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Facebook’s Billion-dollar Hiring Lesson — the Business Case for Eliminating Missed Hires

by Feb 21, 2014, 5:56 am ET

whatsappThe most costly recruiting error in recent history was revealed last week.

On Wednesday, Facebook announced its nearly $19 billion purchase of the instant-messaging firm WhatsApp. But the real news about the acquisition relates to the colossal recruiting failure that occurred a handful of years earlier (as reported by Forbes) when both WhatsApp founders Jan Koum and Brian Acton applied for a job at Facebook and were rejected (Acton was also rejected by Twitter).

As Brian Acton put it ,“We’re part of the Facebook reject club.” You could easily argue that this colossal “hiring miss” cost Facebook billions, and as a result, this hiring error has to rank near the top “not hired” errors, only rivaled by HP’s rejection of Steve Jobs for not having a college degree. If you are a corporate talent manager, this and similar errors should now become a critical part of your business case for fully funding an effective recruiting team and flawless hiring process.

The Top Eight “Billion-dollar Hiring Miss Lessons” for Talent Leaders

No one can of course be 100 percent sure that if Facebook had hired the two founders they would have developed this $19 billion app while at Facebook. However, the fact that co-founder Jan Koum was immediately placed on Facebook’s board of directors strongly builds a case that a top talent was clearly missed. Going from a “reject” to board member in little more than five years would have to be classified as more than a little embarrassing. Because of this very public mistake, corporate recruiting and talent managers everywhere can learn valuable lessons from Facebook’s hiring mistakes. Below you will find the top eight most important missed-hire lessons that corporations should learn and the action steps they should take to avoid them in the future.

Lesson #1 — Calculate the cost of missed hires — executives simply will not fully fund recruiting processes that are designed specifically to minimize “hiring misses” until they see the economic losses that directly result from those “missed hires.” Begin by working with the CFO’s office to quantify the dollar impact on corporate revenue that each major hiring miss has on your firm. Also include in your calculations the added value that the missed hire will bring to your competitor that ends up hiring them. This “missed-hire problem” reaches tens of millions of dollars each year at nearly every major corporation. In the Facebook case, the amount was in the billions.

Lesson #2 — Estimate your percentage of “missed hires” – Google, which has the world’s only data-driven recruiting function, is the only firm that I have identified that has conducted research on the percentage of “missed hires.” Under their “Project Janus,” it developed an algorithm for each large job family that analyzed rejected resumes to identify any top candidates who it might have missed. It found that under its highly efficient recruiting process it had only a 1.5 percent miss rate. And as a result, it hired some of their revisited candidates. However, under the much weaker hiring processes that exist at most corporations, I would estimate that the “missed hire” rate could average as high as 5 percent. You can determine your own rate of missed hires by revisiting a sample of “not-hired” applicants using an approach similar to that used at Google. You should also periodically “identify industry names in the news” and run them through your applicant database to see how many of these industry heroes actually applied at your company.

Lesson #3 — Identify the specific recruiting problem areas – if you use either the “Janus” or the “industry names in the news” approach, you can identify individual applicants who were not hired. Then go back through your records and interview recruiters and hiring managers in order to find out at which point the recruiting process failed. Determine if recruiters or later on hiring managers rejected these top individuals early on, or did they simply drop out of the process due to frustration. When you identify the common error points or processes, you must take immediate action to shore them up.

Lesson #4 — Have a second party independently review rejects in key jobs – you can’t do it for every job, but for key positions you should set up a process that has a second party independently review all potential rejects. Focus on potential rejects who have 1) worked for key competitors; 2) have advanced degrees; or 3) have a minimum amount of industry experience. The same process should be used to ensure that the ATS system is not inadvertently rejecting or hiding top applicants. You should also note that at Google, all of its hiring decisions are made by a group in order to prevent individual hiring managers from rejecting top talent primarily because they don’t meet their own selfish short-term needs.

Lesson #5 — Take extra time when reviewing innovators – the most valuable hiring misses are likely to be innovators, so take a second and even third look before you reject a candidate who appears to be an innovator. This group usually has the highest rate of rejection because they are often highly critical during interviews and they sometimes have a checkered employment history and resume full of job jumping. In fact the two cofounders of WhatsApp abruptly quit Yahoo for no business reason and took a year-long trip around South America playing Ultimate Frisbee. With such a checkered and even frivolous history, your firm might have mistakenly rejected them also.

Lesson #6 — Keep in touch with top talent who are not hired  – if you’re serious about avoiding hiring misses, develop a process to keep in touch with top prospects who were not hired and especially those who dropped out of your process. Build this “someday you are going to work here” talent community online using a Facebook or LinkedIn page. Then use it to periodically send interesting company information and to “push” relevant job openings to its members.

Lesson #7 – Understand the dollar loss when top prospects fail to apply – add to your list of “hiring failures” top talent in your industry who never applied to your firm. If you have a weak employer brand or as many do or a painful application process, you won’t have a chance to miss-hire top talent because they will never formally apply for a job at your firm. You can decrease the likelihood of “the best never applying” by using focus groups or interviews with top talent (usually at industry-wide conferences) or with Internet surveys. The goal is to find out and fix the specific factors that prevent or discourage top talent from applying at your firm. An alternative is to simply look for negative comments about your firm on the Internet or on glassdoor.com.

Lesson #8 — Understand the tremendous dollar loss when you hire weak candidates – there will also be a serious loss of revenue when firms make hiring errors at the other end of the spectrum. In fact, bad or weak hires may cost even more, because in addition to the “lost opportunity” of hiring top talent, weak hires can make serious and costly errors.  If these weak hires slow down innovation and product development or damage customer relationships, the cost each year will likely be in the millions. Key action steps for recruiting leaders include working with the performance management function to identify the number of weak hires (i.e. bottom performers or those that must be terminated). Next work with the CFO’s office to estimate a dollar loss to the firm as a result of each weak hire. The final step requires recruiting leaders to re-examine the hiring process for each “missed individual” in order to identify at which point that their weaknesses should have been identified.

Final Thoughts

It’s a sad fact that at 99 percent of major corporations, there is no recruiting metric to calculate the percentage of top applicants that are missed because of hiring errors or because the hiring process was so frustrating. I recommended such a metric in my “Measuring the Quality of those You Didn’t Hire” article published in ERE in 2010.

If you missed it, today is an ideal time to revisit the topic and to propose “missed hire” solutions to your executives. Recognize that Facebook has one of the most effective recruiting processes on the planet, so the odds are that this problem is much much worse at your firm. But unfortunately, only one corporation (Google) has up to this point taken the time to proactively identify how common and costly the problem is to their firm. My guess is that Facebook will soon be the second corporation to join that formally exclusive club. Perhaps your firm should follow suit!

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.

  • Richard Araujo

    “In fact the two cofounders of WhatsApp abruptly quit Yahoo for no business reason and took a year-long trip around South America playing Ultimate Frisbee. With such a checkered and even frivolous history, your firm might have mistakenly rejected them also.”

    Or, mistakenly hired them into positions in which they felt they were undervalued, and so quit again for another year of Ultimate Frisbee, this time across Europe…

  • G C

    Really? If Facebook hired these guys, they likely would have been frustrated and bored in Facebook, creating nonsense products that served more and more useless, low brow advertising to a billion users–exactly what these founders despise. Maybe they only would become mediocre employees, then eventually guit to start WhatsApp. Further, if they had a bad experience working in Facebook, they might have sold WhatsApp to Google instead (perhaps despite the higher Facebook bid). Then Facebook would be BOTH without these guys as employees AND without the app they think is worth $19B. A double whammy…for HIRING them.

    Facebook, it turns out, may have made the right call in not hiring and instead letting these guys do what they had a passion for doing (albiet, $19B is pretty expensive and that’s a whole other post).

  • Drew Koloski

    IMHO you stating that this is a failure is off base. If you have ever worked at a start up from the very beginning or have been a very early employee, the risk taking attitude and overly ambitious ideas that make you successful will more than likely get you punished in the uber political environment inside of a big, slow company. It also comes off as “selfish” to most interviewers at big companies which is probably why he didn’t get hired. Facebook’s hiring goals for individuals and acquisition activity are mutually exclusive and probably shouldn’t be compared. I’m also pretty sure if we cloned 20 year old Mark Zuckerberg and dropped him out of Harvard today, Facebook wouldn’t hire him.

  • Martin Snyder

    Human affairs are emergent, “Big Data” would be as useful as sheep entrails or coffee grounds in predicting or managing these outcomes. Humility is in short supply…

  • Natasha Bernal

    @G C I really have to agree — perhaps the lack of opportunities given to them at Facebook contributed to them having the drive to prove them wrong — Who knows if they would have wanted to become intrapreneurs at all, let alone if they would have had the key circumstances that enabled them to create Whatsapp. Now that Facebook has purchased it, it’s up to them not to break it! As far as a lot of users are concerned, what Facebook has bought isn’t so much the product as their personal details (again). Will the terms of use change? Will the products merge into one? I find myself wondering whether the former Whatsapp team will simply turn around and come up with the next big thing on the market anyway….

  • Keith Halperin

    Thanks, Dr. Sullivan. As far as a “certain company” using the type of metrics mentioned: is this the same company which admitted after 15 years the open secret known throughout the recruiting community that its application and counterproductive interviewing process was dysfunctional, likely not rejecting two but THOUSANDS of exceptional potential employees?

    @ Drew: Well-said. Does it really surprise anyone that companies controlled by an arrogant and powerful hiring attitude might reject people that “aren’t quite our type” or that founders of large companies wouldn’t probably be hired by them now, and if hired would likely be fired or quit soon thereafter?

    @ Martin: Could you elaborate?

    @ Natasha: Also well-said. “Will the terms of use change?”
    The joke going around is that even though the acquisition hasn’t yet been completed, FB has already changed the terms of use twice and the privacy controls three times (or was it four?).

    Cheers,
    Keith

  • Shanil Kaderali

    I love the idea of going to an executive leader and asking them what they think the cost of hiring mistakes. Really quantify it – good approach.

    I’d add though, with innovators (founders of whatsapp) – these are ideas people. They don’t always fit nicely into a box of most job roles. With a few exceptions of strategy and research roles with some creative freedom, it’s a very small number of companies and individuals who are into this category.

    Companies don’t have good ways to identify them and even then, how to give him a flexible job opportunity.

    The headcount is a cost – not an asset to many of these companies.

    if you inject some silicon valley & digital media openness to companies in retail, health care – in time, maybe but even some of the tech companies don’t get it right.

  • Richard Araujo

    @Keith,

    Emergence is kind of like chaos theory. Human affairs are, in the end, nothing but a bunch of interactions between people under differing circumstances. The exact circumstances and interactions never repeat but affect the outcomes. That’s chaos theory via Jurassic Park and The Goldblum. Emergence is the larger patterns and entirely new aspects of systems that ‘emerge’ as a result of those individual interactions. Human consciousness is thought to potentially be an emergent property, as an example. It’s the result of our brain chemistry. But, while these properties are the result of these systems, at least as of now, it’s impossible to reduce them to a deterministic level even though we know the laws governing those systems. We know the laws of physics and are subject to and the result of those laws, but physics can’t predict what I’ll eat for breakfast tomorrow, or who Facebook will hire.

    Generally speaking, predictions in these areas tend to fall far short of perfection, as in being incredibly wrong most of the time, and when right only so with extreme caveats. Who will get hired is the result of tons of discreet, non automatic and highly contingent decisions and interactions made by all the players in the process. Predicting it is essentially meaningless. Trying to predict what would have happened had another decision been made is likewise meaningless.

  • Keith Halperin

    Thanks, Richard. I was just reading on a another blogsite about a discussion of whether or not true AI were possible, if it were how long it would take, and if it would lead to a “Singularity” aka, “the Rapture of the Nerds”. Somebody there speculated that consciousness/thought might not be an emergent property, but an evolutionary one: “A further observation: human intelligence is not an emergent property, it is an evolved property. This refers to evolution in the narrow, biological sense of genetic evolution of multicellular, sexually-reproducing organisms over the last 800 million years.” Damned if I know- above my pay-grade…

    I don’t know about artificial intelligence, but I do know that things in recruiting would be a lot better with more natural intelligence and less natural arrogance on the part of those deciding policy…

    Happy Friday,
    Keith

  • claudio weinstein

    I don’t believe the conversations of missed hires and acquiring companies is as “mutually exclusive” as it seems.

    As an entrepreneur myself, I often want to reach out and find others who share my thoughts in an effort to gain confidence, learn from others, and bond with those I feel can help put forth my goals indirectly.

    In some cases, my thoughts go to working under the umbrella of a profitable venture if only to develop an environment where profit can continue to be an important part of my work.

    In my own case, my imagination leans towards being too idealistic at times. At those times, I reach out to more profit minded partners to help me hone a portion of my developments towards profitability in order to afford me freedom to work on those more idealistic breakthroughs.

  • claudio weinstein

    Just to complete my thought on my previous post…

    I like the idea of companies tracking every applicant and follower the company has for the purpose of understanding their audience and developing successful hiring practices.

  • Richard Araujo

    @Keith,

    From the discussions I’ve read, the two possibilities (evolutionary vs emergent) aren’t mutually exclusive. As always though, the point is, what’s the point? Hiring decisions may not be emergent, but they are by definition chaotic, being highly sensitive to initial conditions and the outcomes being dependent on multiple factors, all of which can greatly affect the outcome.

    As such, any hire that is not made is not one that can be judged as a success or a failure, regardless of what the person does subsequent to not being hired at company X. A truly controlled experiment is impossible, the person may have done really well or really poorly. Because it’s impossible to know, and because arguments for either possibility can be made, it’s perfect fodder for articles.

  • Keith Halperin

    @ Richard: Thanks.

    Keith