Understanding How Bad Recruiting Costs Your Firm Millions of Dollars

Many recruiting leaders have a hard time getting their function fully funded. One of the primary reasons why is because we don’t quantify in dollars the positive business impacts of great recruiting and the negative impacts of weak recruiting.

The Boston Consulting Group found that recruiting ranked No. 1 among 22 different HR functions as having the highest impact on revenue and profit margins. Without quantification, senior executives don’t see the millions of dollars of lost corporate revenue resulting from an underfunded recruiting function.

The one exception to this lack of quantification is in the sports world, where the increased revenue as a result of recruiting a top talent like LeBron James to the Cleveland Cavaliers has been calculated to be in the hundreds of millions of dollars. In the corporate world we frequently talk about the need for a great candidate experience, but few recruiting functions calculate the dollar amount of the losses that occur when disillusioned candidates tell their friends to stop doing business with your 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 recruiting.

The Tremendous Negative Business Impacts Resulting From Bad Recruiting

When really bad recruiting occurs, what are the negative business impacts to the firm? They are highlighted below. The highest impact ones are listed first.

  • Reduced product sales from a bad candidate experience — by providing a bad candidate experience, you frustrate and anger candidates. And a significant portion of those disillusioned candidates strikes back by no longer buying your retail product. And as a result of that disillusionment, not only do you lose the increased product sales from the 23 percent of candidates* who, if the experience were to be positive, “would be more likely to purchase products or services from the company.” You also lose product sales from the 9 percent of their friends/colleagues “that they will urge not to buy your products.” As a result, it makes sense to find out if those who you are interviewing are current customers of your firm and then to make sure that you are responsive to them if they are not hired.
  • Reduced revenue from hiring below-average performers in revenue impact jobs — hiring below-average performers in the all-important sales and revenue-generating jobs will result in a measurable and significant reduction in revenue. But there will be negative revenue impacts in many other revenue-impact jobs like product development and customer service as a result of the underperformance of below-average hires in these functions. This is because bad hiring will result in less innovation in your products and poor customer service after the sale.
  • Lower productivity from hiring below-average performers in all jobs — a weak employer brand will by itself result in lower-quality hires (i.e. reduced on-the-job performance) in all jobs that you fill. We know that because data** shows that having a strong employer brand can “increase your quality of hire by 9 percent.” And if also you have a weak recruiting process that routinely hires below average performers, for every job that you fill with an underperformer, the firm will obviously get lower productivity from that new employee. You can calculate the cost of hiring a single underperformer by using your average revenue per employee number. For example, if bottom-performing hires produce 10 percent below the average, you multiply that 10 percent by the average revenue per employee (at Sears, for example, the revenue per employee is $140,000 and at Apple it is $2.4 million) and that gives you an estimate of the cost of hiring a single below-average performer. In this case is a negative $14,000 per year for each weak new hire at Sears and a whopping $240,000 at Apple. If you also estimate the average cost of the job errors, accidents, and negative customer impacts, you can get a more accurate dollar number of the negative business impacts of a weak-performing hire.
  • A bad candidate experience may reduce the power of your product brand — at many firms; the employer brand is difficult to separate from the product brand. For example Google and Apple rank one and two on both product brand and employer brand. And that interconnection means that if you damage your employer brand, your product brand will also suffer. So if you damage your employer brand as a result of the bad candidate experience or questionable hiring practices, that can also hurt your product brand and the sales that it generates. The interrelationship between these two brands becomes greater every day with the growth of social media sites like Glassdoor. It is amazingly easy for potential applicants and customers to find out about a negative candidate or employee experiences, and then to use that information to change their job search and product purchasing. Politically, realize that any function that even indirectly damages the product brand (which the firm has spent millions to develop) will be guaranteed a rough time and a lower budget in any corporation.
  • The significant added costs related to replacing mis-hires — mis-hires often prematurely quit or they need to be released. Beyond the obvious recruiting replacement costs, calculate the costs resulting from hiring managers having to spend additional time on recruiting, rather than the regular job. But the largest revenue cost results from having no productivity in that job during each day that the position is vacant. If the vacant position is a revenue-generating job, that revenue may be lost forever. And for any position, a vacancy means that your current employees will be unnecessarily stressed because they need to work harder to fill in. And to make matters worse, if recruiting has an unnecessarily long average time to fill, the costs of those excess position vacancy days will increase dramatically but for no valid reason.
  • A bad candidate experience will reduce future job applications — as we have already seen, having a bad candidate experience disillusions candidates. And as a result of that disillusionment, you will lose out on the opportunity to make a future hire out of the 42 percent* of candidates who have now decided to never again seek employment at your firm. You will also lose the referrals from the 22 percent of candidates who will now tell friends and colleagues not to apply at your firm. You are also likely not to get job applications from any individuals who read the negative reviews on social media posted by your disillusioned candidates or employees.

Final Thoughts

If you’re tired of being underfunded, there is only one truly effective solution in recruiting. And that is working with the CFO to make a strong business case that demonstrates the differential in impact between the positive business impacts in dollars as a result of great recruiting and the negative dollar impacts resulting from an underfunded weak recruiting function.

In almost every organization, once executives realize the huge difference in business impact in product sales, lower employee productivity, and in lower-quality applicants recruiting, those executives are more than willing to provide whatever funding is needed in order to minimize those negative business impacts.

*   CareerBuilder survey

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** The Corporate Executive Board

 

image from Shutterstock

 

Dr. John Sullivan, professor, author, corporate speaker, and advisor, is an internationally known HR thought-leader from the Silicon Valley who specializes in providing bold and high-business-impact talent management solutions.

He’s a prolific author with over 900 articles and 10 books covering all areas of talent management. He has written over a dozen white papers, conducted over 50 webinars, dozens of workshops, and he has been featured in over 35 videos. He is an engaging corporate speaker who has excited audiences at over 300 corporations/ organizations in 30 countries on all six continents. His ideas have appeared in every major business source including the Wall Street Journal, Fortune, BusinessWeek, Fast Company, CFO, Inc., NY Times, SmartMoney, USA Today, HBR, and the Financial Times. In addition, he writes for the WSJ Experts column. He has been interviewed on CNN and the CBS and ABC nightly news, NPR, as well many local TV and radio outlets. Fast Company called him the "Michael Jordan of Hiring," Staffing.org called him “the father of HR metrics,” and SHRM called him “One of the industry's most respected strategists." He was selected among HR’s “Top 10 Leading Thinkers” and he was ranked No. 8 among the top 25 online influencers in talent management. He served as the Chief Talent Officer of Agilent Technologies, the HP spinoff with 43,000 employees, and he was the CEO of the Business Development Center, a minority business consulting firm in Bakersfield, California. He is currently a Professor of Management at San Francisco State (1982 – present). His articles can be found all over the Internet and on his popular website www.drjohnsullivan.com and on staging.ere.net. He lives in Pacifica, California.

 

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6 Comments on “Understanding How Bad Recruiting Costs Your Firm Millions of Dollars

  1. It would be a good step to demonstrate the costs of poor recruiting, but the sports analogies don’t hold. For example, a recent study from Northwestern University found that replacing a ‘toxic’ employee with an average one yielded twice the return of hiring a top 1% performer. One of the biggest wrong moves of the recruiting industry has been to convince every company that they can have the top performers. They can’t. To extend the sports analogy, triple a teams know they aren’t in the majors, and don’t try to recruit MLB players. They don’t have the pay or prestige to offer, plain and simple.

    So, rather than concentrating on hiring ‘top talent,’ if you really want to make a difference in a company’s hiring you will first rate your company’s game to see where it falls, and just what kind of talent it can expect to attract and retain. If you go into the process of trying to prove how much not hiring ‘LeBron James’ has cost you, you first have to make the argument you had a chance in hell of getting him to begin with, because it’s perfectly possible you could make him the best offer you possibly could, and he’d laugh in your face.

    Rather, stop trying to hire ‘top talent’ like you somehow deserve it, and run your company such that top talent wants to come to you rather than seeking it out. This approach is arguably more effective, but it raises questions most companies and business leaders would rather not answer, like, “just who actually does want to work here at our company?”

    1. @medievalrecruiter:disqus Exactly! So many companies are naive to current market conditions, especially in tech. Companies need to review average compensation, market rate, benefits, bonus, stock, perks, etc, and decide if they are competitive. If not, they are setting unrealistic hiring expectations for their recruiters. I like the overall premise of this article though. Too many recruiting operations are underfunded, expectations and metrics are often too high, HMs willing to pay agency fees but not tools for internal recruiters to succeed, not understanding or unwilling to acknowledge all the tools, database, and employees the agency has. On the flip side, some agency recruiters have all the tools, database and employees, but not the business. Very frustrating, and one of the main reasons why there are so many recruiters with short tenures in their jobs. Darned if you do, darned if you don’t.

      1. “HMs willing to pay agency fees but not tools for internal recruiters to succeed”

        I’ve seen this too, and had to fight against it when I was in corporate. As I’ve said many times in the past, recruiting is dominated by Sales! people, and they’re very good at peddling BS and playing on people’s natural irrationality, and so agencies maintain this mystique despite the fact that most companies could replicate the function internally at a far lower cost. When you look at the results of where hires actually come from, they’re dominated by stats you’d expect, which means for all their BS generally recruiters get people the same places companies do.

        They have two things to their advantage. One, the ROI on a pipeline is easier to realize for them, because while you may only need one person for position X, they could potentially place a dozen in similar positions. So the pay off for them in maintaining a database with a lot of resumes, which is essentially what their ‘network’ is, is sooner and better. Two, they’re so good at selling how different and superior their candidates are, despite a complete lack of any objective evidence to support their claims. I can’t count the number of recruiters I’ve spoken to who admit their shtick is pure BS, but so long as they convince a hiring manager that they will cater to their every whim, not like that stick in the mud from HR who insists you have an approved budget in place before making a hire, then HMs will continue to think farming the job out to an ‘Agency Recruiter’ will absolve them of the need to interview and take responsibility, and carry accountability, for who is hired.

        What I did was when they wanted to use an agency recruiter, then the HM owned the process. I’d interview to try and make sure they’re not hiring a moron, and I’d voice any concerns, but in the end it was up to them. I would deliberately not give them advice or take any responsibility for the hire. They almost universally screwed the pooch on every hire for reasons I mention often here, like trying to ‘sell’ the company as one thing when it was really another. Lying to candidates, in so many words. Or, not really investigating what they did or the context in which they worked, so you got a major cultural mismatch.

        HR is basically the punching bag for most companies. On the recruiting end, they’re supposed to be experts in every field, and to interview and place people with little to zero effort on the part of the hiring manager. That they do even a reasonable job with such a ridiculous requirement is pretty amazing in and of itself.

    2. On the contrary, there’s a reason why HR thought leaders and tech Titans like Google and Facebook use sports to prove a point. From Facebook’s “Rodney rule” which helps increase diversity, to Google’s “Power rule” which creates fair pay. Both of which were derived from sports have proven to show significant results. Its also not just about having candidates coming to you because it would limit both the amount and most importantly the quality of the people that could potentially be coming in to the organization. It is a combination of both having prospects come to the organization because they know and trust the brand, as well as sourcing for top talent potential candidates.

      1. I’m not aware of a Rodney Rule. I’ve heard of the Rooney Rule, but that’s a fancy way of saying, “Actively seeking out people we might not otherwise come across.” Never heard of the Power Rule from Google, tried looking it up and found no results, so I’m not sure what it is. I do agree active sourcing along with drawing people in with reputation are both avenues that should be used, my point, worded better, is most companies think they have the attraction thing licked, despite what the reality is. Everyone uses sports analogies, I don’t see any particular power in them, but I see a lot of pitfalls, because everyone tends to assume they’re the best team in ‘the league,’ whatever the evidence might actually indicate.

        If you want to know why your ‘players’ are persistently average or bad, or always leaving, etc., most sports teams, at least as far as I can see, would consider what they had to do to attract better talent and keep it, and also be willing to accept their own limits. And one major thing they know is salary counts, and they don’t try to avoid the subject like is almost always done in recruiting. Businesses on the other hand tend to assume that everyone either does or should want to work for them, regardless of how people are treated, how engaging the work is, and more importantly what they pay relative to the market. And they’re constantly surrounded by Sales! recruiters telling them salary doesn’t count, that people really want satisfaction and fulfillment and purpose, because you can totally pay bills with those, and basically have these people convinced the world should be begging them to work there. That’s not healthy, not realistic, and not conducive to hiring good people in a sustainable fashion.

        The reality is the average company is average, they can’t get and retain the fabulous to 5% of performers, so it’s kind of ridiculous to base strategies on how that’s done. Companies try to hire like every position they have open can and deserves to be filled with Michael Jordan level talent, regardless of what’s actually needed, and regardless of what they can afford. That is a mistake.

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