Our macro research shows that eight out of ten sizable companies are currently running a program aimed at reducing the cost of their HR function. Their procurement leaders are looking into cost savings and overhead reduction programs. One of the most frequent target areas of their initiative is talent acquisition and recruitment. In sizeable companies, procurement has taken over the haggling of recruitment fees with (executive-) search firms from the human resources department. Human Resources in turn complain about marginal and futile savings that only slow the recruitment process.
Whatever your perspective over this, let’s call it infighting, procurement has introduced accountability into recruitment costs, and certainly quite a lot of savings! So, one doubts procurement’s competence and efficacy. Nevertheless, shaving a few pennies here and a few pounds there may be losing sight of the bigger picture of the full cost of talent acquisition.
Because we know that not all of our readers have the time to spend more than a few minutes on an article, let’s drop the ball right now: the highest cost for any company is the opportunity cost of a position not filled or an unsuccessful hire, and the higher you climb in the hierarchy, the more evident it becomes. We shall come back to it later.
This being said, there are of course several areas where straight cost savings are possible. We are going to
analyze the sources of the costs in recruitment,
help you define what you can do about them,
offer some solutions and benchmarking (hint: this will be strongly dependent on your own, sector-specific, research).
Our intended audiences are procurement staff (at all levels) and HR employees, but also managers and business owners who do not have procurement departments. The analysis and solutions we offer are transposable to a company of any size.
Where did my money go?
When we raise the talent acquisition theme, we can safely state that the objective of procurement and HR departments is to transform fixed costs into variable ones and so reduce overall recruitment spent while allowing for an increased quality of candidates and reducing the time to hire.
There are three main sources of costs at play during a recruitment process:
The spending on recruitment.
The cost structure of the talent acquisition activities of the Human Resources department.
The cost of attrition - also called employee turnover: the length of stay of a productive employee. Implied in this statement: the speed at which a new employee becomes productive.
When we raise the talent acquisition theme, we can safely state that the objective of most procurement and HR departments is to transform fixed costs into variable ones and so reduce overall recruitment spent while allowing for an increased quality of candidates and reducing the time to hire.
Should you ignore the overall cost of your HR department recruitment activities, it will be difficult to argue that you achieved any significant savings. So, before we dive into this, we should look at how to evaluate the cost of your talent acquisition activities. And the simpler the method, the more often it will be applied, and the more significant its results.
How to evaluate your recruitment costs?
KPI’s are of the uttermost importance here and they constitute the dashboard which helps you track the evolution of your costs almost “live”. The most important indicator is the cost per hire (CPH): it is calculated by dividing the sum of costs, made of your internal recruiting costs plus your external recruiting costs, divided by the total number of hires, over a determined time period, generally one calendar year, or:
External costs vary according to the number of hires whereas internal costs vary little, hence they represent the highest obstacle during a cost reduction program. Internal costs are spread over the number of hires you make. Therefore, the more hires you make per year, the less fixed costs per hire.
When you are in a situation needing an increase in your fixed costs structure, say hiring a new recruiter because there is a sudden hiring rush, it is sensible to evaluate the opportunity of onboarding an RPO firm, to keep your fixed costs at the same level whilst benefitting from immediately available, highly experienced support. Benchmarking your cost per hire, internally and externally, is obviously important. It helps pinpoint your improvement areas but also everything you accomplish. At the same time, one needs to be cautious with the interpretation of the numbers: the sector of activity, the industry, the geographical location, the expertise, etc. influence the ease or the difficulty of attracting adequate talents. Make sure you compare apples with apples.
The easiest target for cost reduction is your external recruitment spending. It is mostly made of invoiced external services and therefore easy to track. A non-exhaustive inventory that can serve as a checklist:
External expenses for executive search or agencies
Job board fees
Social media presence
Candidates’ or recruiters’ travel expenses (transportation, lodging, food)
Candidate assessment costs (if done by external partners)
Background check fees
Pre-employment tests (psychological and or aptitude)
Employee relocation (if applicable)
As a benchmark, the share of the most expensive recruitment channel - agencies and headhunters – should not pass the 10% threshold of all your external positions in any given time period. If it is, then you know that this is an area where you can deliver your first wave of savings smartly and quickly.
In a Recruitment Process Outsourcing (RPO) solution, your RPO provider takes ownership of this topic and suggests the reduction of external fees as a KPI. As a concrete illustration, we at Serendi realize annual savings of between 35% and 70% for our clients, on the external recruitment costs.
And how is this possible, will you ask. Firstly, because we know how to get the biggest bang for the buck, we know where your money has the most efficacy. We keep an attentive eye on the return on investment of every outside expenditure. Through our active sourcing of candidates, we can for example reduce your spending for agencies and headhunters significantly. Secondly, we negotiate and are familiar with the cost structure of our suppliers, allowing us to reduce where and when there is a margin for reduction. Thirdly, the sizable number of hires we make every year gives us buying power, second to none.
2. Internal cost structure
Let there be no misunderstanding: the highest share of any recruiting department’s budget are the internal recruiters. And they are also the most fixed costs you possess. Cost reduction programs driven by finances normally target the reduction of these overhead costs. While investments into technology, digitalization, and automation are valued by shareholders, fixed overhead costs like in HR are under close scrutiny. Instead of building an internal headcount for your talent acquisition function, you can transform these fixed costs into variable costs. With a Recruitment Process Outsourcing (RPO) solution you will pay only according to the number of open positions and only when the goal of your recruitment function has been achieved – the successful closing of an open position. That is what we, at Serendi, call transactional and performance-based pricing.
And if your business leaders and accounting department agree, you can also get the recruitment cost invoiced directly to the hiring departments by applying the root cause principle. A huge block is lifted away from the general HR budget.
RPO allows for flexible pricing, meaning a flexible cost structure with direct impact in times of crisis and hiring freezes.
While Covid-19 is still ravaging the world, RPO is a used case of agility and flexibility. Serendi’s clients experienced an immediate cost reduction of 45% on average in 2020. Had recruitment been fully internalized, most of the fixed cost would have stayed. Even with a rapid reaction time, which was difficult given the overall uncertainty in the early months of 2020. A cost reduction program would have initially added to the expenses (severance pay, reorganization, notice periods, …). RPO allows for flexible pricing, meaning a flexible cost structure with direct impact in times of crisis and hiring freezes.
Internal recruiting costs are comprised of, among others:
Internal recruiters’ costs, by far and foremost the highest of all costs
Careers page costs
Social media subscriptions and management
Candidate assessment costs (if done in-house)
Employee referral bonuses
Let us now turn to the least transparent, whilst the most significant costs of all.
3. Selecting the right (wrong) candidates – the main reason for a low (high) attrition rate
We have all heard the joke of the man looking for his keys in the middle of the night, right under a lamppost. His friend: ”Are you sure you lost your keys here”. The man: ”I have no idea, but this is the only place with lighting”. What this means is that external recruitment costs are the most discussed and debated because they are also the easiest to track. The internal costs are (somewhat) easy totally.
Unfortunately, what is less transparent is the psychological burden that comes with letting go of people, not only on them but, primarily, on the survivors. And of course, there is a direct cost linked to lack of productivity, severance pay, etc.
By far the most significant costs related to recruitment are hidden costs or costs that are less obvious. Among these, let’s mention the opportunity cost of not filling a position: imagine a project for a client has to be postponed or its signing is dependent on hiring a key person? You can safely attribute the lost or postponed sale to the lack of talent at hand. In harsher words, the failure of the recruitment team.
Other factors play essential roles and they are difficult to estimate. For example, the time it takes for a new employee to become productive is essential in the cost-benefit analysis of that hire. Also, the length of employment of that same hire is highly influential on her return on investment.
Needless to mention that other themes - onboarding, training, and retention - are pure Human Resources and line managers’ responsibilities and must be monitored carefully. Their importance for the success of recruitment and the evolution of a new hire in the company cannot be stressed enough. They are subjects, though, outside of the scope of this paper.
The reason that employee turnover costs are rarely considered is simple: the expenses are passive and are therefore easily overlooked. Where recruitment comes into play is in the selection of the right candidate in the first place, a qualitative issue if you want. And all procurement managers know how difficult is to quantify…quality!
Now to attrition itself: a quick situational analysis first. Various sources give different numbers but all point to the abysmal cost of attrition:
Employee Benefits News reported in 2017 that turnover can cost employers 33 percent of an employee’s annual salary.
Another research has shown that the cost of replacing a leaving employee can be estimated with ca. 50% of the annual compensation cost for this position.
According to the Center for American Progress, the cost of replacing an employee ranges from 10-30% of their annual salary, depending on the industry and length of time on the job — making employee retention strategy a top priority.
And a little bonus: Stephen King, the president and CEO of GrowthForce, adds that “external hires demand 18-20% more in salary than internal hires.”
Add to this that Considering that a survey from Willis Tower Watson found that one in three hires will leave a company within two years, you see how quickly this can add up. Need we say more?
Practice makes perfect: a partner like Serendi identifies, approaches, interviews, assesses, hires, and follows so many candidates every year and so shares its experience with its partners that benefit from quicker, better, and longstanding hires.
The reasons for leaving include interpersonal issues, workload problems, or a lack of recognition. Again, they are all issues that HR and line managers should handle. But you can only address these issues if the employee is willing and motivated. If the hire is wrong in the first place, there is not much to work on.
Obviously, if you know an employee will stay for many, many years and/or be productive quickly without much training, you may be willing to swallow those costs and consider them as part of the general cost of doing business. Unfortunately, most employers complain that the attrition rate is much too high: new hires sometimes leave before they have contributed a single penny to the bottom line. And that is not an issue of motivation or retention, it is an issue of recruitment. We all accept that there may be a bad hire once in a while, or unforeseen circumstances that cut short the stay of a new employee in a company. But those should be the exception whereas, with many organizations, they are the hidden, unwilling rule.
If you can reduce the attrition rate within your company by providing the best available talent and performing a high-quality selection process in the recruitment process you can easily calculate the savings through the increase in retention. This is another domain where an RPO organization can work hand in hand with your procurement team.
The contribution of RPO is invaluable, practice makes perfect: a partner like Serendi identifies, approaches, interviews, assesses, hires, and follows so many candidates for its clients every year that it has solid knowledge and experience-based, recruitment competencies that benefit its client enterprises. It also benefits the hired and rejected candidates: for the former because their time at the company that engaged them will be productive and satisfying, for the latter because it is always better not to get the job rather than getting the wrong one.
Finally, what is often overseen is the burden the attrition puts on other employees, mostly the best performers. The extra work lands on their lap and does not contribute to their overall motivation.