Evaluating the True Importance of Cost Per Hire
HR loves metrics and while we’ve gone over the basics of quality of hire and cost per hire, an interesting perspective is proposed on why over-focusing on these types of metrics can actually have a negative effect. Specifically, Dr. John Sullivan, Professor of Management at San Francisco State, penned an article for ERE urging for recruiting leaders to take another look at how they are utilizing the cost of hire metric. Specifically, how they shouldn’t be using it. Problems may include:
“Recruiting transaction costs are a distraction”
Dr. Sullivan feels that when recruiters and administrators are required to spend more time than necessary focusing on transactional costs, the primary focus is lost, sometimes at a greater long-term cost. Cost of hire may average in the thousands of dollars with a focus to keep that cost down, which may lead an organization to miss out on a higher producer that a larger recruitment budget may have brought in. For this reason, Sullivan believes there should be more focus on quality of hire. “For example, if you required brain surgery, you would certainly be concerned about the cost of the surgery, but the cost element would be of minimal concern compared to be value of the output (living and having a fruitful life).”
“Return on investment is the metric that should be used”
In other areas of business operations, the overall cost metric is never the only metric that is considered. Costs are compared to the value of output or the outcome/result from associated costs. ROI should be the major consideration. Sullivan explains that ROI consists of two parts: “The “I” in ROI stands for the money invested or costs. But the other side of the equation, the “R” or return, is equally or even more important. The ROI formula forces you to compare the cost relative to the return that the costs produce.” In the end, if recruiting costs are reduced, the overall impact may be an increase is expenses.
“Attracting quality is often expensive”
Great talent acquisition teams (i.e. recruiters, administrators) and methods (i.e. advertising, referrals, social media) are typically expensive. The saying “You get what you pay for” certainly applies. Recruiting for the best may also require a longer process than filling a role with the first qualified warm body. Longer processes mean higher associated costs.
“Low cost may mean slow hiring, which can be expensive”
Cutting recruitment resources used to make a quality hire will most certainly increase your “time to fill” objectives. Again, longer recruiting processes mean higher costs. Longer processes also mean a lengthened amount of time that a position may sit open without producing revenue and/or lowering productivity. “Additionally, being slow to close on candidates who are in high demand may cause you to lose the very best ones,” Sullivan adds.
“Many of the factors that increase the cost per hire may be outside of your control”
Pay attention to the hiring costs vs. hiring needs. If recruitment costs are generally unchanging or fixed, an increase or a cut in recruitment volume will have a drastic impact on the cost per hire impact. Sullivan also notes that, “If the mix of job openings changes so that higher-level jobs and hard-to-fill jobs make up a larger percentage, your cost per hire will also increase dramatically, despite your best efforts. If more external executive searches are required, the cost per hire will also increase dramatically.”
“The cost per hire metric is not externally comparable”
With the seemingly infinite number of variables impacting cost per hire metrics and the relative nature of those numbers in relation to the type of factors unique to a particular company, comparing cost per hire statistics against a similar organization may be pointless. Sullivan suggests comparing this year’s cost per hire numbers with last year’s for a more effective gauge of success.
“Candidates can tell a cheap operation”
Top candidates pay close attention to how the recruitment process is run. If they don’t see a strategic or innovative representation of the organization, they may assume the company is not where they want to be. Similarly, if you “lowball” a candidate with a less than competitive offer, the impression will be made that the company is not willing to pay for top talent.
“Low-cost hiring may result in a weak candidate/manager experience”
Stated above, an underwhelming recruitment process will leave a bad impression with the candidate and possibly cost the organization potential new hires. Overworked recruitment staff and limited resources will be conveyed to the candidate during the recruitment process.
“Cheap hiring may drive away the best recruiters”
It’s not just the best candidates you may lose out on, but high performing current employees. Top recruiting staff know what’s necessary to make best hires. If they aren’t given the resources to make it happen, they may look for a company that will give them what they need.
“Attracting active candidates is cheap compared to the cost of attracting non-jobseekers”
Passive candidates (high performers that they want to lure away from other companies) are typically the ones that recruiters are after. Finding and acquiring these passive candidates is a lot more expensive than attaining active job seekers, or motivated buyers, that want an immediate position.
“Cost per hire metrics don’t vary very much”
Sullivan asserts “In my experience, even when recruiting leaders put a lot of emphasis on cutting cost per hire, the figure generally only goes down by a small percentage. This typically low percentage of cost savings makes me wonder whether all of the effort and emphasis are really worth it.”
“Hiring cheap may require the use of inexpensive sources and tools”
Simply put, “the cheapest sources are seldom the most effective ones in attracting high-quality candidates.”
“The formula almost always undercounts the real costs”
Additional costs often are not added into calculations, such as the cost of the hiring manager’s time, the cost of the employee’s time for referrals, or the cost of bad hires. Excluding these costs results in underreporting of the cost of hire metric.
While the cost of hire metric should definitely be considered, Dr. Sullivan’s points may help recruitment managers and executives understand how much impact this metric should or should not have on their strategic planning and budget goals. Overly focusing on this metric may have a negative impact on the business and more long-term disadvantages than previously realized.
Traci Kingery, PHR is an HR Professional and freelance writer based in the Midwest, specializing in immigration and talent management. When she’s not improving unemployment, she keeps busy with her husband and four children.