Cost per hire or ROI?
When a position opens up in an organization, it is always helpful to consider the financial implications created by the vacancy. This analysis may very well influence the strategy, priority and process associated with filling the role. There are three important data points to consider; cost per hire, time to fill and return on investment. Each separate data point provides some insight but when all three are taken into account, a more revealing picture is visible and may often steer the initial search strategy in a different direction.
Cost per hire can be rather easy to calculate and should take into account a few hidden costs including the total recruiting and admin labor, total variable recruitment marketing expenses and an allocation of fixed overhead costs. Time to fill can usually be forecasted but realize that other vacancies may be delayed and suffer the financial consequences of a longer vacancy period. And that leaves us with return on investment. In order to calculate this number, you will need to understand the opportunity revenue or gross profit loss to the organization associated with the length of vacancy. Cost per hire only takes into account half of the equation, cost. ROI takes into account revenue, opportunity loss, priority trade-off and cost.
For example, if an organization’s internal cost per hire to fill a VP Sales position is estimated to be $6,000 and the organization’s cost per hire to fill the position through an external search partner is $24,000, then the pure financial decision is rather straight forward. However, if the opportunity loss to have the position vacant for an additional 30 days results in lost revenue of $100,000/month and by redirecting recruiting resources to fill this position at the expense of others creates additional lost revenue, then time to fill and ROI should be considered.
In this case, the recruitment strategy based solely on cost per hire would influence the organization to fill the position internally as it represents a 75% cost savings vs the external alternative. If however, it was determined that the external partner could fill the vacancy 30 days faster and by doing so it would not delay other hires, then the ROI would influence the organization to fill the position through an external partner as it represents a ROI of at least 300%.
Often times, the initial financial analysis is focused on cost per hire and not on the return on investment. When an urgent hire is needed, organizations tend to proceed as if the position was a traditional hire and if unsuccessful, then it may consider an external search partner. This approach and time delay has financial consequences. If the financial analysis and ROI were taken into account as part of the initial search strategy, it would provide the organization with data to better understand the financial impact of a delayed start and the additional cost of shifting recruitment resources.
Posted by: David Daganhardt, Managing Partner, Bristol Search Group