Before you take the plunge into expanding your team, it's crucial to think over this key question: "What is the financial implication of bringing a new employee on board?"
The financial burden varies from one organisation to another. For some, it's a minimal dent in the budget, while for others, it can be a significant expense. If you find that your cost-per-hire is on the lower end of the spectrum, you're on the right track.
However, if it's the opposite, it's time to reassess your recruitment expenses and streamline them. But how can you go about it?
'Cost per hire' - sounds pretty straightforward, right? It's just the average amount of cash you shell out for each new person you bring into your team.
But, let's not oversimplify things. There's a bit more to it than meets the eye. You see, not all costs linked to hiring are obvious until you roll up your sleeves and dig into the nitty-gritty.
Think about the time and resources it takes to advertise a job, sift through applications, and finally, get the new hire up to speed.
And here's a pro tip: don't skip any potential costs when you're crunching the numbers. If you do, you might miss out on chances to make things better, and you'll end up with a cost per hire estimate that's not quite on the money.
The formula for calculating cost-per-hire is essentially the total of internal and external recruitment expenses, divided by the total number of recruits within a specific period.
When it comes to calculating your cost per hire, there are numerous recruiting expenses to consider and track. Unfortunately, they're not all straightforward outlays that show up neatly on your balance sheet. If only it were that simple!
A common strategy for calculating recruitment costs is to divide them into two categories: internal and external costs.
But what exactly do we mean by internal and external costs in recruitment? What are some examples of each? It's easy to feel swamped and tempted to push the task of calculating recruitment costs aside. But beware, this could end up costing your company both time and money in the long run.
External costs refer to the money and resources invested in services or entities outside of your company, such as:
- Fees for staffing agencies
- Charges for job fair placements
- Costs of recruiting technologies
- Expenses for advertising job vacancies
- Travel costs for applicants
- Costs of screening applicants
- Compensation for relocation
- Signing bonuses
On the other hand, internal recruiting costs are those associated with your existing staff or those you're hiring. These internal costs can include:
- Portions of salaries for staff involved in the recruitment process
- Expenses for training programs
- Lost productivity during training
- Travel costs for recruiters
- Referral bonuses
The structure of your company's recruiting process will dictate how much each expense contributes to your total costs. The more meticulous you are in evaluating your recruiting costs when calculating cost per hire, the more precise your final calculation will be.
Understanding a calculation and its implications can be challenging without a concrete example to guide you. So, let's walk through an example of how to calculate cost per hire.
Consider a company that conducts a year-end review of its hiring practices for the previous year. The company spent a total of $6,500 on external recruitment expenses and an additional $9,500 on internal costs, such as staff salaries for time spent on recruitment and productivity loss during the initial weeks of the new hires.
During this time, the company brought on board four new employees through the recruitment process. By dividing the total expenditure of $16,000 by the four new hires, the company concludes that the cost of onboarding a new employee during this period was $4,000.
Running a company involves juggling a lot of balls, and it's easy for minor details to get overlooked. Calculating the cost of onboarding a new hire might seem like a detail you can afford to approximate, but once you start meticulously tracking your recruitment costs, you'll realize the flaw in that assumption.
Being aware of your cost per hire enables you to spot inefficiencies and fine-tune your process. This not only saves money in the short term by reducing recruitment costs but also shifts your focus towards more efficient hiring methods.
This shift, in turn, enhances the quality of your new hires. A higher quality of hire is an even more effective way to boost your bottom line as it leads to an overall increase in company productivity. So, if you haven't yet determined your cost per hire, stop missing out on this crucial metric.
Understanding your company's cost per hire is crucial for minimizing your overall expenditure and optimizing the areas where your resources are allocated. One practical application of the cost per hire metric is to break down spending across various factors.
By doing this, you can pinpoint areas where you're successfully sourcing top-notch candidates and areas where your efforts are falling short. Armed with this knowledge, you can choose to either revamp your approach to the less effective areas or decide to withdraw funding from them entirely.
Data on the cost of hire can be a priceless asset in refining your recruitment process, including enhancing procedures and strategic planning and investment.
Regularly Review Your Cost Per Hire
It's crucial to routinely calculate your costs to gauge the effect of a process enhancement, a technology or automation project, or a recruitment event. An uptick in costs isn't always a bad sign. For instance, it might rise because you've invested in expanding your recruitment team to manage a higher volume of hires.
Break Down Your Cost by Department and Role
Contrasting your cost per hire data by department and role can help pinpoint areas for process improvement and potential cost reduction. For example, if the interviewing costs for leadership roles are higher due to multiple interviews, consider whether you can cut down the number of interviews without any negative impact.
Determine Your Cost by Source of Hire
Identify which sources of hire are the most cost-effective. You can track the source of hire manually or through your Applicant Tracking System (ATS).
Evaluate Your Cost in Relation to Other Key Recruitment Metrics
Cost per hire data should be analyzed in conjunction with other significant recruitment metrics like time to fill and quality of hire. If feasible, examine their interrelations. For instance, does the cost decrease as the time to fill shortens? What happens to the quality of hire when the cost decreases?
Leverage Cost Per Hire Data for Strategic Planning
As an indicator of the recruitment function's performance, the cost per hire is a vital element in strategic planning and budgeting. It helps determine future investments in recruitment tools and potential expansion of the company's workforce.
Dealing with data and number crunching can often be a daunting task for a company. Seeing figures that are either too high or too low can deter an organization from maintaining a close watch. However, understanding your cost-per-hire offers much more than just raw data. When you interpret these numbers and identify patterns, they can narrate a story, highlighting the strengths and weaknesses in your recruitment process.