Decoding cost per hire as a recruitment metric
If we were to see the cost of wrong hire, it is proportionate to the span of control of that individual – be it senior or lower level hire
Joining People Matters for TA Leadership League Twangout session were Mansi Navlakha, HR analytics, Snapdeal and Vikas Verma, Director, Performance and consulting, AON Hewitt. The session was very interesting and explored the dynamics of cost per hire as a recruitment metric.
Cost per hire has always been an important factor for companies, but now with Big Data analytics coming in, measurement of these has become more prevalent today. A key reason behind this trend is that, it allows for accurate calculation of this cost. So, to begin with, there are three components to cost per hire. They are:
· Actual cash pay-out: This includes sourcing cost, assessment cost and background verification cost. This component has a real cash outflow.
· Opportunity cost: This starts accruing right from the time when a position falls vacant though the hiring process till the time the recruited person becomes fully productive for the company.
· On boarding cost: This includes cost of training after the candidate joins the company.
So, there are both measurable as well as hidden pieces of cost per hire. Additionally, there also exist flaws that come in while measuring these two components. Many organisations these days only look at direct visible cost. Further, many of the companies also fail to include the recruitment function cost to this metrics which is another flaw when it comes to measurement of cost per hire.
For large companies that see a higher turnover of employees such as the IT industry or BPM industry, the recruitment cost is really high and so sourcing cost is the primary driver. So the trend emerging for these companies is RPO (Recruitment Process Outsourcing) so as to lower their direct cost. On the other hand, for companies that are focused on innovation, quality of talent becomes highly important. Hence, these companies look at the quality metrics. Another key parameter driving recruitment for such companies involves answering the question, “How long will candidates stick to the job?” For senior roles, leadership quality becomes highly important, and companies across industries look at the culture fit of candidates. Indirect cost however, is not dependent on the size of the organisation or the industry under which the organisation falls. Moreover, if companies are just looking to begin with the measurement of cost per hire, they need to look at the opportunity cost for roles such as senior-level jobs, sales roles, and any billable resources first. For rest of the roles, companies need to look at the direct cost per hire at a later stage.
If we were to see the cost of wrong hire, it is proportionate to the span of control of that individual – be it senior or lower level hire. Social media also plays an important role in recruitment and contributes to the cost per hire. Starting this year, companies are setting aside huge budget from their recruitment budget for social media hiring. Social media hiring is clearly rising, and necessarily so, in this age of digitalization. However, social media cost does not end there; proactive branding in social media is an expensive but effective affair for which the cost should be measured. Further, for niche skills, the company should formulate a separate employer branding strategy.
Cost of employee referrals also need to be evaluated as a cost per hire metric. When employee referrals emerged as a recruitment strategy in companies, the intent behind it was very clear; when employees are happy with their experience they make referrals of those who they know. But today, the intent of reference scheme has been lost. Employees are referring unknown candidates and this has a negative impact on the cost per hire since more incentives will be given internally and the company may not be getting good people.
· It is important to measure both the direct cost and opportunity cost.
· HR heads need to own cost per hire so that someone can standardize and evaluate the metrics of cost per hire.
· With the Big Data analytics coming in, measurement of cost per hire has become very easy.
With all these metrics of cost per hire coming in, there is a need for HR heads of companies to own the cost per hire so that someone can own the cost and evaluate it as a metrics. Cost per hire is highly prevalent in the recruitment function, and so standardization of this metrics is very important.