Outsourcing Series: What's hidden in cost per hire?
As the next step in my outsourcing series on measuring the effectiveness of your workforce solution, I raise to you a question I receive often, "What makes up cost per hire?" It’s an important question because, when determined with a good degree of accuracy, cost per hire can provide a key indicator into the efficiency and effectiveness of a talent acquisition strategy.
"When it comes to cost per hire, the devil is in the detail. Having visibility into hidden costs is key. What are the measurable gains of process improvements? What is the true cost of an empty seat? How does the onboarding process impact productivity and retention? The answers to each of these questions will have a significant impact on your recruitment spend," explains Craig McGrory, Allegis Global Solutions (AGS) Director of Business Development.
1. How do I calculate cost per hire?
- Employee referral fees
- Total cost of employment of internal recruiting staff and/or Recruitment Process Outsourcing (RPO) provider fees
- Expenses incurred by recruiting staff during recruitment (travel to recruitment events, costly mobile phone bills – particularly when recruiting across multiple countries)
- Reference checks, background checks and/or medicals
- Desk costs and corporate allocations for recruitment team
- Training, development and recruiting costs for internal recruiting staff
- Total cost of employment of non-recruiting staff spent in recruiting e.g. hiring managers, administrators, HR generalist etc.
- Talent pipeline development and maintenance
2. Is the lack of a strong employer brand forcing you to spend more on advertising for open roles?
4. Is having an empty position affecting the morale and thus the productivity of your existing staff?
5. A challenge with talent retention can sometimes require you to fill the same role twice within a short period of time
2. What is the right ratio?
The model discussed above is cost per hire at its most basic, but what happens when things get more complicated? When there is a need to track cost per hire across different divisions, levels or geographical locations, a Recruiting Cost Ratio (RCR) is often used. RCR divides spend by the sum of the salaries of the hires made in a time period rather than the number of hires.
This ensures that the impact of higher costs of hiring senior executives or resources in high-cost locations is taken into account or can be tracked separately. With this approach, it is important that part-time and fixed-contract placements are considered, as cost per hire will be inaccurately high if calculated on a full-time employment basis exclusively.
Again, if you're not confident keeping track of these metrics yourself, it may be time to think about outsourcing your workforce management strategy, as this can help you to monitor each of these metrics at a significantly more in-depth and consistent level, enabling you to better calculate your organization's cost per hire as a result. This level of detailed reporting can often assist you in accurately reporting key hiring data to your executive stakeholders as part of your management of an effective talent strategy.
3. What is a good cost per hire?
Accurately calculating cost per hire is one thing, but what should you take from the figure you end up with? Without strong qualifying data, such as time-to-fill, quality of hire and the seniority of the hires being made, it is difficult to draw any definitive conclusions. For example, a low cost per hire may look good on paper, but will actually be counterproductive and less cost-effective in the long-term if it has been achieved at the expense of quality or is driving up time-to-fill rates. Only by taking the holistic approach to workforce management described above can cost per hire be used as a truly efficient indicator of performance. With over 20 years of experience in calculating cost per hire in APAC for our clients, reach out to us as we would be happy to share examples that align to your business.
"Everyone wants to know their cost per hire, but this is dependent on much more than agency fees and job board spend. Only with a holistic view can you develop a usable metric that allows to you effectively benchmark your organization against others at a baseline level and show reductions or increases year over year," explains Alfonso Nunez, AGS Executive Director Client Solutions for APAC.
How do you calculate cost per hire at your organization? Share your opinions with us. And get in touch with me on LinkedIn if you would like to discuss how outsourcing could make your talent acquisition strategy more cost-effective.