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The Silliness of Measuring Cost Per Hire, and How it Can Reduce Your Strategic Impact

by Aug 6, 2012, 5:15 am ET

I nominate the calculating of “cost per hire” as the single most pointless and damaging exercise in recruiting. Even though the cost per hire metric is widely used, that certainly doesn’t mean that it adds value, and it may in fact actually hurt the recruiting function. Years ago when I was a chief talent officer, I even went so far as to ban the calculation of cost per hire.

photo credit: David Ramons

I did this because cost per hire had the negative effect of causing our recruiters to shift their focus toward cost reduction and away from our real job, which was to produce high-performing hires. If you’re going to be a strategic recruiting leader, you need to stop thinking like an accountant (who focuses on transactional costs) and instead act strategically and focus on the more important and higher value business and revenue impacts that great recruiting can produce. If you were the CEO of the Miami Heat and you were hiring LeBron James, you would consider the cost of the recruiting transaction to be insignificant compared to the economic value that he produced (winning a championship).

A Long List of the Reasons Why You Should Stop Worrying About the Transactional Cost of a Hire

You might think that calculating cost per hire is a low-impact thing to do, but you would be wrong. The metric and how it is used can have many negative consequences that recruiting leaders need to be aware of. The problems with the metric include:

  • Recruiting transaction costs are a distraction – in my experience, nothing distracts from what should be recruiting’s primary focus more than forcing recruiters and administrators to focus on transactional costs. Unfortunately, calculating the cost of recruiting in isolation often has the net effect of forcing recruiters to primarily worry about the cost of hiring (which may average $5,000) even though the business impacts that the new hire produces may be many many times higher (at Apple for example, they exceed $2.2 million per year for each hire). In my experience, cost per hire is an evil metric because calculating it takes up time and resources away from measuring the quality of hires. For example, if you required brain surgery, you would certainly be concerned about the cost of the surgery, but the cost element would be of minimal concern compared to be value of the output (living and having a fruitful life).
  • Return on investment is the metric that should be used – in every other part of the business, managers never look at simply costs. You instead compare the costs to the value of the output or the result that those expenditures produce. The most strategic and widely used metric in business is ROI and this metric contains two elements. The “I” in ROI stands for the money invested or costs. But the other side of the equation, the “R” or return, is equally or even more important. The ROI formula forces you to compare the cost relative to the return that the costs produce. Reporting hire cost without directly linking it to the dollar impact of quality hires calculation is simply a bad business practice. Cutting recruiting costs may actually cost the firm money.
  • Attracting quality is often expensive — marshaling the resources that are required to produce quality hires is almost always expensive. Hiring great recruiters is certainly more expensive, and using the best sources like social media, referrals, and the mobile platform may take longer and cost more than less-effective sources. Job board ads may be relatively cheap but saving a buck by using them may actually cost you a bundle as a result of lower-quality hires. To put it bluntly, you get what you pay for.
  • Low cost may mean slow hiring, which can be expensive – if you cut costs by understaffing your recruiting team, your “time to fill” will increase dramatically. These delays will mean an increase in costly vacant position days (especially in revenue-generating positions). Additionally, being slow to close on candidates who are in high demand may cause you to lose the very best ones.
  • Many of the factors that increase the cost per hire may be outside of your control – your cost per hire may fluctuate regardless of what individual recruiters do. For example, if most of your recruiting costs are relatively fixed for a year (i.e. LinkedIn licenses, ATS costs, your corporate career site costs, and vendor costs) a dramatic cut in recruiting volume will automatically cause the cost per hire to skyrocket. And conversely, a doubling of recruiting volume will reduce your cost per hire, simply because it spreads your fixed costs out over many more hires. If the mix of job openings changes so that higher-level jobs and hard-to-fill jobs make up a larger percentage, your cost per hire will also increase dramatically, despite your best efforts. If more external executive searches are required, the cost per hire will also increase dramatically.
  • The cost per hire metric is not externally comparable – if the goal of calculating the cost per hire metric is to show that your recruiting costs are competitive with other firms, you are in for a big surprise. Not only are the formulas used by other firms not equivalent, but getting accurate hire-cost numbers from your competitors is almost impossible. This means that your only remaining option is comparing this year’s costs to last year’s.
  • Candidates can tell a cheap operation – the very best candidates judge the company based on what they experience during the recruiting process. For example, if candidates who are innovators don’t see innovation in the recruiting process, they’ll assume that innovation doesn’t permeate the corporation. If you lowball a top candidate on their flights and hotel costs, they may judge your entire organization to be equally as cheap. A cheap process may scare away the best candidates.
  • Low-cost hiring may result in a weak candidate/manager experience -- overworked recruiters and low budgets may negatively impact the candidate experience. A bad candidate experience will hurt your offer acceptance rates and your employer brand. The resulting low level of candidate and manager satisfaction may also be a “hidden cost” not included in the cost per hire calculation.
  • Cheap hiring may drive away the best recruiters – top recruiters aren’t stupid, so if you dramatically cut recruiting resources, you simply won’t be able to recruit or retain top-quality recruiters. And without sufficient resources, even the best recruiters can’t work miracles.
  • Attracting active candidates is cheap compared to the cost of attracting non-jobseekers – if your primary focus is on hiring a large percentage of the so-called “passive” non-job seeker, your cost per hire will be dramatically higher. This is because it takes more time to find and to build relationships with individuals who are not actively looking.
  • Cost per hire metrics don’t vary very much – in my experience, even when recruiting leaders put a lot of emphasis on cutting cost per hire, the figure generally only goes down by a small percentage. This typically low percentage of cost savings makes me wonder whether all of the effort and emphasis are really worth it. In my experience, even the best cost-cutting efforts in corporate recruiting seldom save more than $100,000 per year. That’s not very much money in most corporations. The many hours that recruiting leaders must devote to calculating and improving cost per hire may have a high negative impact on the quality of the recruiting process.
  • Hiring cheap may require the use of inexpensive sources and tools – hiring cheap might force you to use only inexpensive or free sources like “help-wanted” signs, posting exclusively on your career site, career fairs, and Craigslist. Unfortunately, the cheapest sources are seldom the most effective ones in attracting high-quality candidates.
  • The formula almost always undercounts the real costs – the formula used by many recruiting functions excludes the cost of the hiring manager’s time. Referral hires never include the cost of the employee’s time. Almost all cost of hire efforts fail to also calculate the cost of bad hires, the low retention rate of hires, the lack of diversity of hires, and the need to terminate bad hires. Omitting these negative performance factors means that you will underreport the actual costs by a significant percentage. 

Final Thoughts

All professionals should be cost conscious; it is simply part of their job. But overly focusing on the transactional aspects of recruiting has simply been a distraction. To make matters worse, the recent American National Standards Institute/SHRM herculean effort to standardize the cost per hire metric has resulted in an increased emphasis on costs. And unfortunately, the areas that really need work, measuring the dollar impact and the quality of hire, are unlikely to be produced any time during this decade.

So if you are recruiting leader, two strategic metrics that you must develop on your own are 1) the relative on-the-job performance of new hires and 2) the dollar impact on the business of great hires (compared to average hires). Every other area of the business has learned to measure quality and their function’s dollar impact. Only HR and recruiting have yet to come on board.

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.

  • Gary Cluff

    Right on, John!

    Although CPH was “in” back in the 1980′s when I managed the EMA’s annual survey on recruiting metrics, it has become irrelevant over the last 10 to 15 years, primarily due to the war for talent. While I agree that ROI garners the attention of organizational leaders, so does Cost of Vacancies, of which replacement/hiring costs are a small part. Thus, Time to Fill and Quality of hire trump CPH.

  • http://www.harrisallied.com Kathy Harris

    This is a topic near and dear to my heart as well John. I’m an advocate of strategic recruiting as a direct way to increase competetive advantage. Unfortunately, corporate processes around recruiting often create bottlenecks. Build a winning team and you win championships, build a mediocre team and, well- you get the idea…

  • http://www.designsontalent.com/ Linda Brenner

    Excellent article. Great points. And you’ve helped many a TA leader create a business case for NOT reporting on this errant metric, regardless of who’s asking for it.

  • Keith Halperin

    Thanks, Dr. Sullivan. Which alternative metrics are best for a Recruiting Manager to use to increase the size of their budget, or a recruiter to increase the amount of their compensation and/or job security? (Realistically, these are the most important concerns in corporate recruiting.)

    Cheers,

    Keith
    keithsrj@sbcglobal.net

  • http://www.tmp.com Joe Zeinieh

    A few thoughts:

    (1) A Dr. Sullivan thought provoking article as usual

    (2) I don’t think anyone can dispute the more valuable/actionable data achieved via an ROI approach vs strictly cph; albeit cph should be a factor of course in determining true ROI

    (3) We’re in an environment where many employers struggle to accurately identify their true cost of hire – whether it’s due to challenges with accurately tracking recruitment marketing effectiveness, internal hard costs, no solid formula in factoring in soft time cost, etc. With that said, tracking the ROI would appear to be a challenging model to successfully put in place. Obviously some employers would do a great job at it; I think other employers may view it as their ultimate goal but are not sure how to calculate it in their orgs uniformly. Couple that with some employer’s challenges extracting true cph, it may be perceived by some employers as intimidating/challenging to implement.

    I’m aware of several staffing firms that do a great job at measuring (placement) revenue generated by recruitment activites – in those cases, the ROI metric capture might be more straightforward than within a non-staffing company.

    I do agree in the value of ROI being the true measuring stick. Maybe a subsequent article can provide some thoughts re: how ROI can be measured by an employer, outside of just CPH?

  • http://www.woodmanseegroup.com Sean Rego

    Great Article Dr. John!

    Excellent article! In some regards metrics are important, however, the most important metric is: Quality of Hire!

    Sean Rego

  • http://www.smarterhire.com.au John Millican

    Great article!

    In many ways it’s a lot easier to measure CPH, unlike with Quality of Hire there are as many other causation agents that can impact quality of hire.

    I’ve been advocating linking quality of hire to a probation review process that provides a number of quantitative measures that paints a picture of quality of hire. My thoughts on the efficacy of the metric is that the impact of the recruitment and selection process on quality of hire will be diluted by other factors such as the new hires manager. So Quality of Hire should be measured during the new hires probation period and probably not much beyond the first year.

    Happy to discuss it with anyone that’s interested.

    John Millican

    smarterhire.com.au

  • http://blogbysuchitra.wordpress.com/ Suchitra Mishra

    Hello John,

    Great post and something that I wholeheartedly agree with. Clearly the standard HR metrics of Cost per resource, HR efficiency (no. of HR employees to total no. of employees), etc. which primarily help in driving down the costs are no longer sufficient in an environment where talent is the competitive edge for organizations. The need of the hour is HR metrics that are aligned to the current and the future business plans to ensure that not only is there no shortage of talent when we need it but also that we have processes and programs in place to create the right talent for our business. I picked five of the metrics that could help drive the talent advantage for an org here : http://blogbysuchitra.wordpress.com/2012/07/29/five-human-resource-metrics-that-link-people-to-business-strategy-business-operations-performance-metrics/

    Regards,
    Suchitra

  • http://drjohnsullivan.com Dr John Sullivan

    Keith

    Here are my top business impact recruiting metrics in descending order

    1. Quality of hire — the percentage improvement in the on the job performance level (or performance appraisal rating) of new-hires during their first year, compared to a standard.
    2. The dollar impact of quality hires — taking the percentage of improvement of new hires and multiply it by the average revenue per employee to get the dollar impact of quality hires.
    3. Revenue loss due to position vacancies — the business impact of excessive position vacancies, especially in revenue and revenue impact positions.
    4. The cost of new-hire turnover — the turnover rate of new hires within the first year and the cost of that new-hire turnover in key positions including opportunity costs
    5. Innovation from new-hires — the dollar value of implemented innovation from new-hires during their first two years.
    6. The cost of bad new-hires — the percentage of new hires that must be asked to leave and the cost of new-hire errors and negative customer impacts from bad hires.
    7. Project delays – Number of projects that are delayed because of talent shortages.

  • Louise Goodman

    I agree with this in part. I work for an advertising agency so looking at the marketing CPH is the first step to getting clients to think about what really works vs. what they’ve always done. We don’t just look at CPH however, we look at a number of metrics
    application to hire ratio
    rejected applications
    applications rejected at the first screening stages
    offers made

    the idea is to get clients looking at the marketing activity that drives the best quality applications with the best ROI and the LEAST applications. then we can look to re-invest the money we save into building the employer brand… which should make sourcing the best talent easier

    we’d love to be able to link this to deeper ROI however a lot of companies are still using their ATS drop down info to analyse marketing and sourcing effectiveness, which is not an accurate measure of what messages and media candidates have been influenced by on their decision journey. CPH is an useful first step to help make the whole recruitment process more accountable.

    it should however evolve on from just measuring CPH; the candidates decision journey is complex so, unfortunately(!), the measurement method will need to be complex as well

  • http://www.clearfocusfs.com Jim Wong

    So many companies make the claim that their people is what makes their company so special. In fact, they go as far as saying it gives them their competitive advantage. I’m sure you have even heard many of these same companies say their people are their biggest assets. However, when it comes to sourcing, attracting, recruiting and retaining their people – the hard costs are always measured as an expense but they never look at the return on their investment. If people are truly an asset to their company, the dollars spent for recruiting should certainly be viewed as an investment and measured as such.

  • http://www.linkedin.com/in/robmcintosh Rob McIntosh

    I am going to go against the stream and disagree with this article. Not every aspect of it but rather directionally disagree. I have been in a role which requires me to directly interface with the CEO, CFO, COO and other key Executives for the last 10 years. If you ask them what are the important key metrics in Recruiting they will tell you items that are derivatives of:

    Cost
    Speed
    Quality

    On the cost side it comes down to two simple measurements.

    (1) Operating Income = Since Recruiting is a core services function and is a cost center, then how can you keep the OI optimal given it directly impacts margin/profit of the company.

    (2) Lost Opportunity = How much money (Revenue) are we leaving on the table as a company if a position is left open for a period of time.

    In both instances Cost Per Hire or any or metric and analysis that allows us (Recruiting) and the business to understand where are the opportunities to lower the cost to serve or optimize the ROI by sourcing channel if key. This is because it helps:

    a)Ensures you are running an optimal recruiting organization in support of the business needs.
    b)Helps frame a conversation with the business based on facts/data which can help level set expectations or help change behaviors to improve in these areas.

    While I agree that you should not make the focus all about cost, to not looking at it would be a crazy as someone opening a business and expecting to make a profit if the outgoing is more than the incoming.

    The third measurement that I did not include above given the metric would be PPH (Profitability Per Hire) vs CPH and significantly impacts profitability is Quality………but that is an article in its own right and has been written about philosophically by many before.

  • http://www.ctg.com Lori Law

    So how does a financially focused organization overcome this? We’ve been meausring cost per hire and average # of hires by recruiters for years. We do keep track of ROI of recruiting tools we are spending money on in order to determine if we should continue with the services or switch to better recruiting tools that yeild better results.

  • http://TandLassoc.com davis howell

    HI Lori,

    First, I would like to know how you are measuring cost of hires.

    Try factoring the cost of NOT filling a position as well as the cost of a not so good hire. I will make the presumption that as a financially focused organization, you look at the direct costs associated with a hire-i.e recruiting fees, employee (including management time) time taken to do the interviews and of course the the HR time taken to onboard the new employee.

    My experience (10+ years in the recruiting industry) says that this approach usually entails driving down the recruiting fee structure and increasing the warranty period with the recruiters you FINALLY sign. Most likely, not the best recruiters you can retain.

    Try this. On a $2MM quota in software, each week the position is open costs the company about $30,800 in GP. On hardware, figure about $20,000 GP. Put those numbers into your cost of hire and see what the impact is to the company bottom line.

    Davis

  • paul humphreys

    Strongly disagree with this article, although I feel there is value in having this discussion.
    There are some glaringly incorrect assumptions here.

    Firstly, we shouldn’t knock the idea and reasons behind measuring CPH as this article seeks to do. Recruitment doesn’t exist in a vacuum and we should always be mindful of cost. Businesses do not exist to support recruitment functions, rather the other way around.
    Businesses must generate profits, and high costs in recruitment negatively effect this. Fact. Ergo it is reasonable to minimise cost (assuming a satisfactory level of recruitment is achieved). Measuring CPH is not “the single most damaging” exercise in recruitment. Of course it isn’t.

    Secondly, you say the recruitment fee of LeBron James is irrelevant. No it is not. I have no idea who LeBron is (I hope it’s not a real name), but the cost of a player is critical, otherwise they would cost $100billion, OR $200b. Heck why not a Trillion Dollars? Of course the cost is relevant. The recruitment is not the end goal, the club making a profit and staying in business is the end goal.

    Third, you say Apple employees generate over $2.2m revenue each. NO THEY DO NOT. They generate that on average. But the junior intern is not adding $2m of value to the business. Of course not. Whereas the guy who designed the iPod is generating far more value. It’s an average. Therefore if some employees are generating a much more modest return on investment then the costs associated with hiring them become incredibly relevant.

    Lastly, this article assumes measuring quality of hire is possible, even easy. It is not. It is so completely subjective as to be almost meaningless.

    I appreciate that this article means well, and the point it should make is that CPH is not the only metric worth measuring. But in making this point I’m afraid you have made some really crazy statements John that need to be addressed.
    Recruitment can not and does not exist in a bubble where it is immune to economics.
    The cost per hire is a very important metric, and should be studied and reported on. It is the interpretation of this that is sometimes mis-handled, but it remains crucial.

  • http://www.trimedx.com Todd Rogers

    I’m troubled by this. The logical implication is that in a cost/benefit analysis, transaction cost is irrelevant or merely a distraction, at best. Transaction costs are a price barrier and always will be. They also tend to be highly visible; sort of the low hanging fruit for bean-counters. Although it’s unsettling to think of human beings as such, there are workers who are content functioning as commodities. There are only so many LeBrons and only so many Mannings to go around. Pretty soon, a substitution has to be considered. Quality will yield to scarcity. ROI will become a distant second to transaction burdens.
    (Respectfully)

  • http://superecruiter.blogspot.com/ Morgan Hoogvelt

    Couldn’t agree more or have said it better myself. The metric I focus on is internal client satisfaction. If my hiring managers are more than satisfied with the quality of hire, then we are doing our jobs. Simple focusing on cost and keeping it as low as we can does not provide us too much value or get our talent levels where we would like them to be.

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  • http://recruitingviews.blogspot.com/ Ian Harvey

    John, Sorry to come late to the party, but I am glad that there is someone else out there who feels the same as I do about CPH.
    There is no more direct link between good recruiting and cheap recruiting than there is between good recruiting and expensive recruiting. There are good and bad cheap recruiters, and good and bad expensive ones.
    The problem with the fixation on CPH is that it detracts from the more important strategic debate around quality of hire and ROI. Cost is a part of this, of course, but it has been too easy to argue that, even if you don’t know what the return on your recruitment investment is, if you lower the cost the return must be going up.
    Even if the metrics currently used to measure ROI are not perfect or universally accepted, this is where the debate and development should lie.

  • http://www.shakercg.com Joseph Murphy

    There are many who asked (and John replied well), “What to measure?”

    Think of staffing as a business process with a yield to manage and the metrics emerge.
    Here are a few that quickly come to mind:
    Waste & rework – 90 day voluntary turnover, offers rejected
    Rejects & defects – 90 day involuntary separations
    Variation – range of productivity from best to worst of new hires
    Cycle time – opportunity cost of vacancies (think line down in manufacturing terms)
    Cost to finished product – investment to achieve job proficiency (time and dollars)

    In a poll recently conducted on a BLR webcast, 57% of respondents stated they did not measure and track 90 day turnover. That is akin to manufacturing not reporting on waste. That just does not happen in manufacturing, but in recruiting it is the norm.

    88% of respondents stated they did not measure and report on new hire performance variation. That is akin to manufacturing not reporting on quality variation.

    There are much better metrics than CPH. But data would suggest, HR practitioners have not adopted them….yet.

    Here is a place to read more on some of these matters.
    http://www.shakercg.com/blog/2012/04/lessons-from-lake-wobegon-and-quality-of-hire/

    Thanks, and keep writing John
    .

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