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

Posted By Dr. John Sullivan On August 6, 2012 @ 5:15 am In Advice and How-Tos | 30 Comments

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.

[1]

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 [2]. 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 [3]” 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 [4] 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.


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URLs in this post:

[1] Image: http://www.ere.net/wp-content/uploads/2012/08/Miami-Heats-LeBron-James.jpg

[2] the more important and higher value business and revenue impacts that great recruiting can produce: http://www.ere.net/2012/07/30/show-me-the-money-the-top-10-revenue-impacts-of-a-great-hiring-process/

[3] passive: http://www.ere.net/tags/passivecandidates

[4] recent American National Standards Institute/SHRM herculean effort: http://www.ere.net/2012/03/13/cost-per-hire-is-now-a-new-hr-standard/

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