Measuring your “Cost per Hire” – to Outsource or not to Outsource

Guest Blogger Michael Swope, VP at Renaissance, shares his thoughts on determining your true cost per hire.

In almost every client meeting I’ve had over the last two years, Cost-per-Hire (CPH) is a topic of discussion that always comes up.  In my position, this is an important factor in determining if our services are of use to a particular company.  What continues to surprise me is the number of small and large companies that don’t track this measurement and what’s more, these companies often incorrectly track this measurement.

There are many studies on CPH and a simple Google search will take you in every direction possible, with most searches yielding a simple and outdated formula of 1.5 times the position’s annual salary. For example, a marketing position paying $50,000 would yield the following formula:  $50,000 x 1.5 = $75,000 cost per hire.

I’ve also met with partners who’ve insisted that their CPH is as low as $10. Their rationale is that they post an opening on a job board for $100 and end up making 10 hires from that one posting. Trust me- there are large corporations that truly feel this is their cost per hire, ignoring all other factors that go into making a new hire.

So which is it?  Does it cost $75k or $10 to staff a marketing position? I think the answer actually lies somewhere in between.

I like to calculate the CPH using some/all of the following metrics:

• Time invested in the recruitment process – How much does a company pay all the people making a specific hire and how long does it take them to make that hire?  Companies are running leaner than in the past and when time is being spent on recruitment needs, time is being taken away from core responsibilities and revenue generating tasks.
• Employment advertising investment made.
• Loss of revenue – If a sales position that generates $10,000 a month remains open for three months, and it takes two months to get that individual trained, a company could be looking at $50,000 of lost revenue through the recruitment process.
• Training invested in your new hire – Training costs vary per company, but I like to use a round estimate of $2,500, $5k or $10k, based on the level of training needed. Even a qualified person has costs associated with getting used to company culture and processes.

These are really the only four areas of cost per hire that concern me, and each can add up to a significant investment.

Case Study:  Company X needs a new Sales Manager

• Position pays $70,000 per year, plus commission/bonus
• Current sales team is generating $50k per month, short of $60k per month goal.
• Advertising the position will cost $500 over a two week period.
• 600 resumes will be received and need to be reviewed:
  • Typical review time is 3 minutes per resume – 30 hours of time.
• 25 phone screens will take place – 6 hours, 15 minutes of time.
• 8 in-person initial interviews will occur – 8 hours of time.
• 3 follow up in-person more detailed interviews will occur – 6 hours of time.
• Background checks and reference checks will take 2 hours total of time.
• The position will remain open for 2 months and it will take this person 2 weeks to be fully integrated into the company – lost revenue at goal of $25k.
• Hiring Manager earns $100k per year or $48.08 per hour (assuming only one person is involved in hiring decision).
  • Time invested of 52.25 hours = $2,512.18.
• Training and two week ramp up of new employee – $2,500.
• Time lost from core responsibilities we will set at zero for the sake of this case study, but can be very significant for most companies.
• Total Cost per Hire = $30,512.18.

The true CPH may actually be higher based on the time/revenue lost from the Hiring Manager’s core duties and possible involvement of more than one hiring authority.

Taking all these factors into account, Outsourcing may or may not be the best solution for your company. If you are able to reduce your cost per hire to just a few thousand dollars, then keeping the hiring process in-house makes sense.  However, in most cases, costs can easily rise into the $10k-$20k range. If this is your situation, it may be best to focus on your core business responsibilities and outsource the hire as a cost-saving strategy.

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