June 24 , 2018

Don’t Lower Your Cost Per Hire, Raise It (This Is Not a Typo)

As seen on ERE Media, January 15, 2018.

Note: This “think piece” is designed to stimulate your thinking about the damage done by typical cost-cutting in recruiting

Spend More Win More

In my experience, recruiting has long overemphasized cost-cutting. And that focus has, unfortunately, reduced both our effectiveness and our business impacts. It’s time to rethink cost-cutting and to instead we must learn how to increase expenditures in key recruiting areas.

Interestingly, the value resulting from maximizing your total spending on recruiting was recently illustrated in the College Football Playoff national championship game. The final two teams (Georgia and Alabama) had one major factor in common … they ranked No. 1 and No. 2 in total recruiting spending within their conference. Rather than striving to reduce costs, these championship-caliber teams demonstrated that winning is associated with spending the most on recruiting. Google, which receives nearly 3,000,000 applications per year, has even bragged that its recruiting budget is double that of the average corporation. So if you’ll bear with me for a few minutes, I’ll demonstrate why most cost-per-hire reduction efforts actually decrease your quality of hire and inadvertently reduce your business impacts. 

More Illustrations of How Cost-Cutting Damages Results

For a moment, let’s use a fishing tournament as an analogy covering cost-cutting. If you were totally committed to winning the top prize, would you purposely try to cut your costs by using inferior bait, moving your boat less to save gas, or by using cheaper fishing gear, knowing that the few dollars that you saved would significantly reduce your chances of catching the prized fish? In the same light, would you ask your brain surgeon, your gas leak repairperson, or your brake specialist working on your family car to cut corners in order to save a few dollars? Of course you wouldn’t, because you know the tremendous costs and risks associated with even a minor process failure.

When recruiting leaders know the real impact that cost-cutting has on their recruiting results, they almost instantly stop most across-the-board cost-cutting.

10 Reasons Why Excessive Cost-Cutting Damages Recruiting Results

I’ve written extensively in the past about the futility of focusing on cost per hire. And to me, it’s clear that our multi-decade effort to become an HR hero by cutting costs has been a failure. Some of the reasons why the process of reducing cost per hire is almost always flawed include: 

  • Few measure the business impacts of cost-cutting in the wrong areas— unfortunately, few recruiting leaders realize or take the time to measure the direct impact that cost-cutting in critical areas has on the quality of those who we hire. Leaders need to know the areas where cost-cutting can do the most damage, so they can avoid cutting costs in the wrong places.
  • The business impacts of a top hire are multiple times greater than cost per hire— the business impact of a top performer or innovator new hire over multiple years at most corporations reaches into the millions of dollars. And the cost of a single bad hire that, for example, sexually harasses can also be in the millions. So the focus should instead be on increasing recruiting’s business impacts, and that often involves spending more money in key areas.
  • Winning in a competitive battle/competition is always expensive— in a highly competitive world, you are often competing against firms that are willing to spend much more. And although recruiting itself is expensive, successfully hiring top talent may cost up to 50 percent more in recruiter and management time alone. And because it’s a competitive battle, you have little choice but to “match” the new programs and the increased spending of your talent competitors.
  • The cost per hire is always a minuscule amount of corporate spending— with an average cost per hire of slightly over $4,100 (source: SHRM), over even hundreds of yearly hires, even major reductions in the average CPH will save much less than 1 percent of the overall corporate budget.
  • Even with a focused effort, costs don’t decrease very much — this is perhaps the most important reason not to focus on hiring costs. Many recruiting costs are fixed, and as a result, cost per hire shifts dramatically when the volume of hiring changes significantly. And as a result, even when recruiting leaders put a lot of emphasis on cutting cost per hire, the figure generally only goes down by only a single-digit percentage. That means that a great deal of effort produces very little cost saving, while simultaneously damaging recruiting results, which is not a good prescription for success.
  • Low costs may result in slow hiring, which means you will lose quality candidates— if you cut costs by understaffing either recruiters or your administrative team, your time to fill will increase dramatically. These cost-cutting created delays will mean an increase in costly vacant position days (especially in revenue-generating positions). Additionally, being slow to close on candidates who are in high demand will cause you to lose many of the very best ones.
  • Candidates can be turned off by a cheap recruiting operation the very best candidates will, unfortunately, judge your company based on what they experience during the recruiting process. So if you lowball a top candidate on interview transportation and meal costs, they may judge your entire organization to be equally as cheap. A cheap recruiting process that doesn’t use innovation and technology may scare away the best candidates.
  • Low-cost hiring may result in a weak candidate/manager experience— overworked recruiters and low budgets will reduce the attention that recruiters can give to top candidates. And that will negatively impact the candidate experience.
  • Cheap hiring may drive away the best recruiters— top recruiters aren’t stupid, so if you dramatically cut recruiting resources, you simply won’t be able to recruit or retain top-quality recruiters. Without sufficient resources, even the best recruiters can’t work miracles.
  • The cost per hire metric isn’t externally comparable — because the formula used to calculate costs varies so much, you simply can’t make accurate external comparisons with your talent competitors.

The 7 Highest-Impact Recruiting Areas Where You Should Avoid Cost-Cutting

A BCG study revealed that of all 22 HR functional areas, recruiting had the highest impact on the critical business impact areas of revenue and profit. But that high impact can only be maintained if you maximize spending in the specific areas of recruiting that have the highest impact on hiring success. I call these factors Critical Success Factors. And because of the high impact of these factors, reducing expenditures in these areas (beyond any obvious waste) will cost you multiple times more in lower new-hire productivity over the employee’s tenure than any initial savings during the hiring process. The seven highest-impact critical success factors in recruiting where you should avoid cost-cutting, and instead be adding resources, are listed below. The highest impact areas where being starved of essential resources does the most damage appear first on the list.

  1. Not calculating and using a quality-of-hire measure  if you don’t measure the on-the-job performance of new hires (i.e. quality of hire), you will not be able to tell where cost cutting actually reduced the quality of the outputs from your process. For example, you could see if eliminating a referral bonus resulted in a decrease in the quality of referral hires after the bonus was eliminated. Seeing what factors that top-performing new hires have in common also allows you to focus your resources on the best place for advertising, for sourcing quality candidates, and the best assessment methods.
  2. Not focusing on high-impact jobs — appropriate cost-cutting has a higher impact in jobs that are prioritized based on their impact on business results. So disproportionately allocate more recruiting budget, talent, and resources to revenue-generating, product development, and other high-impact jobs. Put high priority jobs at the head of the queue. Normally no more than 25 percent of the frequently open jobs should be prioritized. You can normally cut costs with relatively little negative impact by outsourcing your low-impact jobs.
  3. Not using the most effective sources — the highest impact recruiting activity is sourcing. If you don’t attract quality candidates, no amount of quality assessment and effective candidate selling can produce a quality hire. Using 100 percent active and cheaper sources means you will miss the best currently employed individuals. Other typical cost-cutting areas that damage the quality of candidates include using cheaper but ineffective sources like free job boards, reducing the number of days that a job is posted, and how often an older posting is made current. Cutting back on recruitment advertising and deemphasizing the most powerful source, employee referrals, may initially save bonus dollars. However, it will dramatically impact both the overall volume and the quality of your applicants and hires. Cutting back on executive search fees will save recruiting budget dollars, but it may, unfortunately, result in the hiring of numerous lower-performing executives.
  4. The number and quality of your recruiters — using cheaper or less experienced recruiters means that you will lower your ability to effectively assess or sell top candidates. Fewer support staff will slow your time to contact, time to interview, and time to hire. And as a result, top candidates may be gone long before you can get around to making a hiring decision.
  5. Discontinuing employer branding expenditures — employer branding is the only long-term attraction effort. Spending on employer branding makes potential applicants much more aware of your firm and what makes it a great place to work. So reducing spending on employer branding will result in some short-term savings, but it will have a tremendous long-term negative impact on the number and the quality of those who are attracted to your firm.
  6. Not using the most effective candidate assessment approaches — skimping on interviews, technical tests, and reference checking may cause you to miss some candidate weaknesses. And that may result in many more expensive failed or flawed hires.
  7. Not maintaining administrative support — skimping on administrative costs like self-service interview scheduling, interview travel, or relocation expenses may discourage quality applicants. It makes your company appear cheap or behind the times in using technology to an outsider.

Final Thoughts

All professionals should be conscious of waste because the cost of that is simply part of their job. But overly focusing on the transactional aspects of recruiting has proven to consistently be a distraction. So the lesson to be learned is that if you insist on focusing on cost-cutting, do it outside of the above seven critical success factor areas and focus it on your low-priority, low-impact jobs. And finally, in this new data-driven world of recruiting, you absolutely must measure the performance of new hires on the job (i.e., quality of hire) so that you can use it to improve every aspect of the hiring process. But also because a quality of hire measure allows you to identify the specific areas where excessive cost-cutting negatively impacts the quality of your candidates and the performance of your new hires. Remember that cutting costs means fewer resources and fewer essential resources in critical areas, which results in lower performance. 

If this article stimulated your thinking and provided you with actionable tips, please take a minute to follow or connect with me on LinkedIn

image from pixabay

About Dr John Sullivan

Dr John Sullivan is an internationally known HR thought-leader from the Silicon Valley who specializes in providing bold and high business impact; strategic Talent Management solutions to large corporations.

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