Relegating Cost Per Hire to Its Rightful Place

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May 6, 2016
This article is part of a series called Wake-up Call.

Lou Adler and Dr. John Sullivan have long questioned the validity of the cost-per-hire metric on these pages. Indeed, John has even gone as far as revealing that he once banned the measurement of cost per hire.

So, I am in fairly esteemed company in my view that the importance of cost per hire is overplayed by the vast majority of talent acquisition leaders and by the organizations in which they reside.

From Cost Center to Profit Center

First, let’s be clear, I’m not advocating that cost per hire shouldn’t be measured. It should, but only as part of a wider calculation of the return on investment of the overall recruiting program — and the ROI of each hire.

Placing cost per hire in the right context is perhaps the first step in shifting the mindset of talent acquisition functions from being cost centers to becoming profit centers for their organizations. This is not as fanciful as it seems given studies by the likes of BCG (see slides below), which found that of 22 HR processes studied, it is excelling at recruiting that provides the biggest differential between leaders and laggards in terms of revenue growth (3.5 times) and profit margin (2.0 times).

The Absurdity of Cost Per Hire

I recently ran a webcast for LinkedIn and SHRM entitled In recruiting, how important is cost per hire?, which drew on the above study from BCG as well as other studies by the likes of Bersin by Deloitte, SHRM, and PwC Saratoga.

  1. Cost per hire should be put into context as part of a wider discussion on ROI — evaluating hiring is essentially a blend of three elements – cost, agility, and quality. The weighted importance of each element depends on the type of talent you need to hire, with the general rule being the more senior, scarce, or pivotal the hire, the less important cost per hire becomes.
  1. If you are going to measure cost per hire, at least do it properly — calculating cost per hire is actually more complex than it may first appear and too often I’ve seen organizations negate to include factors such as hiring manager time, referral payments, and even recruiting technology costs. This study by SHRM is a great place to start.
  1. The most mature talent acquisition functions spend 2x more per hire than organizations with the lowest maturity — yes, you read this correctly. A study by Bersin by Deloitte ranked over 500 organizations into four levels based on the maturity of their talent acquisition functions. The headline finding was that the most mature (and by extension the best performing) spent on average two times more per hire than those organizations ranked as the least mature.
  1. The extra investment pays off — the Bersin study also found that the most mature talent acquisition functions enjoyed 40 percent less new-hire attrition and 20 percent faster time to fill than their lowest maturity brethren. I’ll explore what this means in dollar terms in the next section of this article.

Too Much Emphasis on Lowering Cost Per Hire Will Likely Prove More Expensive in the Long Run

But how can you prove this? Well, by taking the findings of the Bersin study and some other commonly held assumptions on the cost of attrition, and comparing two fictional (but identical) companies, let’s try.

Meet Smart Inc. and Dumb Inc.

As the slides below show, Smart Inc. and Dumb Inc. are comparable in many ways. Both have a $1Bn turnover, 10,000 employees, need to make 10,000 hires in the forthcoming year, and pay average compensation of $50,000. The difference though is in their talent acquisition functions. Smart Inc. falls into Bersin’s Level 1 “Optimized” category, while in contrast Dumb Inc. lags in the Level 4 “Reactive and Tactical” lowest level of maturity. The numbers for average cost per hire, new hire attrition, and time to fill come directly from the Bersin study.

Smart Inc. spends $3.2m more on its recruiting program than Dumb Inc.

Basic arithmetic tells us that Smart Inc. invests twice as much in its recruiting program then Dumb Inc., but will that extra investment pay off? Again, see the slides.

First-year new hire attrition puts Dumb Inc’s sums in a flux

Things get interesting when we look at the quality measure from the Bersin study — first-year new hire attrition. This is not only a good indicator of quality of hire, but also the performance of the talent acquisition function. Studies by the likes of CEB and PwC Saratoga concur that the cost of replacing someone who leaves is between one and two times their salary. For this example, I have used a conservative multiplier of 1.25 and applied the 10 percent (most mature) and 17 percent (least mature) figures from the Bersin study to Smart Inc. and Dumb Inc. respectively. This produces some notable numbers with the cost to Smart Inc. being $4.4m less over the year — a figure that already surpasses the additional investment Smart Inc. made in its recruiting program.

Dumb Inc. loses out again on potential net lost revenue

Things get even worse for Dumb Inc. when we look at agility as measured by time to fill in the Bersin study. To calculate the impact of this, I have assumed that each role remains vacant during the hiring process. This enables us to calculate the potential lost net revenue by multiplying the average revenue per employee per day ($455) by the number of hires per annum (1,000) and the average number of days to fill each role (44 days for Smart Inc. and 55 for Dumb Inc.), negated by the salary saved during the time it takes to fill these roles. The difference between Smart Inc. and Dumb Inc. — as the slides below show — is a lower potential net loss revenue of $2.5m.

The final result: Smart by name, smart by nature

You get what you pay for. Smart Inc. may have invested $3.2m more than Dumb Inc. to make an identical number of hires, but with $4.4m less losses due to first-year attrition and $2.5m less net lost opportunity through faster time to fill, it has proved a far more astute investor. Other qualitative measures will likely only exacerbate the savviness of Smart Inc.

Final Thoughts

Recruiting is like any other business practice in that cost is only one of the factors that should be taken into consideration. As such, shift the conversation from a one-dimensional one on cost per hire to a multi-faceted one on return on investment. That conversation should be one that scrutinizes the top line as much as the bottom line, and it is analytics that can help recruiting leaders identify the right investments to make to drive the desired outcomes they and the business seek.

This article is part of a series called Wake-up Call.
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