Beyond Cost-Per-Hire: How to Boost TA’s Strategic Impact
This post is part of the Elevating Talent Acquisition Across Asia series - a collection of personal viewpoints and experiences in connecting Talent Acquisition practices to organizational outcomes.
The series is meant to provide insights, educate, challenge the status-quo, and provoke thought amongst the C-Suite and Function Heads at MNCs on delivering exceptional business results with the right Talent Acquisition strategy, practices, and capabilities.
Asia’s Cost-Per-Hire Dilemma
Cost-Per-Hire (CPH) is a misunderstood and often misused metric. Many organizations are striving for it to be as low as possible without examining the impact it has on the quality of talent coming in to meet business outcomes. This oversight can actually increase costs over time.
CPH is a timely topic for Talent Acquisition (TA) professionals, many of whom are under fire in Asia. They’re being asked to deliver better quality hires with fewer resources. They report higher workloads, more specialized roles to fill and increased applicant volume (that isn’t necessarily matched in quality of applicants). Under this challenging landscape, TA professionals are being measured and evaluated on CPH rather than the quality of hire.
In a recent Cielo webinar, “Overcoming Asia’s Cost-Per-Hire Dilemma”, I discussed CPH best practices that enable organizations to protect revenue, increase efficiency and improve Quality of Hire. By measuring the right data, organizations can develop a talent acquisition process that increases the quality of candidates and saves money in the long run.
In this post, I will show that while CPH is an often used metric, its use should be balanced with other critical metrics such as quality of hire and cost-per-vacancy that give organizations more insight into the true ROI of TA. Topics covered include:
- Differences in CPH
- Calculation Methodology & The CPH Formula
- Financial Impact of Unfilled Positions - Implicit and Intangible Costs
- Reducing Overall TA Costs: Additional Metrics to Consider
- Putting CPH to Good Use
- Overreliance on CPH: It Can Be Costly for Your Organization
- A Smarter approach to Hiring - Balancing between CPH, Quality & Agility
- Boosting TA’s Strategic Impact - Go Beyond Cost-Per-Hire
Differences in CPH
Here’s what could drive differences in CPH:
- Calculation Methodology: CPH differs substantially according to the calculation methodology employed.
- Employee Function: CPH differs for each function, e.g. cost per hire numbers between the sales, finance, and R&D functions may not be comparable.
- Region: Cost of living and cost of services vary widely, such that the same cost per hire figure in a middle-income city may reflect a costly hiring operation whereas in a higher-income city it may reflect a very effective hiring process.
- Industry: CPH doesn’t account for differences in hiring difficulty by industry, e.g. industry-level cost per hire may be much higher in the pharmaceutical industry than in the retail industry given the differences in position requirements.
- Employee Level: An average CPH doesn’t account for considerable differences based on type of hire, e.g. the cost of executive hires includes executive search firm and relocation costs when compared to entry-level employees.
Calculation Methodology & The CPH Formula
CPH can be measured in many ways, including:
Type of Hire: Measured by each type of hire such as:
- Internal Hires
- External Hires
- Employee Referrals
- University Hires (Graduates)
- Experienced Hires (Executive Level)
Hiring Volume: Calculated based on total number of hires during a specific period of time. While the data is easy to gather, it does not differentiate between types of hires.
Recruiter: Measured based on each recruiter’s hiring activities and can also be used to gauge staff efficiency. While this works best at companies with full life-cycle recruiters, overhead costs are harder to divide by recruiter.
Organizational Unit: Determined for each business unit or geographic region, which shows variance across different areas and is good for decentralized/regional teams. However, data collection could be difficult.
Requisition: Calculated using details from each requisition filled, making this the most accurate (and resource-intensive) type of calculation.
Most organizations measure CPH using the Society for Human Resource Management’s (SHRM) formula below.
The measure includes a host of external and internal costs to the TA Function. Select examples include:
Financial Impact of Unfilled Positions - Implicit and Intangible Costs
In my experience working with MNCs, almost all fail to see the impact unfilled critical or revenue-generating positions have on the bottom line and choose to focus on CPH instead.
In addition to the external and internal costs outlined above when calculating CPH, organizations must also define and estimate intangible costs throughout the duration of a vacancy, as well as reduced productivity before the vacancy is created and after the vacancy is filled with a new hire. The tables below highlight factors to consider when calculating cost-per-vacancy, as well as the cost of lost Productivity During Onboarding.
Reducing Overall TA Costs: Additional Metrics to Consider
Calculating the following metrics can also enable organizations to make a positive impact on financial performance, employee engagement and productivity:
Time-to-Fill: Consistently track how many business days it takes to fill a position, from the day a requisition is opened until the first accepted offer. It indicates how your TA marketing efforts are working and how confident your managers are in making hiring decisions.
Interview-to-Offer Ratio: This reveals the total number of candidates the hiring manager needed to see before making the final decision to hire. The higher the ratio, the less clear the manager is on the department’s needs.
Retention Rate: The key metric is the 90-day mark. If the organization retains fewer than 90% of employees in the first 90 days, there’s a critical challenge in either the screening and interviewing process, the team’s understanding of the skills required for the role or how the role is being communicated to the new hire.
Hiring Manager Satisfaction: Using a real-time, anonymous survey at the time of hire allows you to capture the hiring manager’s perception of the process and indicates whether the TA team is meeting expectations. Tracking and reporting hiring manager satisfaction on a quarterly basis also provides benchmarking.
Candidate & New Hire Satisfaction: An anonymous, real-time survey that asks new hires how their expectations matched the reality of their new position, provides a comprehensive view into the entire TA and onboarding experience. Surveys should be administered on the first day of work and at 90 days on the job. Engaged new hires reach productivity faster and remain more productive over their tenure with an organization, which also leads to greater employee loyalty and longer retention.
As with new hires, candidates should also receive anonymous opportunities to provide feedback. Satisfaction should be measured (regardless of your intent to hire) to ensure you are delivering a great experience during the hiring process.
Putting CPH to Good Use
Here are some ideas on how to leverage CPH for strategic impact:
Improving TA Decisions
Use CPH to determine whether the TA function has the capability and processes in place to bring in quality hires at the right time within budget. This could help determine if the team needs to be upskilled or if Recruitment Process Outsourcing (RPO) should be considered.
Influencing Business Decisions
Use CPH to make market-entry decisions based on talent availability and costs. Identify skills that are high cost to recruit for, and assess L&D’s ability to instead develop those skills internally.
Supporting Corporate Strategy
- If the firm is growing rapidly and cost-cutting is critical to your growth strategy, focus your TA efforts on scalable TA strategies, such as virtual career fairs and group interviews.
- If the firm is entering a new market in the near future, prioritize decreasing CPH and time to productivity in the new market, but do not ignore quality as sustainability of talent will be critical for market success in the long term.
- If the firm is facing new and substantial competition in existing markets, consider candidates who won’t be as difficult to source and dislodge from your direct competitors.
Overreliance on CPH: It Can Be Costly for Your Organization
The Boston Consulting Group found that TA ranked No. 1 amongst 22 different HR topics as having the highest impact on revenue and profit margins. Yet, by using CPH as the primary metric to measure TA success, organizations shift their focus toward cost reduction and away from bringing on board quality hires and filling vacant positions in a timely fashion to meet business objectives.
Many TA leaders have a hard time getting their function fully funded. This is partly because we don’t quantify in dollars the positive business impacts of great TA practices and the negative impacts of weak TA practices. Without quantification, senior executives don’t see the millions of dollars of lost corporate revenue resulting from an underfunded TA function.
Here are some examples of how organizations could lose revenue from an underfunded TA function and overreliance on CPH:
- Reduced revenue from hiring below-average performers in critical and revenue generating jobs
- Lower productivity from hiring below-average performers
- The significant added costs related to replacing mis-hires
- Reduced power of your brand from a bad candidate experience
- Reduced product sales from a bad candidate experience
A Smarter approach to Hiring - Balancing between CPH, Quality & Agility
Organizations should start estimating the true value of the TA function. For example, in the corporate world we often talk about the need for a great candidate experience, but few TA functions calculate the dollar amount of the losses that occur when disillusioned candidates tell their friends to stop doing business with their firm.
Start determining your business impact by working with your CFO’s office to first identify and then to quantify in dollars the revenue impacts of both great and weak TA practices. Balance cost per hire, agility and quality, with relevant costs attached, so your executives see the true benefits and risk of your talent strategy. To get the right funding and not be overly focused on CPH, it is critical to demonstrate the business impact of poor quality hires and increased time-to-fill on lower employee productivity, lower product sales, lack of innovation, and limited business expansion across the region.
As demonstrated earlier, true CPH can be a complex calculation. When discussing TA ROI internally, one must also balance it with Quality and Agility. Quality sits across a number of measures such as candidate & hiring manager experience, new hire attrition, new hire performance, source of hire, employer brand, NPS, and conversion rates. Agility is the measurement of the speed at which the TA function’s strategy and activities are capable of responding to changes in business demands and filling vacant positions.
Boosting TA’s Strategic Impact - Go Beyond Cost-Per-Hire
To be an employer of choice and attain or retain their competitive advantage, organizations must find ways to reduce expenses while attracting and retaining a motivated, engaged and productive workforce. An intelligent approach to talent acquisition and analytics is key.
Measuring and using CPH to inform TA strategy can result in better quality of hire and lower CPH. However, measuring CPH is just one part of the overall equation for talent acquisition ROI. It pays to have a balanced talent acquisition strategy with an optimized blend of cost, agility and quality. How you balance these elements will depend on the talent you need for your organization and your function’s maturity level.
Ultimately, quality of hire and cost-per-vacancy is a much more important measure than CPH to meet business outcomes and measure the effectiveness of the TA function. While cost is important to track, it shouldn’t come at the expense of quality. Focusing on the internal budget of the TA department is insignificant compared to the impact of the quality of hires it brings on board to fill the right role at the right time.
In my post Moving from Order Taking to Being Consultative & Strategic, I stressed companies need a TA function that has members who are decision influencers, not order takers, and advisors who earn the right to influence staffing decisions by having a deep knowledge of the organization, its mission, and the relevant labour markets. Organizations must also encourage this newly assertive role for TA and truly partner with this function to serve the larger business strategy. That’s especially relevant in this area, where ROI should trump CPH.
In my next post, I will cover how organizations can define and measure Quality of Hire.
About the Author
Sadaf Pitt is a Talent Acquisition advisor whose career spans two decades across North America and Asia. She has held diverse roles in a variety of sectors before she discovered her true passion: Transformative & Strategic Talent Acquisition. She is a strong advocate for boosting Talent Acquisition’s voice and value in Asia’s leading MNCs. She is also an adult Third Culture Kid (TCK) and Multi-Local. Answering the question, "Where are you from?" is a tricky one for her. You can connect with her on LinkedIn or follow her on Twitter.
Her other posts include:
- Elevating Talent Acquisition Across Asia - The Need to Go Beyond Transactional & Reactive Recruiting Practices
- Elevating Talent Acquisition Across Asia - Moving from Order Taking to Being Consultative & Strategic
- "Where Are You From?" The Third-Culture Kid Dilemma