Insights

parisima-cost

Cost Per Hire

Insights

Most people in Recruitment like to think of themselves as commercially savvy, and there’s always a lot of talk about cost-per-hire. There are others who say that the emphasis on cost-per-hire is a bad thing because it takes the focus away from quality of hire, which is more important. There is a long list of reasons why cost-per-hire is unimportant, but the top two are:

  1. It’s meaningless
  2. Focusing on it could seriously harm your company

Consider this example which, I hope, illustrates the point:

The HR Directors of two companies, let’s call them Company A and Company B, are chatting at a conference. The companies are direct competitors and each HRD knows the other well – they both employ 10,000 people, have 8% attrition and 2% headcount growth. They start talking about recruitment and the HRD from Company A proudly states that they’ve got their cost-per-hire down to $2,500. The HRD from Company B, knowing their cost-per-hire is $3,600, changes the subject and makes a mental note to reduce the recruitment budget. What they didn’t discuss was:

  • Company A fills 50% of its vacancies with internal candidates
  • Company B fills 10% of its vacancies with internal candidates

So whilst they both make 1,000 external hires per year, Company A fills 2000 roles, whereas Company B fills 1,111. Doing the maths, their current spend on Recruitment is:

  • Company A: 2,000 x $2,500 = $5,000,000
  • Company B: 1,111 x $3,600 = $4,000,000

Therefore, Company A’s cost-per-hire is lower, not because their cost is lower, but because they’re filling more jobs. This illustrates my first point; cost-per-hire is meaningless – it’s not the same as Cost.

Now, bearing in mind that the number of employees moving internally to a new role is 9 times higher at Company A than it is at Company B, ask yourself these questions:

  • Which company is likely to have the most engaged workforce?
  • Therefore, whilst both companies have 8% attrition, which company is likely to have the highest unwanted attrition?
  • Therefore, which company do you think will have the best performing workforce?
  • Therefore, all other things being equal, which company will be more profitable?
  • Which company would you prefer to work for?

It gets worse… The HRD of Company B decides they too should be able to recruit at a cost-per-hire of $2,500, so slashes the recruitment budget by 30%. This makes them more reliant on active candidates, and impacts their ability to attract top talent, which in time goes on to impact the company’s performance even more. And this illustrates my second point – focusing on cost-per-hire could harm your company.

I said at the start that most people in recruitment like to think of themselves as commercially savvy. For this to be true, we need to be able to demonstrate to people like Company B’s HR Director, the return their company would get if it invested 25% more in recruitment, just like Company A, rather than how we can do it for 30% less, like they’re asking us to.