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Outsourcing Series: What's hidden in cost per hire?

Kristy Sidlar
By Kristy Sidlar
on December 28, 2016
Image credit: monkeybusinessimages via iStock

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.

However, calculating cost per hire accurately is no easy task. There is no definitive means of doing so, and approaches can vary from business to business and even within an organization. This makes judging the cost effectiveness of your talent acquisition strategy difficult. How can you be sure your cost per hire is efficient if your competitors, or even your own CFO, are calculating it by a completely different means?

"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.


With this in mind, here are three of the most important questions to consider when trying to calculate cost per hire:

1. How do I calculate cost per hire?

At the most basic level, AGS calculates cost per hire as both external and internal recruiting spend divided by the number of hires in a given period. This is simple - the difficulty lies in ensuring all of the costs associated with recruitment are taken into consideration. While some areas of expenditure are obvious and easily identified, such as agency fees, job board and recruitment technology costs, others are harder to quantify.
Ensuring these hidden costs are taken into account is key if cost per hire is to be calculated accurately. External costs like those listed above are generally easy to quantify; it is internal costs that can prove more problematic to track. These can vary significantly from business to business, but some of the most common include:
  • 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
These are some of the most common internal costs that impact cost per hire, but a wide range of other factors can also impact your recruitment spend: 
1. Do you have process inefficiencies that are driving up costs?
2. Is the lack of a strong employer brand forcing you to spend more on advertising for open roles?
3. Do you have an optimal sourcing strategy that effectively manages the channel mix and subsequent advertising spend?
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
Essentially every aspect of your talent acquisition strategy and wider workforce management has the potential to impact your cost per hire, but knowing exactly how can be difficult to quantify.
How do you get around this problem? The key is to develop an approach to workforce management that is as all-encompassing and wide-reaching as possible. It's important to consider the value that outsourcing your workforce solution could bring to the way you calculate cost per hire. This can help you to develop a clear, consistent workforce management strategy, making it easier for you to understand the different factors that impact cost per hire and identify areas where improvements can be made.

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.

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Kristy Sidlar
Written by Kristy Sidlar
Kristy Sidlar has more than 20 years of experience in the talent acquisition and recruitment industry, with ten of those years in Recruitment Process Outsourcing and Managed Services Provider. In her current role as Managing Director of Business Development for Allegis Global Solutions in the APAC region , Kristy is responsible for leading the APAC business development team and using her knowledge of our values and solutions to help support our clients’ strategies. Kristy is a first point of contact for companies seeking information regarding workforce management solutions. She collaborates with business development leadership to bring in and qualify leads. She attends industry events and develops brand awareness, educates companies on recruitment solutions and strategically aligns potential clients to appropriate contacts. In previous roles, she has also provided consulting services for technology selection and implementation, talent acquisition process evaluation and redesign, workforce planning and employer branding.

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