Don’t Show Me The Money! (At Least Not in Large Companies)

Jun 13, 2005

You know, I always wanted to be a super hero. I grew up, of course, with Superman, Spider Man, and Wonder Woman, but my favorite was always Ultra Man. He had that classic super hero mythology, a normal person who was virtually killed and the only way he could come back to life was if he were given these extraordinary powers to turn into a giant. But like all super heroes, he had an Achilles heel. For him, it was that, once he pulled the trigger and became a giant to battle some horrible genetic-mutant monster that came from nearby polluted waters, he could only stand earth’s sun for like 15 minutes. Well, it turns out I’m not a super hero. I’m just the mad scientist who has the formula for someone else to become a super hero. I’m looking to create a staffing super hero. We shall call you “The Human Resourcer.” My secret lies in not only helping you create a high-quality, effective recruiting function, but doing it on a zero-cost basis. Would I be wrong in saying this is the key to mythic status in your company? Though there’s no doubt the most important thing is to create a high quality, effective staffing function, one can’t ignore the cost of such and endeavor and how it’s funded. Actually, there’s even more to it than that. As it turns out, the way a staffing organization is funded can create a certain dynamic between staffing professionals and their clients, which can make for a healthier recruiting environment and help you do your job better. So yes, the intro to my formula is that you can actually get your staffing organization funded by someone else and, in doing so, be more effective. As I’ve referred to in the past, it’s all about your value to the company. Except this time we’re going talk about it in cold, hard, glorious cash as well as effectiveness. I know, I know, you’re saying to yourself, “Dude, this is great! Crack open the kimono and let us par-take…” Okay, but a few caveats (as Dr. Franken-shteen said to the monster). First among these is that most of what I have to say applies to internal staffing organizations of large companies. The reason for this is that, in large companies, even though there’s more money available to fund staffing, the trick is not to expose it. This is where my secrets lie. What about small companies, you ask? Good question. Let’s start with how small companies fund internal and external recruiting as a way to ease into what I hope won’t lull you (and me) to sleep. (This is my other caveat: I’ll try not to get too technical and boring. Problem is, when you’re talking about money and that line down at the bottom, it’s hard to make it sexy). Small companies usually fund recruiting in a very straightforward way. There isn’t much money, so everybody’s neck is on the line. Thus they usually go the simple and traditional route: All recruiting costs, including outside, third party search, fall under HR. This includes the permanent, fixed costs of recruiter salaries, job postings, advertising, recruitment advertising, and job fairs and costs associated with technology, such as applicant tracking systems. Typically, this also includes the cost of third-party outside recruiters (or this cost falls in an outside line item called “unbudgeted cost” that gets absorbed by HR). Occasionally, small companies will have third-party recruiters paid by the business areas who hired them. But in general, with small companies, all costs are owned by human resources. In big companies, by contrast, not only is it not always the case that all staffing activities are funded by HR, it’s not even smart for HR to own all the recruiting costs. In this instance, money does not translate into power. However, as in every instance, value does. Here’s the problem. In large companies, even though there is in theory more money and resources available to fund staffing, the idea of large costs showing up on the “general and administrative” (G&A) budget line is not attractive. In these environments, if you have a big pot of money sitting on a line item like that, where do you think the company’s going to turn the minute they need to cut costs? This is just on one level ó the crass, pure dollar amount level. But there’s another downside to subsidizing your company’s recruiting that’s more fundamental and linked to your effectiveness as a valued partner. Assuming your goal is to be a respected and valued strategic consultant (and that should be everybody’s goal), if you fund all the recruiting through your HR department, the service you provide your clients will, to them, essentially be free. And we all know how we value something that’s free versus something we have to pay for. So to create a healthy recruiter-client dynamic, it’s important that each side be vested in the process, that each has “skin in the game.” Thus there are several reasons why it’s important to know how to fund a corporate staffing organization outside the traditional structure in a way that reflects a true cost-value relationship, without having to expose external costs on the G&A line. “Okay, so how?” you ask. Well as it turns out, there are several models to choose from that can be carved to fit your needs, more than I can fit in here. I’ll try to give you a feel for some basic frameworks. Let’s start with the ones I feel are less appealing. The first is a simple model that seems pretty straightforward and logical given the issues I’ve raised. If you’re a head of staffing and you’re trying to create a staffing function where you need to add recruiters, technology, job postings, branding, and an employee referral mechanism, you set it up so that the overhead costs of recruiters’ salaries stays in HR, but all other variable costs attributable to a search ó e.g., advertisements, etc. ó get charged back to the business unit that’s hiring. Sounds logical, right? Problem is, sometimes it’s difficult to assign certain costs to a department. For instance, when you have multiple searches for similar departments and you have to place a lot of ads, you don’t want to “sack” one department with too much of the bill. Is this easily figured out? Of course, but it requires some judgment on what to do internally versus externally. And you still have that sizable chunk of overhead (recruiters’ salaries) on the dreaded G&A line. Another model is the full charge-back model. In this scenario, all recruiting and staffing costs are considered variable and are charged back to businesses. The costs are allocated to different business units based on the employee population or that unit’s percentage of the company’s revenue. This also makes sense, because a lot of other HR costs are allocated this way. It’s simple, it’s straightforward ó but it’s not very engaging. It doesn’t really get either side vested in the process and outcome of staffing and recruiting. There’s no skin. And we need skin (I said I would try to make it sexy). What I recommend, and have seen work successfully, are two allocation models that have different takes on them. If they were drinks I’d have to call them allocations-with-a-twist. The first is a model where all recruiting costs are allocated on a per-hire basis. Not only does this properly align recruiting with the businesses, it forces a planning conversation between recruiters and the head of business units. Here’s what you do: In developing your budget for the quarter or year, you sit down with your department heads to look at past and current turnover and to determine future needs. Then you aggregate the numbers, come up with a demand forecast for the next quarter, and break it down by function and level. You now have the information to build out a recruiting strategy based on needs ó you’ll know your external, as well as internal, needs and how much funding you’ll need per hire. Armed with an amount, you can then go back to the hiring manager and present him or her with a figure. A key approach here is to present the amount you need to allocate to their department per hire, but then mention that whatever isn’t used will be “refunded” or rebated. The great thing about this model overall is that you could do it in advance or on the “back end,” after everything has occurred. I know this sounds complicated, but there are many benefits to this model, including:

  • It forces dialogue between staffing professional and hiring manager before recruiting needs happen.
  • It forces skin in the game. There is joint and mutual respect for the costs of recruiting, which causes more engagement and seriousness in the process.

There are also some possible pitfalls to this as well:

  • If the company is not used to having an allocation charge-back model for other things, financial accounting could be an issue.
  • Management and recruiting teams may not be able to do a good job forecasting needs (but they’ll get better).
  • It places the recruiting team in the difficult position of constantly having to sell its services internally (they’ll need solid metrics related to time and quality).
  • If you can’t perform at a level the business units expect you to at cost value, businesses will complain about those costs and go elsewhere, depriving you of the ability to maintain your department’s overhead costs (the businesses won’t have a charge back).
  • Some companies get into situations where they have to renegotiate their deal every quarter, which is taxing time-wise.

The second allocation-with-a-twist model is a retroactive allocation of costs at the end of the year, based on what happened during the year, except that the allocation is based not on a per-hire basis but as a percentage of the average salary of those you’re recruiting. For instance, if a department hires 100 people at an average salary of $35,000 per year, you could come up with a percentage to charge back ó say 10%. So you would allocate $3,500 per hire back to the business unit. And you could tier the percentage based on the level of the employees hired (the higher the level, the higher the percentage). In this model, because it’s percentage-based, the HR department needs to be careful ó they could end up making money. The last allocation model is a slight hybrid where, at the beginning of the year, you allocate your staffing department’s overhead fixed costs back to the businesses, and then as the year progresses, any specific costs above and beyond the overhead fixed are allocated to the businesses that used them. Bottom line (and, after all, this is all about the bottom line), there are many ways to skin the allocation/charge-back cat. But the important skin here is “skin in the game” for both the staffing organization and the business unit. This is the path toward the Holy Grail for staffing professionals ó creating a high quality, highly effective recruiting function without outsourcing, on a zero-cost basis. Do that, and you’ll be a huge hero, a super hero. The Human Resourcer. And then you’re where you want to be: You can focus on how to improve the performance of the recruiting function, not on how to pay for it.