In recruiting, how important is Cost Per Hire?

I spend a considerable amount of my time helping organisations improve the performance of their recruiting functions. 

As I wrote in a previous article (see here), I find the overemphasis on cost per hire to the detriment of everything else surprising. Whilst cost should of course be part of the equation, on its own it is one-dimensional.  Every other function in the business makes decisions based on value (or ROI) and so should HR. Cheaper does not necessarily mean better – particularly when it comes to acquiring talent. The right question should be ‘what is the level of investment that will exponentially provide the best outcomes’.

It seems those clever chaps and chapesses at Bersin by Deloitte agree. In a recent study they found that organisations at the highest level of maturity (classified as “optimised talent acquisition functions”) spend two times more per hire ($6,465 vs $3,258) compared to those with the lowest impact (“reactive tactical recruiting functions”). Yes, you read that correctly - two times cost per hire.

And to paraphrase Shakespeare’s Henry V what do these few, these happy few, this band of brothers get for their larger investment in talent acquisition? A better return. A much better return with optimised talent acquisition functions enjoying 40% lower new-hire attrition (10% vs 17%) and 20% faster time-to-fill (44 vs 55 days) compared with reactive tactical recruiting functions.

This seems a perfect opportunity for a little maths using the data in the Bersin study along with a number of other widely held assumptions.

Smart Inc. and Dummy Inc – a battle of opposites

So, let’s take two identical firms. Both have annual revenues of $1bn, employ 10,000 staff and need to hire 1,000 new employees in the forthcoming year. The first, Smart Inc. has a recruiting strategy firmly based on Bersin’s optimised talent acquisition function whilst the second firm - (yes, you’ve guessed it) Dummy Inc. is cost obsessed and believes its reactive tactical recruiting function is more than sufficient.

First blood to Dummy Inc.

Naturally, when it comes to a pure cost comparison, Smart Inc’s annual outlay on hiring is significantly higher than Dummy Inc. as the Figure below – using the values in the Bersin study – illustrates.

What could the additional outlay incorporate? Leaving aside whether that involves partnering with a recruitment process outsourcing (RPO) firm or building in-house (one doesn’t want to be accused of bias) the extra investment could include initiatives to attract passive talent, harness predictive analytics and use superior technology – all delivered by high calibre recruiters.

Smart Inc. come roaring back

A good indicator of quality of hire is first-year attrition. An employee leaving — voluntarily or involuntarily — within the first year typically indicates poor selection, poor onboarding or both. Experts from the likes of CEB and PwC Saratoga calculate the average cost of turnover for new hires is equivalent from one to one and a half times salary. The figure is based on direct costs (e.g. recruiter costs, RPO fees, marketing, technology licenses) and indirect costs (e.g. lost productivity, new hire ramp-up, hiring manager time).

For the purposes of our example we’ll assume that the multiplier for both Smart Inc. and Dummy Inc. is 1.25 and that the average salary is $50,000. This translates – see Figure above – to Smart Inc. having over $4m less annual losses due to first-year attrition than Dummy Inc. This means that in comparison to its cost obsessed counterpart, Smart Inc. has already recovered its additional outlay on hiring. Smart by name, smart by nature.

Smart Inc. move further ahead

Finally, let’s look at another key component – agility as expressed by speed of filling vacancies with Smart Inc., according to the Bersin study, taking on average 44 days to fill a role, and Dummy Inc. lagging behind on 55 days. If we look at the comparative potential net lost revenue opportunity, we see Smart Inc. is the daddy once again with $2.5m less net lost opportunity revenue than the wooden spoon wielding Dummy Inc.

The result

You get what you pay for. Smart Inc. may have invested $3.2m more than Dummy Inc. for 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 only exacerbate the savviness of Smart Inc.

Final thoughts

It’s time for HR and Recruiting leaders – and the vendors that support them – to evolve the conversation beyond cost per hire. Studies like the one featured here by Bersin help those pioneering this approach as does the research from Boston Consulting Group (see here) included in my previous cost per hire article.

The BCG research (see Figure above) concluded that companies adept at recruiting enjoyed 3.5 times the revenue growth and 2.0 times the profit margin of their less foresighted peers. If that doesn’t shift the attention to outcomes over cost, nothing will.

About the Author

David is a Director at Cielo, #1 RPO on the Baker's Dozen for global breadth and quality of service. David has helped a number of organisations design data driven talent acquisition programmes that drive effectiveness, growth and competitive advantage. He also speaks, writes and chairs conferences on HR Analytics and other key tenets driving the seismic change in the future of work.

Connect with David by email, LinkedIn or Twitter and take Cielo's Talent Activation Assessment here.

You may also want to read some of David's other articles:

• Cost Per Hire: "It's the wrong recruiting metric, Gromit..."
• 11 Key Takeaways from #PeopleAnalytics15
• 7 HR Analytics Firms to watch
• Robots vs Humans - where is the Future of Work headed?
• HR Analytics - The New Goldrush?
• The 20 best HR Analytics articles of 2014
• 10 Predictions for HR & Recruiting in 2015 - Part 1 and Part 2
• Never mind the bureaucracy, here's Punk Rock org structures...
• The Who's Who of HR Analytics Influencers - Part 1, Part 2, Part 3and Part 4 
• Is HR ready for the Big Data & Analytics revolution?
• Part 1 and Part 2 of our fictional HR Director's journey into the world of HR Analytics

Keywords: HR, Human Resources, HR Analytics, People Analytics, Talent, Recruiting, Hiring, Talent Acquisition, Talent Management, HR Metrics, Cost Per Hire