Beware of False Economies: 3 Ways to Avoid the Trap

Mar 14, 2011
This article is part of a series called Financial.

We are in interesting times with regards to corporate recruiting. This is a Big Inflection Point in the business cycle (arguably the largest one many of us will experience in our lifetimes) and recruiting departments are really stretched.

Part of the challenge corporate recruiting departments face today are a result of not recognizing “False Economies.” A False Economy is when something seems like a great deal or a good idea, but the economics are not what they seem when viewed more holistically or from a different vantage point. This is usually a result of tension between short-term objectives and long-term objectives: value is typically traded between the two. Jack Welch famously remarked about two years ago that “On the face of it, shareholder value is the dumbest idea in the world …”

That is an interesting insight to reflect upon in light of managing a corporate recruiting operation.

There are a host of potential False Economies in corporate recruiting departments — things that seem like they save money or create value, but in reality the true net economic value is substantially less. Identifying and understanding these False Economies will be imperative for staffing leaders to navigate the rough waters ahead.

One timely example is recruiting team capacity … many organizations currently have an insufficient capacity model for the current demand plan. This typically results in overspending that is far greater than the cost of deploying a more sustainable resource model. At the center of the dilemma is the substantial difference between maximum capacity and optimal capacity. Many corporate recruiting departments have been cut so much that they would need to operate at maximum capacity to meet the needs of the business. This is unsustainable, like running your car at redline all the time: sure you can do it, but how long is it going to last?

Many companies over the last 3-4 years of the recession evaluated the benefits of cost-cutting and trimming corporate recruiting staff to the degree that it is a False Economy. The net impact of the actions is likely negative … because it was short-term thinking. Now they are suffering the consequences of doing so by experiencing dramatically increased spend on search firms, disillusioned recruiting staff, and higher team turnover.

So saving money in the short term is going to cost a lot in the long term. And that is not even considering the potential impact to the average net quality of hire as recruiting departments were gutted, selection and assessment best practices were abandoned, and process, tools, and other best practices were disrupted. If you add both the tangible and intangible impact, even using conservative assumptions, the impact is substantially negative. The short-term savings in cutting the recruiting department at many companies was a False Economy. Just a few weeks ago I was talking with senior staffing leaders at a global, Fortune 500 company and one of them remarked, “The hiring managers are all direct-dialing to search firms at this point, because we don’t have the capacity and can’t find enough recruiters to hire.”

Ineffective capacity modeling is just one example. There are many others.

There are some steps to take when thinking through changes to the operating model in corporate recruiting that will help you avoid the pitfalls of False Economies:

1. Scenario Planning Analysis: When considering making changes, scenario-plan what might happen if key inputs or outputs change. This will lead to more effective, well-rounded points of view, and therefore to improved decision quality. Before making changes, spend the time to conduct some “What If” analysis and compare the predictable cost models. Using the capacity model issue as an example, you might ask yourself the following types of questions:

  • What if the forecast hires is too little by 25% and my team is asked to deliver more?
  • What would we do to meet demand?
  • What would it cost to use alternative resources (search firms, contract staff, others)?
  • What’s the opportunity cost of unfilled positions and the impact on the business?
  • How do all of these tangible and intangible costs impact cost per hire in this scenario?

2. ROI Analysis: Much of the False Economies that crop up in corporate recruiting departments are due to a lack of transparency with regard to the ROI on investment dollars. Conduct an inventory of spending patterns and evaluate if they are the correct decisions for 2011. For example, there are often large opportunities to re-evaluate how budget dollars are allocated, and repurpose the spending to achieve a greater return. This may sound simplistic but it is one of the most common areas of waste I observe in corporate recruiting departments: spending dollars on things that have limited ROI. Indeed, whole industries have been built around this one area of corporate inefficiency (you know who you are). Some questions to ask might be:

  • What is the cost/benefit analysis of our sourcing team? How much yield do we achieve from this investment?
  • What is the yield from our spending on job boards and other advertising? 
  • What is the opportunity cost associated with other resources involved in the recruiting process? For example, if hiring managers are heavily involved in some aspects of the recruiting process, what is the opportunity cost (and benefits) of this model?

3. A/B Testing: This is also called split-testing. At the core, A/B testing is exactly what it sounds like: you have two versions of a potential solution (A and B) and a metric that defines success. To determine which version is better, you subject both versions to experimentation simultaneously. In the end, you measure which version was more successful and select that version for deployment. I am a huge proponent of evidence-based decision making; the lack of evidence-based decisions is why False Economies exist in the first place! But in reality many organizations make investment decisions without properly evaluating the outcomes that each potential “solution” produces. In simple terms, they guess, and often they guess poorly.

I can hear the dissention already: “But we don’t have time to evaluate different options … we need to hire X many people THIS QUARTER…”

Well, one key to avoiding False Economies by using A/B testing is recognizing that the trade-off in time is worthwhile. It takes more time to test, but in the longer term, it’s a great investment because it minimizes the chance of False Economies. Here are some thought-starting scenarios where A/B testing might prove enlightening:

  • What if we eliminated the sourcing team support for Division A but kept it in Division B? What would happen to cost per hire and time to fill (and other metrics)?
  • What if we added recruiting administrative support to Recruiting Team A and compared it to Recruiting Team B (that does not have administrative support)? Would throughput really increase?
  • What if we stopped posting jobs to XYZ job board in Division A and kept posting them for Division B? What is the impact?
  • What if we automated pieces of our recruitment process (online assessments, scheduling, etc) for Division A but kept the process in Division B the same, how would our results compare?

False Economies are everywhere, and the way to avoid them, as much as possible, is to take a strategic approach to thinking through them. As usual, sound off in the comments and share your point of view.

This article is part of a series called Financial.
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