The Economic Consequences of Reducing Cost Per Hire

There has been a steady decline in average cost per hire in corporate North America over the past several years. In this article, I’ll discuss some factors that contribute to the trend. I’ll also answer this important question: Does a decline in the average cost per hire mean that staffing is getting more efficient? Cost Per Hire Cost per hire is a well-known metric, calculated by dividing the total staffing costs by the number of hires. Total staffing costs break down into fixed and variable costs. Fixed costs include recruiters’ salaries, staffing infrastructure, and overhead. Variable recruiting costs are made up primarily of sourcing costs, but may also include agency and assessment fees if applicable. Among the 1,460 organizations participating in the 2002 Staffing.org survey, the average cost per hire was a few dollars under $4,000. This figure represents a decline of nearly 37% in average cost per hire compared to 2000, when the reported average was $6,342, and a decline of 11% since 2001 ($4,522 per hire on average). What explains the dramatic decline in average cost per hire in North America? Since sourcing represents the largest single outside expense in the cost of a hire, it makes sense to look more closely there. Candidate sourcing is undeniably changing. Newspaper revenues from employment classified ads have been dropping precipitously for a decade, as online venues such as job boards become the chosen media for candidates and corporate recruiters to connect. Even within the online world, though, the media mix is changing. Corporations are sourcing talent from the traffic coming to the corporate website. In 2002, 83% of Fortune 500 companies posted jobs and accepted applications on the corporate careers website, up from 71% in 2000. Sourcing on the corporate site has brought about decreased reliance on commercial job boards. In our study “Where the Jobs Are,” iLogos Research found that postings on corporate career websites outnumber postings on job boards by a factor of three to one. As corporations implement robust candidate relationship databases, sourcing costs will decrease further by better marketing of opportunities to candidates sourced in the past. Ultimately, corporations may adjust or reduce reliance on volume sourcing methods as the quantity (and quality) of candidates mined from its proprietary database rises and other sourcing methods become more targeted. Staffing Efficiency Ratio An alternative metric to cost per hire is the “staffing efficiency ratio.” This ratio is calculated by dividing total staffing costs by the total compensation of the positions recruited. That is, one takes both fixed and variable staffing costs incurred over a period and divides by the sum of the starting salaries of all the positions filled over the same period. Though not completely insulated from differences in geography, industry ,and job function, the staffing efficiency ratio is a better metric than cost per hire for comparing the financial performance of recruiting across companies. Staffing.org found an overall staffing efficiency ratio of 11.6% in the group of companies participating in its 2002 study. In other words, the average staffing function cost the corporation $11.60 for every $100 in salary of those recruited. The Staffing Efficiency ratio has dropped each year that it has been measured by Staffing.org, with a value of 16% in 2000 and 13.6% in 2001. With cost per hire dropping for three years running, it is no surprise that there is also a downward trend in staffing costs represented as a proportion of total salaries recruited for. To put the staffing efficiency ratio into perspective, it is interesting to compare an internal staffing function to third party agencies. A typical agency fee is in the range of 25% to 30% of the first year salary of the position being filled. In that sense, staffing efficiency ratio represents the ‘fee’ that an average internal staffing function would charge back on a cost recovery basis. Considering it this way makes clear the premium one pays for an outsourced service or a quality process. When analyzed by industry, size, and region, substantial differences in staffing efficiency ratios emerge. One pattern appears to be that larger organizations have a lower staffing efficient ratio than smaller organizations. Large companies enjoy higher volumes, with greater repeatability among hires, and possibly enjoy certain economies of scale with respect to recruiting overhead and infrastructure. Cost and Quality Does it make corporate economic sense to decrease the cost per hire as much as possible? Reducing headcount in the staffing department, cutting back on testing and assessment, or implementing poor staffing technology all have one significant impact on the company: they reduce yield quality of the staffing function and consequently have an adverse effect on corporate productivity. Without any reference to quality or productivity, both the standard cost per hire and staffing efficiency ratio metrics gives only a partial picture of staffing performance. The true measure of staffing efficiency should be not how much it costs to hire a certain level of total salary but how much it costs to hire a certain output in productivity. Being more cost efficient is a good goal in staffing. However, you should not get too focused on a single metric, nor should you take your eye off the ball on quality. Slavish devotion to cost per hire or the related staffing efficiency metric will have an adverse impact on company efficiency. Whenever I see a company embarking on a cost containment campaign, I make a point of asking, “What are you sacrificing?”