Relegating Cost Per Hire to its rightful place

Lou Adler and Dr. John Sullivan have long questioned the validity of the cost-per-hire metric when evaluating the business impact (or otherwise) of talent acquisition functions. 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 organisations in which they inhabit.

From Cost Centre to Profit Centre

First, let’s be clear, I’m not suggesting you should throw the baby out with the bathwater by 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 centres to becoming profit centres for their organisations. This is not as fanciful as it seems given studies by the likes of BCG (see Figure 1 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).

Figure 1: Recruiting has the largest influence on revenue growth and profit margin of all HR topics (Source: BCG Study - 'Realizing the Value of People Management'

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 related 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.

Figure 2 - Deriving value in recruiting involves an optimal balance of quality, agility and cost considerations2.

2. 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 organisations negate to include factors such as hiring manager time, referral payments, and even recruiting technology costs. This study by SHRM, which was led by Jeremy Shapiro and Andrew Gadomski - both acknowledged thought-leaders in this space, is a great place to start.

3. The most mature talent acquisition functions spend 2x more per hire than organisations with the lowest maturity — yes, you read this correctly. A study by Bersin by Deloitte ranked over 500 organisations 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 organisations ranked as the least mature.

4. 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.

Figure 3 - the most mature recruiting functions spend 2x more per hire, but the extra investment pays dividends (Source - Bersin by Deloitte)

To explore what this means in dollar terms through a worked example of two similar companies - one adopting a one-dimensional cost-per-hire focused approach and the other an approach that promotes quality of hire and agility over cost, head over to the bible for recruiters that is ERE by clicking on the following link: Relegating Cost Per Hire to its rightful place.

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 About the author

 David is a respected influencer, writer and speaker on people analytics and the future of work. He was recognised as Best Writer at the 2015 HR Tech Writers’ Awards, and was awarded one of ten LinkedIn Power Profiles for HR in January 2016. David’s role as Global Director, People Analytics Solutions at IBM enables him to help clients apply an analytical, insight led and business outcome focused approach to their talent strategies and people decisions. 

 David also speaks at and chairs industry events. He has been co-chair of Tucana’s People Analytics Conference in London for the last two years, is one of the judges of the 2016 Workforce Analytics Excellence Awards, is a keynote speaker at the Workforce Analytics Summits 2016 series in Amsterdam, Sydney, New York and Singapore, is a member of the HR Tech World Blog Squad and will moderate a session at Beyond - The Global HR Leadership Forum in Amsterdam on 30th June.

 Connect with David on LinkedIn, follow him on Twitter and read his blogs on HR Tech World and ERE.

Keywords: HR, Human Resources, HR Analytics, People Analytics, Talent, Recruiting, Hiring, Talent Acquisition, Talent Management, HR Metrics, Cost Per Hire, Workforce Analytics, Talent Analytics, Data Driven HR, Employee Engagement, Performance Management, Future of Work, Quality of Hire, Evidence based HR