no longer be short-sighted employers who will put a cap on the maximum reward money employees can earn in a year, as exists today. What’s up with that?

This article is provided for informational purposes only and is not intended to offer specific legal advice. You should consult your legal counsel regarding any threatened or pending litigation.

  1. Gerry Crispin

    Great article Hans! I’m saving it. You’ve been in this space so long, your insights just ooze out. I would also love to moderate a panel on the subject with you and a couple other crazed folks. I will pitch it.

    That being said, I’ve a couple thoughts on the subject and especially with regard to your “reasons”.

    1. Saying “solutions” haven’t worked is like complaining about guns that don’t fire and strike targets on their own. They do work and some firms that a decade ago were getting 15-20% of their hires via referrals are now pushing 40-50%. They wouldn’t be able to manage it w/o technology tools. It’s just that it has nothing to do with the tools themselves.

    2. Over the last decade, the AVERAGE SOH % for referrals has NOT crept up much but the distribution has changed from a normal d one to a flat d and that is significant as it shows more firma have actually abandoned/ignored the use of referrals.

    3. Further supporting your premise, the number of refferrals generated in a given compaqny that generates 1/4 of all hires is acutally quite low and as a result when you calculate the Yield, it is extraordinary. Companies will hire 1 out of every 11 (range is 1/2 to 1/25) people referred, and these ratios scales for the few firms that generate 10s of thousands of referrals a year.

    4. So the real issue is why more people don’t get a referral before they apply. The answeer is a) they don’t realize it is a game changer (the equivalent of changing from a lottery where your chance is 1 in 200 to 1 in 11) and b) they assume a referral is a reccomendation. It’s not. Dunbar’s number [150] of meaningful relationships is accurate but not relevant to this discussion. Let me explain. I graduated from a small college with [currently] only 27,000 living alumni. EVERY one of them would be more than happy to be my employee referral if I can reach them and ask. And now with SM I can. I just need to know that it is impoortant to do so.

    5. And my final observation is that the tenor of the article was about employers and recruiters USING referrals to get to job seekers versus educating jobseekers (or simply making referrals more available for job seekers to obtain).

    To illustrate: What if a firm listed the colleges where their employees were from and the numbers from each? What if the firm admitted that of the 400 hires they made last year 100 were from referrals by only 300 employees? What if you could see the distribution of all employees by their previous employer? What if all affinity groups in a company offered weekly 2-hour chat rooms to job seekers with the promise that some would be referred for future openings etc. etc.

    No, companies don’t do that [yet] but, technically I can teach you to get that info w’o the firm’s permission anyway- you just need to know it is important…and soon someone will recognize that if you offered a $10 referral solution to help find a referral before you applied, you would sell millions of them.

    Bottom line, solutions are being sold to the worng stakeholder.

    Just sayin’

  2. Joe Goss

    I’ve only occasionally had to deal with issues around who referred first (that’s built into the rules), but I have had to deal with “is this really a referral” — the issue that arises when a candidate applies first and then lets his friends know about the job (or even, “I know this guy and would have referred him if I’d known he were looking”).

    Generally, we pay when there is a nexus, but while getting people who we might miss pulled out of the pile is useful, it isn’t necessarily what we want ERs to accomplish. I’ve also seen cases where managers allocate candidates they know already to their own employees to make sure someone gets a referral bonus.

    Ultimately, we want a way to get candidates we wouldn’t be seeing otherwise (or at least, better vetted and fired up), without people playing games to get paid.

    Communication in the process pays off in spades. It can definitely bump up results tremendously and gain the confidence of the employees most likely to refer others.

  3. Keith Halperin

    Thank you, Hans for a well-written and stimulating article.
    A few thoughts/questions:

    1) Perhaps a reason that ERPs have been less successful than planned is that the recruiters (whether corporate or contract) may not have been credited with the hires that resulted, and it may have been perceived as an inconvenience at best and competition (similar to an external 3PR) at worst.

    2) It would be interesting to find out if the vast majority of ERs come from the 4% super-connectors, if there is more of an 80/20 situation (80% of ER hires come from 20% of the employees), or some other distribution (perhaps a normal [bell-curve] distribution). Regardless, it would be useful to find out how to increase that percentage so that a greater number of employees successfully participate. (In the mid ’90s, I worked for a firm which had such a generous policy toward ERs that its employees would put out classified ads to look for their ERs.) As I have suggested elsewhere, it might be advisable to implement a policy where every employee below the the level of director were required to refer 1-2 hired employees/year, and that this would be considered a significant portion of their compensation, as Hans describes. HR or Recruiting (fully credited for ER hires) could provide the information and techniques on how to do it for those who aren’t in the usual referrer categories. Have enough companies done this to find out if it is effective?

    3) Have there been any detailed studies of what positions (either by skill, experience level,or some other factor) are best/more easily hired through ERs and which aren’t?

    Thanks again, Hans.

    Cheers,

    Keith

  4. Howard Adamsky

    Brilliant article; just lovely.

    I am inspired.

    Sadly, can you even imagine, in your wildest dreams, trying to explain and/or convince dough faced HR people of the value in your ideas?

    Can you even imagine, discussing this with most CEO’s whose eyes glaze over while they refer you to the fluid filled folks in HR? Can you even imagine this? After all, they are in the leadership business not the hiring people business. (They have a staff for that.)

    Your article is great but it is not for the masses. It is for the pioneers. For the thinkers and the doers and the innovators and the fearless. For those with the vision and the scope to see the value in emerging methodologies and ideas.

    Your article is for the 3% and Lord, how sad is that?

  5. Felipe Villasenor

    Hans, good article.

    Here is where I AGREE with you:
    1) Importance of connectors, reference to Malcolm Gladwell’s Tipping Point, and some of the issues that as pioneers in the space of Referral Recruitment that we are facing due to the current paradigm shift brought on by the impact of technologies that enable social media.
    2) HR is too worried about risks: the HR guys and gals want change, they tell us this every day. They know they can improve, but keeping the status quo in this recessionary hiring environment is a safe bet for them (but of course does not prepare their Recruitment organization for tomorrow). In general companies slap you on the wrist if your innovative changes have any fallout, you make mistakes when innovating to bring additional value, but the risk/reward is worth it – companies must change to support HR & Recruitment. If only the HR department were incentivized like sales people, imagine…
    3) Networking with tons of connections: I agree with you that people can’t really have thousands of computer friends on these social networks and this is precisely why we innovated. On Cachinko, our networking structure inherently provides Employers with the ability to network with candidates, even their employees (imagine that!), and their friends too. In the end, everyone will be connected to thousands of people, but interaction will happen on occasion. Individuals or Employers can’t have thousands of true friends, but with the way networks are built on Cachinko you can be connected with them all and enable communication with them and among them as needed. Not all connections have to be friends, but they can certainly all be useful for different purposes – with Cachinko, you decide.
    4) Staffing firms: very different from an Employer when embracing hiring solutions and they are worried that the end of third party recruiters is near, change can be perceived as scary, but it’s a necessity to bring value to your customers

    To be transparent with all readers, I am a co-founder at Cachinko.com (Social Media Recruiting Solutions) and also an inventor on a patent pending with the USPTO regarding the creation of clique based social networks and automation of referral reward payments through these types of networks.

    Here is where I DISAGREE with you:

    1) Players in the Referral Recruitment Space: The companies you mentioned they tried, but not really – perhaps because they are not specialized in referral recruitment. They are not in this space to win, they are trying to offer a “me too” solution where you can send someone an email or a web link and as we say in Texas “this ain’t gonna cut it.”
    2) All candidates will end up in an ATS: I don’t think so, at least not like the ATS of today. They will end up in a Social ATS that supports both Talent stored centrally and in a distributed model. Traditional ATS players’ market share will erode to new players UNLESS they make a dramatic 180. The recruiting industry is in a paradigm shift, and the shakeout will create new market leaders. Old school ATS players that don’t change on their own will be forced by the market to change as their customers go elsewhere. Unfortunately, most ATS players are stubborn and just won’t change (you know who you are).

    Gerry Crispin is right on with his assessment. One of these days, I would love to meet both of you and chat for a few hours. I know we all want to be part of the paradigm shift in the industry and see it happen, but how and when this happens all depends on what solutions are available on the market and whether HR is committed to embrace. HR is always interested in great ideas, but they can’t always implement them because there is not a match between the influencers and decision makers within their organization – just be patient with HR and the Recruiting industry, they are almost there (believe)!

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  11. Felipe Villasenor

    Today (June 28, 2012), I read on TechCrunch (breaking news source ;) about a new company Zao.com that received $1.3m in funding that has a solution extremely similar to H3.com. So I thought I would revisit Hans’ superb article and it’s comments. Two years later, I can easily say the Referral Recruitment problem is not solved. I have seen so many companies try, but not make a dent on the market. At this point, I don’t think it’s about the technology or the iteration of any company’s proposed solution. HR and Recruitment Marketing say they need it and want it, but are just not ready to embrace it, the reason why is the “white elephant” in the room. That elephant is getting old and most of us want it to die soon…

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