Spend More… Not Less On Cost Per Hire – And Instead Focus On Hiring Results

CEOs often cited recruiting as their #1 strategic challenge, yet HR’s response is to cut hiring costs? I can also report that I have heard multiple CEOs say out loud that “they expect their recruiting needs to be fully met, regardless of costs!”

Example – When Superior Results Are Critical, Costs Can Be A Low Priority 

There are many selection efforts when you must choose, where you wouldn’t let costs be a major deciding factor among your selection criteria. For example, if your family doctor just revealed that you likely have cancer. When planning your search for a cancer specialist, would you start your search by looking for a cheap cancer specialist? Or after your family recently had your first new baby, wouldn’t you bypass considering costs. And instead, tell your auto specialist that, of course, you would only consider the very best brakes and tires for your car (not the cheapest ones). As a business leader, when you were selecting cybersecurity software to protect your extremely sensitive customer databases. Once again, would you even consider the cheapest ones? 

It is my contention that you must have this same focus “on results and not costs” approach when you are battling to attract the talent that is desperately needed if your business is to thrive.

A Shift In Focus Towards Improving Results Is Now Required

Yes, the most commonly reported metric in recruiting is cost per hire. But damn the costs. Because today we are fighting a war for talent, so finding enough talent is likely the top factor causing your organization’s lagging business performance. Recruiting leaders should, at least for the immediate future, and when they are filling key positions. Instantly stop worrying about their “cost per hire.” And instead, focus on filling every open job faster, with better skilled and higher performing new hires. 

Next Realize How Minuscule Hiring Costs Really Are

I recommend that you begin by realizing that the cost per hire (or CPH), whether it is high or low, is almost always a minuscule dollar amount in the big picture corporate scheme of things. Both Glassdoor.com and SHRM peg the average cost per hire at a little over $4000. 

However, compared to a new hire’s impacts, CPH is relatively minuscule. For example, the CPH at a company like Google would likely only be 2% of the new hire’s first-year salary. And the CPH amount of a single top performer would be only .0005% of the multi-millions of dollars in value that the new hire would produce during their first year. So the lesson to be learned is to focus on the bigger number, the new hire’s performance.

Begin To Focus On These Three Recruiting Metrics

If You Want to Impress your CEO and improve your recruiting results, examine only three recruiting metrics.

  1. Cost per hire, unfortunately, changes recruiting decisions – because of CPH’s long history of prominence. I have found that even maintaining the current status quo of calculating and reporting the cost per hire (CPH) metric will remain damaging. It is so ingrained. This metric can’t help but reduce the needed shift in focus away from costs and toward recruiting results. So I recommend that you literally stop talking, measuring, and reporting on CPH, at least for the remainder of 2021. 
  2. ROI, rather than just the amount spent, should be the #1 recruiting metric – Let’s face facts, attracting quality talent is critical, but it is almost always expensive. But only recruiting makes the mistake of looking at costs in isolation. Because in every other part of the business, managers never look at costs in isolation. Instead, they compare the ratio of costs to the value of the output that those expenditures produce. This approach is called ROI, and it is the most strategic and widely used metric in business. This metric contains two elements. The “I” in ROI stands for the money invested or costs. But the other side of the equation covers the “R,” or the returned value from that investment. In my view, recruiting should immediately adopt the ROI calculation as one of two primary metrics. Unfortunately, most in recruiting are scared away by the ROI metric. Because it forces them to calculate the returns or the dollar impacts produced by recruiting. To help overcome any fear, recruiting should work with the CFO’s office to better calculate ROI. 
  3. The #2 most important metric should be calculating new-hire performance – after the ROI of the recruiting function, the second most important recruiting metric is a performance metric. For example, if you are recruiting an expensive star baseball pitcher. It simply would make no sense if you failed to check the new hire’s performance (ERA and their winning percentage) over their first six months with the team.

Unfortunately, the measurement and the data collection related to CPH distract from the effort needed to measure the much more important factor, recruiting’s impacts. The performance of the new hires metric is so valuable because it is the only metric that can reveal which part of your recruiting process is working (and not working). Some mistakenly call this metric “quality of hire.” However, I find that simply using the word “quality” confuses and even scares many in HR that are “metric challenged.” So don’t ever use the “Q word” around recruiters. Instead, call your primary success metric “The performance level of new hires” because to calculate it, you only need to measure the performance of new hires after 6 or 12 months of working. Then, you compare their performance (generally their performance appraisal number) to the average performance level of other recent hires (usually in the same job family). So, in summary, recruiting’s ROI and the performance level of new hires become the only two primary metrics in today’s talent marketplace. And the third metric, CPH, can simply be ignored for a while.

The Many Business Impacts From An Over Emphasis On Costs

There are many areas within recruiting where almost any focus on reducing costs will measurably damage both your recruiting and your business results. The top 8 recruiting areas where cost-cutting is likely to cause the most damage are highlighted below.

  • Lower advertising spend – excessive cost-cutting in the area of posting jobs will decrease the number of qualified applicants. And with an insufficient number of applicants even seeing your job postings. The odds of making the quick hiring decisions required in today’s competitive talent marketplace decrease dramatically. Trying to save on advertising dollars will mean that you will likely only attract “active jobseekers” and talent within a commuting distance. Spending less on advertising may also cause you to limit your postings to the cheapest but least effective job posting sites. 
  • Fewer referrals and cheap sources – refusing to spend on employee referrals will reduce your applications because it is the top source for applicant volume and new-hire quality. For example, rather than spending on this #1 source referrals, you try to cut costs by using cheaper but less effective sources like Craigslist ads and career fairs. The smart move is first to track the ROI and the success percentage of each source used. And then to exclusively use the sources with the highest return in quality applicants and top-performing new hires. And that means employee referrals come first. Often followed by Boomerang rehires, revisiting silver medalists, and indirect poaching of top performers from your competitors.
  • An absence of quality sourcers – if you spend less on hiring quality human sourcers, you will decrease your candidates’ volume and quality. Also, if you’re looking for the so-called “passive candidates,” you won’t be able to find most of them without spending money on the very best sourcing tools and sourcers. Who are capable of proactively reaching out to find these “hidden gem candidates.” And then they have the capability of convincing them actually to apply. Unfortunately, in today’s marketplace, without the willingness to pay for dedicated sourcers. You will likely attract mostly active candidates and the unemployed.
  • The appearance of cheap recruiting – Note that top candidates will likely be immediately scared away because they can “smell a cheap recruiting operation almost immediately.” Most potential applicants simply assume that a cheap recruiting function is an indicator of a cheap company. So, if you expect to attract the very best candidates or recruiters, don’t let your cost scrimping show.
  • Fewer quality recruiters – if you scrimp on hiring or paying experience recruiters. You will reduce your candidate sorting, assessment, and selling capability. Today, even average recruiters are in great demand. If you make the mistake of hiring too few excellent recruiters, too many contractors, or if you pay them too little, this “Penny wise but pound foolish” approach will result in several serious problems. Including missing top candidates that applied, a high dropout rate because of weak communications, inaccurate candidate assessments, and a failure to convince the most desirable candidates with multiple choices to say yes to your offer. It’s also important to note that scrimping on the support tools that top recruiters need, including LinkedIn licenses and recruiter retraining, will also likely negatively impact both the results produced by your recruiters and their long-term retention.
  • Reduced agency spending – The recruiting for your most strategic and impactful positions (your executives) will be damaged when you fail to allocate enough money to pay for the best external executive search and diversity recruiting agencies.
  • A reduction in candidate payouts – Being cheap with candidate payout costs will result in fewer finalists saying yes, for example, scrimping on the travel costs that top candidates expect or on reasonable new hire relocation costs. Will simply scare away multiple candidates that are being treated better by other competing companies. 
  • Reduced recruiting technology – Cutting your spending on recruiting technology will hurt you in virtually every area of recruiting. First, because not having enough efficient recruiting automation may unnecessarily actually increase your recruiting labor costs. Insufficient recruiting tech will also result in weak resume parsing, a slow recruiting process, the ghosting of candidates, and a bad candidate experience. All because, at the very minimum, recruiters have weak CRM or ATS support.

Incidentally, It’s Also Extremely Difficult To Significantly Reduce CPH

I would also note that in my experience, it’s extremely rare for any recruiting function (even with a full faith effort) to successfully make a significant cut in overall average recruiting costs by even 10%. However, at the same time, the damage that cost-cutting will do is real. And for most corporations, the dollar damage caused by a misguided cost-cutting effort often exceeds the dollars saved by a factor of two (WOW).

Final Thoughts

I recommend that you begin focusing on your recruiting function’s ROI and the dollar impacts produced by its new hires. Simultaneously you should encourage a much-reduced emphasis on cost-cutting. And that usually means no more than simply trying to avoid being wasteful while at the same time not devoting any time trying to pinch pennies. However, because excessive cost-cutting can be so damaging during today’s talent wars, I nominate the calculating and the reporting of “cost per hire” as the single most distracting and damaging exercise in recruiting. Primarily because the resulting costs of not having sufficient qualified talent are simply too great of a burden in today’s economy.

This Was A Think Piece – designed to shift the focus of recruiting leaders towards improving recruiting’s outputs and results.

Author’s Note 

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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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