Recruiting Costs: A Manager’s Opportunity

Aug 12, 2008
This article is part of a series called News & Trends.

Cost has always been central to recruiting. One of the most popular (though not the most useful) metrics is cost-per-hire.

But demonstrating the value of recruiting is difficult. The reasons are simple enough — recruiting costs are tangible; the benefits less so. It takes time for new hires to become productive, and their contributions are difficult to measure with any precision. Furthermore, it is impossible to attribute an employee’s performance to the recruiter’s skill at getting the right fit, in the right place and time. Consequently, tying recruiting results to cost is nearly impossible. Few even try. So recruiting managers usually find themselves under pressure to “manage” costs better — which usually means do more with less. Some companies have just given up trying and handed over their recruiting to an RPO vendor.

RPO has its own issues, but one benefit of RPO may just be that recruiting managers begin to understand costs, and how to manage them to their advantage. I don’t mean “manage” as in “limit” (although that’s a very fine thing), I mean structuring costs to maximize flexibility, leverage in-house expertise, and limit cutbacks during down cycles. This is the “manage” they teach in B-school.

Fixed and Variable Costs

The key to managing cost structure begins by distinguishing between fixed and variable costs. Fixed costs are infrastructure costs that are necessary to participate in a business. Once incurred, they are fairly stable. They include things like office rents, recruiter salaries, hardware, and software costs. They are part of the price of entry. Management and organizational theorists have an old saying: structure follows strategy, and strategy is constrained by structure. In English, this means that organizations acquire resources to support their strategy and goals. But once acquired, be it people, buildings, or equipment, it’s hard to change. Your organization’s infrastructure is a fixed cost. It can’t be reduced easily.

Variable costs on the other hand, fluctuate with activity. As activity rises, so do variable costs — things like advertisements, commissions, and travel costs tend to be variable.

CFOs hate fixed costs, and hate increases in fixed costs even more. Most of us can deal with high costs during peak production. But, when activity is low, reducing costs is a struggle. This is because so many of them are fixed, and cutting fixed costs is painful — as anyone who has laid off staff can attest. Unfortunately, layoffs are the fastest way to cut fixed costs. Variable costs, on the other hand, lower themselves during slowdowns, and are infinitely preferable on accounting reports. Not only are layoffs painful, but after laying off core talent, it can be hard to replace them when demand picks up later. Many organizations are slow to ramp up recruiting staff, having been burned earlier. It is much easier if you can keep your core expertise intact. The way to achieve this is to increase variable costs relative to fixed costs. This is done through something called Selective RPO.

Now You See It…Now You Don’t

How does one convert fixed costs to variable costs? The answer comes to us as a variation of Recruitment Process Outsourcing. The initial reviews of RPO indicate that wholesale RPO is risky. Client companies aren’t happy and vendors aren’t profitable. It seems that keeping some expertise in-house (read: recruiters who understand the company) has real value. Didn’t we already know that? Apparently, the market did not. The key is to retain aspects that add higher value, and outsource the simpler, repetitive work. In other words, recognize what you do well and keep those activities in-house, then selectively outsource the other processes.

This Selective RPO allows you to affix costs where you add the highest value, leaving costs for all outsourced processes variable.

As importantly, you leverage valuable recruiting expertise, supporting your talented people with outside vendors to handle repetitive and menial tasks. You’re less likely to cut headcount during a downturn. This combination of managing costs, leveraging expertise, and reducing layoffs is a management trifecta. It is a direct result of carefully structuring fixed and variable costs.

Getting it Right and Wrong

I’ve recently dealt with a company that is making the effort to structure its recruiting costs to maximum advantage. The recruiting organization is small relative to the organizations’ needs. But their processes are well defined and managed. Fed by an external sourcing team, it has reliable and repeatable processes. Because the sourcing team is external, its processes are also modular. This modular structure ensures their recruiters can handle a higher number of requisitions when needed, by outsourcing the (repetitive) sourcing component. And because the relationship with sourcers is ongoing, not transactional, constant feedback flows through the process, allowing a small number of well-qualified candidates to reach hiring managers.

By monitoring individual recruiter workload, the sourcing is turned on or off, ensuring no bottlenecks develop. The organization also requires hiring managers to provide feedback very quickly, and holds them accountable for delays in the interview process. Despite the external nature of the sourcing team, measurement and feedback processes are shared the length of the process in a partnership, rather than in a typical vendor, or transactional relationship. By virtue of strong execution, this recruiting team has managed to convert previously fixed sourcing costs into variable costs.

By contrast, another organization I’ve worked with adopted a similar approach, but without sufficient attention to process. In this case, its brand is very well known — so much so that they rely on it almost exclusively. In an effort to convert fixed costs to variable costs, they too have contracted with outside vendors for sourcing. But they have paid little attention to process.

After months of frustration it became clear that the strength of its brand has enabled it to hire at volume without establishing any regularity in sourcing processes. Feedback is irregular (I’m being kind), and the external sourcers are treated as vendors (read: poorly). Everyone is scrambling to put bodies forth and hoping to get lucky. The outside vendors are servants, not partners, with the expectation that vendors should be grateful for the association. This arrogance has destroyed any likelihood of a partnership, and without decent processes, there are no reliable, repeatable results. The external sourcers, given little feedback, continue to generate large volumes of candidates, clogging the system. Worse yet, they have become fixed costs.

In response, the leadership is trying to bring in a “headhunting mentality,” hiring more outside vendors, throwing more money at the problem. While it is unfortunate, those in charge (at least for now) are so taken with their brand, they are currently incapable of learning. Here, despite an incredibly strong brand, virtually unlimited resources, and one of the best compensation packages in history, costs are rising while results decline. So, even a smart plan to convert fixed costs into variable will fail without attention to execution.

The Take-Away

Managing the ratio between fixed and variable costs is one of the few opportunities a recruiting manager has to demonstrate business acumen. This cost structure lends a number of advantages and becomes even more important when demand cycles are unpredictable. Any process not requiring essential company knowledge that can be removed from fixed costs and converted to a variable cost is a winner.

To ensure success beyond accounting reports, the relationship with outsourced partners needs to be a partnership, not transactional in nature. Feedback must flow freely in order to create reliable, repeatable processes. HR leaders who combine strong processes with this type of fiscal discipline tend to be treated as line managers, with all the right and obligations that go with executive offices.

This article is part of a series called News & Trends.
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