What RPO firms don’t want you to know about cost-per-hire.
During Bill Clinton’s successful presidential run in 1992, it was reported that his ever-acerbic campaign’s political advisor James Carville had signs in the offices that read: “It’s the Economy, Stupid.” Carville was gambling that Americans would “vote their wallets.” Put another way, people would react to the campaign messaging based on the one area of the government’s performance they could measure: the impact of the economy on their lifestyle.
Business leaders, like voters, are awash in numbers. Every day the media bombards the public with information on inflation, interest rates, economic growth, yield curves, and stock market indices. Every morning a new talking head appears on a network magazine show to explain why his analysis is best. It is overwhelming trying to discern which data is right, which data is pertinent and, ultimately, which data is worthless.
In the area of HR, we are now under ever-increasing pressure to demonstrate contribution to the bottom line of the business. The CEO and CFO are asking—sometimes bluntly—what is the performance impact of HR programming on financial performance? To have the proverbial “seat at the table,” HR leaders must respond with metrics that tell a whole story and can be clearly linked to real world impacts.
Ironically, staffing has always been one area of HR that is measurable. In some respects, the staffing function has a simple, binomial outcome: the job is filled or the job is not filled. Unfortunately, it is not that simple.
We all know that there are enormous quantities of data that can be kept in any large staffing organization. Funnel metrics, conversion ratios, and sourcing channel data are some examples. Research firms that provide “benchmarking” data (we will talk about benchmarking later) publish giant tables of information by industry sector stressing cost-per-hire, but measuring staffing departmental performance is not that simple.
The rapidly growing popularity of outsourcing staffing, or what HRO acronym junkies call recruitment process outsourcing, has spawned a new breed of staffing experts and a plethora of articles, advertisements, and case studies that stress that the RPO providers will “reduce your organization’s cost-per-hire.” That’s nice. Companies should optimize their metrics.
Cost-per-hire is a concept which has been promulgated by research firms that sell benchmarking data. Below, I will show an actual case study where the entire staffing operation and the company’s financial performance degraded over a three-year period. As quality-of-hiring efforts eroded, the cost-per-hire actually dropped. One of the first issues that we need to address is where did the myth of cost-per-hire start?
To understand this, one must recognize the influence of consulting firms and research firms that publish annual surveys of data. They encourage the practice of “benchmarking.” However, standards published by these metrics gatherers are the average of the data provided by respondents. Therefore, to use data or the process of benchmarking itself is to aspire to be average.
Thankfully, most firms and staffing departments do not aspire to be average. They aspire to outperform the benchmarks. Fundamentally, however, the researchers determine on which metrics they wish to collect data and what they publish. And the problem remains that the benchmarks that our hard-working staffing departments seek to exceed may not be valuable measurements at all. Cost-per-hire is one such measurement that tells you almost nothing.
In the era of HRO, RPO providers feel the need to demonstrate their positive financial impact. Many RPO firms do not provide a holistic service but rather a piece of staffing such as sourcing or a sub-process. Each RPO provider that stresses cost-per-hire looks at the cost of the sub- process or processes its firm may provide and calculates the cost-per-hire or addition to the cost-per-hire for only those services. RPOs argue that their service will reduce overall costs.
This barrage of marketing messaging has actually made the popularity of the concept of cost-per-hire even more prevalent. In addition, it underscores the fact that organizations all calculate this benchmark differently and may include a host of factors related to acquiring talent. If there is no standard calculation, then the data accumulated for benchmarking is worthless.
The next logical extrapolation is for an organization to attempt to reduce cost-per-hire against prior years. Once again, the problem is that this may not tell you much. For example, we examined the performance of a client for whom we performed a diagnostic but never implemented an outsourcing solution. In this case, the company had diminishing earnings and diminishing performance from its staffing department.
The staffing department had an amalgam of mismatched strategies and lacked measurements, save one. They were all very proud that the overall cost-per-hire had diminished steadily over a three-year period. They also pointed out that cost-per-hire had decreased while hiring rose during the prior three years. Fig. 1 shows the data they presented as evidence of performance.
As we examined further, we discovered more to the story. In fact, headcount had been relatively flat during the three years. Issues related to employee turnover had led to the increase in annual hiring numbers. The staffing department could hardly be held accountable for the retention issues driven by the company’s misfortunes. However, data showed that turnover in the first 90 days and first year of employment were very high at nearly 50 percent. Therefore, the staffing department was filling the same job multiple times per year.
Overall cost metrics showed that on pure cost-basis, there were economies of scale as hiring increased, in that costs only went up about half as fast as the number of hires. Cycle times had remained relatively constant, so managers were not complaining about delays in hiring but were unhappy with what one referred to as “desperation selection.”
While cost-per-hire decreased, overall staffing costs had skyrocketed 14 percent at a time when company profitability was in question. The staffing department used no pre-employment assessments at all, and no quality measures were being taken. But cost-per-hire was declining. No thought was being given to the huge organizational costs of turnover and training. The structure of the overall HR operation made those issues the problem of the organization effectiveness and training departments. As the company evaluated an HRO strategy, the staffing department proceeded to accumulate bids from RPO firms, and discussions about the primary goal were around further reducing the cost-per-hire. All bids promised that reductions would come from better processing of candidates.
Unfortunately, the company and the RPO providers all missed the point. Cost-per-hire did not tell them anything about quality. Mathematically if you are filling the same jobs multiple times per year, the denominator (jobs filled) goes to infinity, and the quotient (the cost-per-hire itself) goes to zero.
In short, if you are only measuring cost-per-hire, the lower the quality-of-hire, the better your performance may appear!
We propose a more meaningful measure, taking total staffing costs divided by the headcount plus any new (not replacement) requisitions. Think of this as the cost of keeping all seats filled. As with any metric, you need to balance with other measures related to cycle time, but this calculation automatically punishes you for filling the same job twice as the headcount or denominator does not change. We refer to this measure as the Staffing Operational Performance Quotient (SOPQ). Fig. 2 has key data highlighted.
So why do some staffing departments and RPO firms want to use cost-per-hire as a guideline? For the same reason that the staffing managers in our case study used it. They are not equipped to approach staffing as anything other than a processing discipline, and they do not have the holistic approach or the requisite tools to manage quality of hire. In fact, our case study management had rejected validated pre-employment assessment because it would add to the “stellar” cost-per-hire.
There are two distinct aspects to quality in staffing. One is the quality-of-process and the other is the quality-of-hire. Most RPO firms lack the ability to do the necessary employee research and administer the assessments necessary to ensure quality of hire. They also lack resources to do the statistical studies after the fact to measure and fine-tune assessment programs. In many cases, they consider pre-employment assessment a hindrance, as it may require the sourcing of a larger pool of potential candidates.
In the era of HRO, if you are using an outside multi-process BPO player or an RPO firm, you should insist they approach the staffing process with the same strategic perspective, level of care, and commitment to quality you’d want internally. Make sure they have the tools to provide a quality-of-process and a quality-of-hire. Also, measure the overall staffing costs and the cost to maintain organizational headcount (SOPQ) and judge the provider on that metric. Remember, cost-per-hire does not tell you anything, and the benchmarks are flawed at best.
Perhaps you should hang a sign in the staffing department that reads “It’s about the Quality, Stupid.” Who knows, you might also get hired to do a talk show on CNN!