Cost Per Hire: The Last Great Black Hole of HR

To me, the fascination with “Cost Per Hire” (CPH) is one of the last remaining black holes of staffing. A Black Hole, after all, is a collapsed star that creates such a gravitational pull that nothing can escape its clutches, not even logic. Like an report using a single point of reference, developed by the use of partial information, conceived with a myopic goal, failure to achieve a significant purpose is assured. The only real constructive outcome from a CPH report, is proof that a member of the senior HR staff can divide a smaller number into a larger number. In my career, I have seen many quality staffing programs rendered impotent because of undue fascination with a perceived high CPH. Conversely, I have seen many inadequate staffing programs flourish because they may have failed, but they failed at a very low Cost Per Hire. One of the first significant reasons not to place undue emphasis on your CPH is that few companies use the same formula to calculate CPH. Yet, they compare each other’s CPH with abandon. The simple formula to calculate CPH is to take all expenses, other than fixed costs (permanent hiring staff salary/benefits cost, office budget costs, utilities) and divide that number by total hires during that period. So if you ran one ad (5K), paid agency fees (20K), went to a job fair (4K), and maintain a third party Web site (6K), you spent 35K above your line costs. If you had 10 hires, you would have a 3.5K CPH. (Plus a job offer from me tomorrow.) If your organization insists on calculating a total cost per hire, then your line budget expenses of, for example, 250K would be factored in and your cost per hire would now be 28.5K (By the way, I am withdrawing that offer.) The problem with this scenario is that to a staffing professional none of the above data tells you anything you really need to know. Things get even more complicated when you consider training, cost of “empty chair” time, the impact of hiring delays on turn-over, the cost of losing imbedded knowledge, lost promotion potential, etc. Cost per hire is but the tip of the iceberg. Numerous other issues need attention such as:

  • Rate of hire against anticipated rate of hiring need
  • Article Continues Below
  • Time To Fill
  • Quality of Hiring
  • Priority of Hiring to Priority of Need
  • Immediate Hiring Need Vs Strategic Hiring Plan
  • Training and Assimilation Costs
  • And more..

For the last few years, those of us in Staffing and Human Resources have spoken of the need to collaborate more closely to the business units we support. I have been to many professional “rubber chicken” banquets where the after dinner topic was “Strategic Partnerships: HR in the Year 2000.” However, with “partnership” comes responsibility. More to the point, with responsibility comes accountability. The origin of the basic CPH report goes back to a more simple time. Once a year, Staffing and HR would be advised of the need to develop a budget that would support the need to hire 300 new employees. Well, if we hired 300 people last year for a cost of 3K per hire (or 28.5 based on the formula used), then hiring 300 people in the coming year is the simple mathematical function of 300 X 3K = 900K. However, are we hiring the same people this year as we hired last year? Are these hires at the same level? Is the market strong or weak? Are we looking for people with generic or industry specific skills? How urgent is the need to hire? Was last years program successful? Did it support our business partners? requirements? Exactly how important is the CPH anyway? Certainly not a s a sole or singular measuring tool. Let us imagine that you run a hiring program with an average CPH of 15.5K. The year before your CPH was 18.5K. If the purpose of tracking cost was to measure your performance, you must be winning. However, let us also imagine that the recent hiring of a new VP of Marketing and Sales was only 8.5K CPH, and the recent hiring of a new Facilities Manager was 22.5K CPH. With the CPH that low for my VP of Sales, did I get the best possible hire for a position that could make or destroy next year’s fiscal outcome? At 22.5K CPH for building maintenance, will we truly be able to eat off the floors, and exactly how is that translated as a dollar value? If we are the National Center for Disease Control, maybe it is worth it. If we are a sales office, maybe it is not worth it. <*SPONSORMESSAGE*> However, if CPH is not the true measure of a successful staffing program, what is? Should we not also consider: Time to Fill (TTF) certainly must be an issue with your business units as well. Are you truly a member of the Year 2000 Strategic Partnership if you are focused on a low CPH, with no regard for TTF? You saved 8K in running a conservative cost search for your new VP of Sales and Marketing. However, without the strategic direction a solid VP could provide, during the search it is estimated that you lost 3.5 million dollars in new sales. CPH without tracking (TTF) in the same report risks appearing unaware and unworldly to your business unit collaborates. If you want to lower CPH and not adversely affect TTF, good luck. No really, I mean it. Quality of Hire (QOH) is another issue that drives cost in staffing. The VP you hired was less expensive to recruit because s/he was out of work. Their network was cold, their contacts dusty and you lost three months ramping up in a 365 million-dollar market. However, you saved 8K in the staffing cost. Where do you want the roses sent? Skill/Requirement Match (SRM) to determine is the skills of the hires are close to the original requirements of the requisition. A good way to qualify the effectiveness of your searches. It also is a good way to ?test? the validity of your requisition process. Do the specs match the need. If, to keep CPH low, you are restricting headcount in your Staffing organization. But with an average of 8 hires a month per representative, with two staffing representatives, and a year end goal of three hundred hires, are you going to sustain a rate of hire consistent with need? No! But hey, great cost per hire! But that is the kind of foolish logic and cost solutions a program developed with but one goal in mind can cause. The single-minded focus on cost per hire pre-dating the 1990s and the next millennium is as out of place as a world globe at a meeting of the “Flat World Society.” We influence our business units a lot more than a few thousand dollars, more or less, per hire. Through our efforts (or lack of effort) the success of new development, manufacturing, sales and marketing, and continued growth can hang in the balance. The real mission of Staffing and HR remains: “To hire the best possible candidate, in the most advantageous of circumstances, as quickly as can be done and still done well.” I see no CPH in the above statement. I see a complex and interactive statement that defies a simple “pass or fail” report card. CPH is a simple short cut to measure staffing effectiveness. It’s true only purpose can be to try and prove a point that logic and market knowledge fail to validate. ?I want to cut cost, how can I do it?? Rather than, ?I want to develop an effective and successful employment program, what are all the variables?? There is no quick answer, no data point, no simple insert we Staffing, Recruiting and HR professionals can contribute to our Strategic Partners to prove our success or failure. Our success cannot be possible if our business units ultimately fail, no matter how impressive our CPH. On the other hand, we cannot be measured as failures if our business partners flourish and are profitable due to timely and effective staffing. If your business partners want a simple report to measure your success or failure, they do not yet understand or appreciate your contribution. Likewise, if you think a simple CPH measures your effectiveness, then that is not only tragic, but a likely sign that you too, have been sucked into the last great black hole of HR. Have a great day recruiting!

Ken Gaffey (kengaffey@comcast.net) is currently an employee of CPS Personal Services (www.cps.ca.gov) and has been involved in the Department of Homeland Security, Transportation Security Administration project since its inception. Prior to this National Security project Ken was an independent human resources and staffing consultant with an extensive career of diversified human resources and staffing experience in the high-tech, financial services, manufacturing, and pharmaceutical industries. His past clients include Hewlett Packard, First Data Corporation, Fidelity Investments, Fleet Bank, Rational Software, Ericsson, Astra Pharmaceutical, G&D Engineering, and other national and international industry leaders. In addition to contributing articles and book reviews to publications like ERE, Monster.com, AIRS, HR Today, and the International Recruiters Newsletter, Ken is a speaker at national and international conferences, training seminars, and other staffing industry events. Ken is a Boston native and has lived in the greater Boston area most of his life. Ken attended the University of South Carolina and was an officer in the United States Marine Corps.

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