Referral Recruiting: Duh!

It has been interesting to note the recent re-emergence of referral recruiting ventures and ideas. Duh, everybody knows that (employee) referrals have been the No. 1 source of hires forever (as indicated by CareerXroads), and that according to professor Granovetter’s groundbreaking research in the early 1990s, close to 60% of people say they have found their current job through some form of referral. No-brainer, especially with the adoption of social networks like Facebook, LinkedIn, etc., right?

However, between the late 1990s and today, many companies have tried to automate/extend/improve the referral recruiting process: refer.com, jobster, h3.com, zubka, YorZ, KarmaOne, Jobvite, and dozens of others both in the U.S. and Europe. All have failed or moved away from any referral recruiting focus, and in the process perhaps as much as $100m in VC money has gone up in smoke.

Why? No doubt many of the new entrants will back-up their fundraising efforts with the proverbial “But this time it’s different…” statement, so let’s pause just for a minute and consider why I think to date a lot of smart people spending huge amounts of VC money have failed to crack so obvious an opportunity.

Here are some of the key lessons learned from all that cumulative failure:

I — Perhaps the wrong opportunity was targeted: rather than trying to make everybody a productive “referral recruiter” we should have focused on boosting output of existing referral recruiters.

  • You can take a horse to the water, but you cannot make him/her drink. Only 4% of people are actual “connectors” (see Malcolm Gladwell, The Tipping Point), perhaps proven by fact that fewer than 4% of LinkedIn’s members are in “500+” category. No wonder that in traditional ERP programs only a fraction of employees actually take part and score (multiple) rewards. It’s great that hundreds of millions of people have a LinkedIn or Facebook account, but 96% of them will never become successful networkers regardless. So all these referral recruiting solutions are wasted on the majority of employees/people.
  • “Dude, where’s my network?” Even though most people would never consider making referrals for total strangers, they do expect a referral recruiting solution to come with a large built-in network of high-impact connectors! Crazy? Most people have never heard about Dunbar’s Number, which simply means that in spite of boasting to have 7,000+ LinkedIn connections you still only can have meaningful relationships with about 150 people. Referral recruiting solutions which broadcast referral reward opportunities to the Web will not yield (good) referrals, as people only make referrals for people with whom they have at least a minimal relationship or strong affinity. Successful users need to have a good network plus networking skills to start with. Your own network plus your own social standing will always outperform any hired or public social network.
  • Unfortunately, in most corporations recruiters are part of the HR organizations (and not procurement, where they should be). HR organizations are often more focused on risks rather than opportunities, and hence worry too much about allowing non-employees to make referrals/earn rewards, about recruiters doing cool stuff on Facebook, etc. Why worry endlessly about a $5,000 reward to fill $100,000 job when after 30 days you’re going to give the job to contingency recruiters anyhow and pay a $20,000 fee?  The real opportunity for referral recruiting solutions is with hiring managers in organizations without HR departments, as they don’t worry about all the silly stuff. Think about it: 6 million U.S. companies do not have an HR manager, vs. maybe 125,000 companies, tops, which employ HR staff?
  • Maybe as many as 70% of all jobs filled by the $8 billion executive search/contingency recruiting industry come from referrals, so one could argue that search fees are in a way referral rewards being paid to the middle-man and not the actual referrers. Given that headhunters usually are excellent networkers and true connectors, if they had embraced these new referral recruiting solutions, these solutions would have been wildly successful in improving their productivity and thereby making their customers even more dependent on them. But do the reluctance to perhaps share a modest portion of their fees with their networks, and fear that referral recruiting solutions could make their customers also good at referral recruiting, make them stay away from referral recruiting solutions?

II — Perhaps the psychology of the actual referral process was not fully appreciated: it’s not about money. It’s not about technology. It’s not about being cool.

  • Real “connectors” make incredibly prudent and balanced decisions when it comes to referring a job or a candidate: they will only make a referral if they truly believe they’re doing the right thing for both people on each side of the referral. Whereas a financial reward can certainly add urgency to a referral request, money will not corrupt their decision, as we saw at h3.com where $10,000 rewards never resulted in resume spam and never yielded bad candidates. It’s not about financial rewards; it’s about prudent people carefully managing their social credit balance sheet to first of all help people whose relationship they value.
  • Though it’s not about the money, creating the “right” referral reward is quite important. Employees/people who make referrals have a pretty good idea how much money they’re saving the employer. Five to ten percent of the annual salary with a minimum of $5,000 seems to work best for a position over $50,000 salary. Offering a wrong reward is worse than asking for free referrals.

III — Perhaps back-office issues were not fully appreciated.

  • If we accept that only a small fraction of a company’s employees are true connectors, and in the same light that only a fraction of our personal networks are true connectors, then it’s obvious why referral recruiting solutions advocate that non-employees should be able to make referrals and earn or share rewards. Resulting back-office issues should not be underestimated, and indeed are a genuine concern for HR managers: W-9, 1099 IRS reporting, etc.
  • The perennial complaints about ERP programs has been about the tracking of referrals, transparency for referrers and candidates, plus the adjucating of disputes as to who brought in the winning candidate first. If you reach out to the right number of connectors in a particular labor market segment, it’s quite likely that the same candidate will get referred by more than one person. (Shally Steckerl experienced this in his wildly successful H3.com search, outlined in a 2006 H3 white paper). Sophisticated tracking of referrals across multiple degree social networks is essential. (H THREE Inc./H3.com actually owns a portfolio of four patents (one issued and three still pending), and while at one point there were a dozen companies who appeared to be infringing the patent, startups do not have the funds to pursue such alleged infringements. Hence investing in patents is not useful for startups.)
  • Referral recruiting solutions will always be one of multiple recruiting tools which are deployed simultaneously, which means that all candidates will end up in an ATS system, where they will end up being treated the same way as candidates from any other source. This is wrong and upsets both referrers and referred candidates. Since referrers personally vouch for their referrals, both referrers and referred candidates should always be treated with extra courtesy.

What’s Next?

Innovation is all about keep trying to find solutions for problems, and once we realize that the problem is not how to enable all employees to become productive referral recruiters, but how to increase the recruiting yield from the true connectors we have among our employees, somebody will crack this quest for the silver bullet and create great ROI for his/her investors.

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Personally, I think SelectMinds and LinkedIn have good chances of getting it right, because both can enable the connectors among our employees to easily and in perhaps a semi-automated way use their networking skills, their positive social credit balance sheet,s and their large meaningful or affinity-based networks.

As a result, there will be employees in the future who maybe have a salary of $75,000 but who make another $75,000 a year or more in referral rewards, and please let’s hope there will no longer be short-sighted employers who will put a cap on the maximum reward money employees can earn in a year, as exists today. What’s up with that?

Hans Gieskes
Hans Gieskes is President & CEO of Cision AB Group, the global $160m revenue PR software company and non-exec. director/ advisor/angel investor for a number of privately held Internet companies, including H3.com, Retirementjobs.com, and Peoplefilter.com in the human resources field. He’s the former Chairman & CEO of Houghton Mifflin Company, a $1.3 billion publishing company. Previously, he was president of Monster.com worldwide. He has been an active user of the Internet and its precursors since the mid-eighties. He has lived on both sides of the Atlantic and has extensive and successful experience in dealing with trans-Atlantic organizations and the cross-culture issues of these international companies.