Evaluating recruitment costs like a recruitment outsourcer

HR professionals run the risk of putting too much emphasis on the direct pricing when considering outsourcing, without regard to indirect cost or effects on their business, say Dr Domniki Demetriadou and Dr Steven Lindner.

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Recruitment managers growing tired of traditional ways of filling job vacancies have turned to recruitment process outsourcers (RPOs) to drive down costs, reduce hiring timelines, improve candidate quality, and enhance the satisfaction of hiring managers and candidates. For over a decade, RPOs have achieved impressive results for their clients.

RPO, as defined by NelsonHall, the leading global independent analyst firm in business process outsourcing, is when a client transfers operational responsibility for one or more recruiting functions, including recruitment administration, to a recruiting services provider. The service must provide recruitment administration on behalf of the client to qualify as a RPO service.

RPO does not include standard recruiting services provided by a recruitment agency on a project-by-project basis. The contract needs to be a minimum of one year in length to qualify as an outsourcing service.

Of the many metrics important in staffing, costs typically drive most decisions. When a company examines its costs associated with staffing, it typically looks to the cost-per-hire (CpH) metric, e.g. the average cost a company incurs to hire a new employee.

Unfortunately, there are a three primary drawbacks associated with the CpH metric that 'muddy the waters' when we use it to determine whether RPO is a viable alternative for some or all of your recruitment needs.

Drawback No. 1: Many companies report a single CpH metric for the entire staffing function. This assumes that there is substantial uniformity in staffing needs and operations from one time period to the next. CpH does not take into consideration variations in job function or skill levels, industry, geography or labor market conditions and the availability (or lack thereof) of qualified candidates for the positions to be filled.

Drawback No. 2: CpH, as defined even in its most comprehensive version, only captures direct costs associated with the staffing function. It does not address any indirect costs incurred by a company in the process of hiring talent, such as opportunity costs.

Drawback No. 3: Many companies only track sourcing costs, such as advertising, search companies or employment agencies. The resulting CpH will be an underestimate of what it is actually costing the company to hire a new employee. So it's not uncommon that an RPO solution may appear, at first glance, to be a more costly means of staffing compared to what a company is doing on its own.

Ideally, the CpH should include the costs of all advertising, agency usage, employee referral awards, applicant travel and relocation, fully loaded recruiter pay and benefits, as well as all internal operational costs such as the cost of facilities, technology, staff training, etc.

A better alternative to CpH is the recruiting cost ratio (RCR) and its corollary recruiting efficiency ratio (RER). To calculate the RCR, you will need to know:

• Your total recruiting costs (i.e., internal recruiting expenses, both fixed and operating, plus external recruiting expenses such as sourcing, signing bonuses, travel, relocation and visa expenses).


• Your total compensation recruited (i.e., the total base salaries plus the value of non-salary compensation for new hires, including part-time hires, during the first year).

To calculate your RCR, you simply divide the total recruiting costs by the total compensation recruited and multiply the result by 100. The RCR indicates how much it costs to hire 1 GBP of new employee compensation.

Once you know your RCR, you can compute your RER by subtracting the RCR from 100. This metric standardises the directionality of the index so that a higher RER indicates a more efficient recruiting program, assuming all other things being equal.

Dividing costs

Unlike the CpH, the RCR equalises the impact of the variations listed in drawback number one. For example, more challenging markets drive recruitment costs up, but they also require paying candidates higher compensation. By dividing costs with total compensation, the resulting metric is more directly comparable across positions, industry and geography.

However, the RCR still fails to address the other two shortcomings that plague the CpH metric – i.e., failing to account for all recruiting costs and capturing only direct costs associated with acquiring talent.

When considering what the 'total cost of ownership' is for your company to run its staffing operation, you also need to consider the indirect costs of recruiting. Some indirect costs are directly related to the recruitment process, such as costs associated with the time hiring managers spent reviewing resumes or interviewing unqualified candidates.

Other indirect costs are more subtle and elusive in capturing them. For example, consider opportunity costs. These can be huge, particularly when you are talking about high-value, revenue-producing positions. How much does it cost your company to have a sales or a consultant position open for longer than necessary? Not only are you missing out on the revenue from servicing existing business, you also are missing out on opportunities of servicing new business.

Finally, there are intangible costs that you can incur in recruitment, such as costs resulting from the selection of 'wrong' candidates. How much do you lose in revenue generation by selecting an average vs. a top performer? What is the cost you incur in dealing with a hired employee who is a 'poor cultural fit'?

Companies considering an RPO solution are tempted to base their decision on whether to engage an RPO primarily by comparing their direct costs with the RPO's costs.

Leaving out indirect costs (drawback number two) is equivalent to making an investment without a known rate of return. Speed to hire, quality of candidates and quality of service are all indirect cost factors that contribute enormously to positive bottom-line business results.

Leaving out all internal costs, such as operational costs (drawback number three) is equivalent to having a team of recruiters standing in a car park with no phones, PCs, recruiting technology, offices, training, IT and legal services, and so on.

It is just good business practice for companies to know what it is really costing them to recruit and hire talent. This becomes even more critical when comparing your costs to other alternatives.

Dr Domniki Demetriadou and Dr Steven Lindner are from the WorkPlace Group®, which provides customised recruitment process outsourcing (RPO), project-hiring recruitment, contingent workforce management and professional temporary staffing services for all levels and functions across all industries.

HR Zone, 24-Jul-2008
Categories: HR Strategy
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