In Recruiting, How Important Is

Cost Per Hire?

October 7, 2015

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David Green Vice President

About David Green: David is a Director / Vice-President at Cielo, and works with international organizations to design talent acquisition programs that drive growth and competitive advantage. David advises businesses on effective ways to leverage data and develop strategies that produce the best business outcome while also aligning with talent strategies and business priorities. He also blogs, speaks and chairs conferences within the talent and people analytics space.

About Cielo: Cielo is the world’s leading pure-play provider of global Recruitment Process Outsourcing (RPO) solutions. Cielo leverages its global reach, local talent acquisition expertise and customised solutions to help clients achieve a sustained advantage and outstanding business outcomes through their talent practices.

uk.linkedin.com/in/davidrgreen

linkedin.com/company/cielo-talent

cielotalent.com

I believe cost per hire is a misguided means to judge recruiting department performance.

For one, it rewards the wrong things and ignores

quality of candidate and quality of hire.

For another, it’s for too tactical and narrowly focused. Worse, improving costs could degrade

quality.

 Lou Adler

①  Put Cost Per Hire (CPH) in context as part of an overall discussion on ROI

②  Examine how the importance of CPH depends on the talent you need to hire

③  Highlight the components you should use to calculate CPH

④  Demonstrate how a low CPH can actually be more expensive in the long run

⑤  Look at the potential impact on the business

Agenda

What is ROI in recruiting?

Quality

Cost

Agility

Agility is the measurement of the speed at which the resourcing function’s strategy and activities are capable of responding to changes in business demands

True Cost of Hire is a complex calculation including team costs, operational cost of line management, marketing spend, and supplier costs

Quality drivers sit across a number of measures e.g. candidate & hiring manager experience, new hire attrition, new hire performance, source of hire, employer brand NPS, conversion rates

The Perfect Balance? Difficult to achieve, but then, it is not often the target. Business drivers inevitably lead to a weighted model with importance of Cost, Agility & Quality dependent on what talent you are hiring

Cost per hire varies by role

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 Delivering quality hires consistently

… is perceived as the most important strategic function of talent acquisition for all stakeholders (C-Level, Business Unit Leaders and Talent Acquisition Leaders)

- Cielo, Talent Acquisition 360 Research

Skilled Few

Talented Many

Expert One

Seniority

Importance of cost per hire decreases

Impo

rtanc

e of c

ost p

er h

ire d

ecre

ases

Scar

city

Approach •  Investment •  Complexity •  Time •  Resources

Calculating cost per hire

Cost Per Hire = ( ) ∑(External Costs) + ∑(Internal Costs)

Total Number of Hires in a Time Period

①  External Costs •  Advertising & Marketing

•  Background & Eligibility Checks

•  Campus Recruiting

•  Consulting Services

•  Contingency to Regular Fees

•  Drug Testing

•  Employee Referral Awards / Payments

•  Immigration Expenses

•  Job Fairs / Recruiting Events

•  Pre-Hire Health Screens

•  Pre-Screening

•  RPO Fees

•  Relocation Fees

•  Sign-On Bonuses

•  Sourcing Costs

•  Travel & Expenses – Candidate

•  Travel & Expenses – Recruiter

•  Technology

•  Third-Party Agency Fees

②  Internal Costs •  Cost of Recruiting Staff

•  Cost of Sourcing Staff

•  Internal Overheads

•  Non-Labor Office Costs

•  Recruiting L&D

•  Secondary Management – Cost of Time for

Events

•  Secondary Management – Cost of Time for

Recruiting

③  # Hires Total number of hires in a time period

•  New hires

•  Backfill due to

attrition

What are the characteristics of an optimized recruiting function?

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New-

Hire

Turn

over

Time t

o Fill

(in D

ays)

18%

16%

14%

12%

10%

8%

6%

4%

2%

0%

60

50

40

30

20

10

0

17%

10%

44

55

Cost per Hire $3,258

Cost per Hire $6,465

Level 1 – Reactive Tactical Recruiting

Level 4 – Optimized Talent Acquisition

Mature recruiting organizations spend more by hire But, maturity brings better quality of hire and increased agility

What is the potential cost impact?

Source: Bersin by Deloitte, 2014.

•  2x Spend per hire, equates to: •  40% Less New-Hire Attrition •  20% Faster Time to Fill

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title title title title title title title

  Let’s take a look at 2 similar companies

Example

Meet Smart Inc. and Dumb Inc.

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 Smart Inc.

“Optimized” Talent Acquisition function o  Average CPH = $6,465 o  Average new hire attrition =

10% o  Average Time to Fill – 44 days

“Reactive and Tactical” recruiting function o  Average CPH = $3,258 o  Average new hire attrition =

17% o  Average Time to Fill – 55 days

…now let’s compare based on cost, quality & agility measures

SMART q $1Bn Turnover q 10,000 employees q 1,000 annual hires q Avg compensation = $50k

DUMB q $1Bn Turnover q 10,000 employees q 1,000 annual hires q Avg compensation = $50k

DUMB

Who has the higher cost per hire?

Quality

Agility

Cost

Smart Inc. spends 2x more on hiring than Dumb Inc…

1,000 1,000 $6,465 $3,258

$6,465,000 $3,258,000 +$3,207,000 -$3,207,000

Cost Per Hire Number of hires per annum

Average Cost Per Hire

Total Annual Cost Per Hire

Difference – Smart Inc. vs Dummy Inc.

NB: Average Cost Per Hire figures taken from Bersin by Deloitte

SMART DUMB

What impact does this extra investment have on quality?

Who has better quality hires?

Cost

Agility

Quality

Low quality hires can significantly impact the business

First year turnover is a good indicator of quality of hire…

Source: Telegraph.co.uk reporting on 2014 Oxford Economics Study Source: PwC Saratoga

Avg cost of replacing a departing employee is

$48,982

Avg cost of turnover for new hires is

1 to 1.5x the annual pay of the departing employee

What impact does this have on our example?

… turnover is expensive

40% less new hire turnover equates to $4.4M

1,000 1,000 10% 17%

$6,250,000 $10,625,000 -$4,375,000 +$4,375,000

Cost of First-Year Attrition Number of hires per annum

First-Year Attrition Rate

Total Annual Cost of Y1 Attrition

Difference – Smart Inc. vs Dummy Inc.

NB: First-Year attrition figures taken from Bersin by Deloitte

100 170 $50,000 $50,000

Number of Y1 leavers

Average Annual Salary

1.25 1.25 Cost of attrition – salary multiplier

SMART DUMB

What is the impact of agility as measured by time to fill?

Who has better quality hires?

Cost

Quality

Agility

AGILITY

20% faster time to fill equates to $2.5M SMART DUMB

$1Bn $1Bn 10,000 10,000

44 days 55 days $20,000,000 $25,000,000

Lost Opportunity – Time to Fill) Total Annual Revenue

Number of employees

Average Time-to-Fill

Lost Gross Opportunity Revenue

NB: Average Time-to-Fill figures taken from Bersin by Deloitte

$100,000 $100,000 $455 $455

Average annual revenue per employee

Average revenue per employee day (220 days)

1,000 1,000 Number of annual hires

$227 $227 $10,000,000 $12,500,000

Average cost per employee day (220 days)

Total salary saved for Open roles

$50,000 $50,000 Average annual salary

$10,000,000 $12,500,000 -$2,500,000 +$2,500,000

Lost Net Opportunity Revenue

Difference – Smart Inc. vs Dummy Inc.

So, is it smart by name & smart by nature?

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Cost

Quality

Agility

+$3,207,000 -$3,207,000

-$4,375,000 +$4,375,000 -$2,500,000 +$2,500,000

-$3,668,000 +$3,668,000

The Results Difference in Cost Per Hire

Difference – First-Year Attrition

Difference – Lost Opportunity/Time to Fill

Total Difference – Smart Inc. vs Dummy Inc.

SMART DUMB

Despite spending 2x more on its recruiting program, the actual cost to Smart, Inc. is $3.7M less per annum than Dumb, Inc.

$3.7M

Excelling at recruiting leads to positive business outcomes…

22 Other Topics: Mastering HR Process; Global people management and international expansion; Enhancing employee engagement; Providing shared services and outsourcing HR; Managing diversity and inclusion; Managing change and cultural transformation; Actively using web 2.0 for HR and managing associated risks; Strategic workforce planning; Delivering critical learning programs; Managing corporate social responsibility; Transforming HR into a strategic partner; Health and security management; Managing flexibility and labor costs; Restructuring the organization; Managing work-life balance; Managing an aging workforce Source: Boston Consulting Group

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2

3

4

5

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Delivering on recruiting

Onboarding of new hires and retention

Managing talent

Improving employer branding

Performance management and rewards

Developing leadership

3.5x 2.0x

2.5x 1.9x

2.2x 2.1x

2.4x 1.8x

2.1x 2.0x

2.1x 1.8x

Economic Influence is Discernible in all HR Topics but is Most Pronounced in Six…

Revenue growth Profit margin

The impact that the most capable

companies achieve over the least capable

companies

Topic in which most capable and least

capable companies were compared

①  A balanced recruiting strategy is an optimized blend of Cost, Agility and Quality – the balance varies depending on the talent you are hiring

②  If you are going to measure cost per hire, make sure you include all the relevant external and internal components

③  Investing more on recruiting can improve quality of hire, increase agility and consequently be less costly in the long run

④  Excelling at recruiting can have a significant and positive impact on business performance

⑤  Within HR, recruiting is arguably the function that can provide the best return on your investment

Key take-aways

If you can’t measure it, you can’t manage it.

 Peter Drucker

David Green Vice President

uk.linkedin.com/in/davidrgreen

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