The Hidden Cost of Poor Recruitment Processes

FourthLine Director Dan Waltham considers why we don't pay more attention to our retention rates and continue to make bad hires, when the cost of poor recruitment is so high...

This article was inspired by an event held by Plamen Ivanoff.  He is the Executive Chairman of i-intro, an innovative provider of SaaS to the recruitment sector.  The event focused on the cost of failed recruitment processes at a company level.  They used the REC’s 2017 “Perfect Match” report to inform much of the conversation.  The first part of this article sets the scene using the same report and expands on the point to cover the wider economy. 

The cost of recruitment

“Perfect Match”, a 2017 report by The Recruitment and Employment Confederation, calculated the cost of one bad hire.

The report considered the cost of salary, contingent recruitment agency fee, time and salary costs of senior managers involved in interviewing, lost team productivity, training, impact on other staff retention and the cost to do all of that again after 8 months. 

For an employee hired at a salary of £40,000 who left after 8 months the cost was equivalent to almost five times (4.7) the salary of that person - £132,000 to be precise.

What do bad hires cost UK plc?

Let’s take a quick peek at UK employment statistics…

27 million people are employed in the UK private sector.  According to Adzuna’s UK job market report from March 2019, the average advertised salary in the UK is approximately £35,000.

From the most recent ONS data, retention rate for those privately employed in the UK is 83% (or 17% turnover).  Retention Rate is defined by those employees who stay with the same employer for over one year. 

Combining this data with the REC analysis we can estimate the cost of bad hires on the economy. 

3.16million private sector jobs are created annually and according to our ONS data, 17% of those jobs (537,200) will be open again within 12 months.  Let’s imagine that only 5% were hired via recruitment agencies (26,860) on an average salary of £35,000. 

Still following?  Good. 

Now let’s say that a third (8,953) leave after 3 months earning £8750 each, a third leave after 6 months earning £17,500 each and the final third leave after 9 months earning £26,250 each.  Calculating those figures and multiplying by the 4.7 from the REC report we reach our number.

Poor recruitment practice has cost UK business £2.2 billion in the last 12 months. 

What is your retention rate? 

Hopefully your retention rate compares favourably to the national average, but have you considered what it might be costing you?

10 hires at £35,000 salary who left after 6 months cost your business £822,500 last year.  Five hires at £50,000 who left after 9 months cost your business £881,250 last year.  The cost of 1 poor hire at £100 000 who leaves after 11 months...£413,600.

As Ivanoff and his team pointed out at the event;  “Is this level of Return on Investment acceptable? Would it be acceptable elsewhere in your business?  Of course not.  So why is it acceptable in arguably our most important process?“

Shouldn’t retention rate be the thing that really matters….?

Fill rates, time to hire, cost per hire, recruitment margins are all industry standards.  But they only measure short term success.  A bum on a seat.

Those are the wrong KPIs and they are potentially costing you money.

Retention rate is the only true measure of successful recruitment. 

Why do we make so many bad hires?

Considering the cost alone, even one bad hire out of every five can be damaging.  Any more and the capital and human investment increases quickly. 

Quality in your interview and onboarding process, reward structure and employee engagement programme.  Those quality touchpoints will improve your retention.

However, the fundamental process that you need to review is how your recruit.

It might work brilliantly to get numbers through the door and started on day one.  That doesn’t represent a successful outcome. 

The question you should ask is, “How many of your hires are still working with you after 12 months?”  If the number is below 80% then you have a problem process.

It’s time for a shake up and for the recruitment industry to be challenged to deliver better results on this key metric.  A change is needed on both sides of the debate though.  Margins are squeezed, following a standard process has become more important than building great teams. 

Quality has been sacrificed for speed.   Here is why…

Recruitment companies are awash with forms and formulas that grade jobs. A contingent recruiter survives and thrives by placing two jobs per month. 

A placeable job is measured by a host of factors.  For example, the number of people you can connect with in 24 or 48 hours; the speed in which you can get the job to shortlist and interview; the level of competition and the ease of finding additional candidates through LinkedIn. 

If your mission critical job fails to meet any of these “fillability” requirements then it goes to the bottom of the pile.  The more recruiters you use to find that person, the lower it goes in that pile.  After a while it gets forgotten about or passed to the new starter to “give it a go”. 

Why do recruiters do this?  The average fill rate for contingent recruiters is 25% - 35%.  The process is not working for those guys 65% - 75% of the time.  That’s why.

The failure of most recruitment processes is that speed is now the differentiating factor.  For recruiters and for the organisation recruiting. 

How quickly can my supplier send me these CVs?  Which supplier can get them to me quickest?  How quickly can I get this job to interview?  Will this process move quickly enough to help me reach my two placements this month? 

The candidate’s need becomes secondary and the right candidate is sacrificed in favour of the immediately available candidate. 

When getting a process completed quickly becomes a priority then quality suffers.    When quality suffers so does retention.

The outcome of this thinking culminates in our 17% turnover rate.  Our £18 billion cost.  Your £500,000 cost.

References

https://www.rec.uk.com/research/perfect-match

https://www.ons.gov.uk/economy/governmentpublicsectorandtaxes/publicspending/articles/isstaffretentionanissueinthepublicsector/2019-06-17

https://www.adzuna.co.uk/wp-content/uploads/2019/04/UK-PR-Mar-2019-Adzuna-Job-Market-Report.pdf

https://www.ons.gov.uk/employmentandlabourmarket/peopleinwork/employmentandemployeetypes/bulletins/jobsandvacanciesintheuk/september2019

https://www.theguardian.com/society/2018/sep/03/who-works-where-uk-public-sector

https://www.ons.gov.uk/employmentandlabourmarket/peoplenotinwork/unemployment/datasets/vacanciesbyindustryvacs02

 

Topics: Talent Solutions

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November 1, 2019
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Daniel Waltham
Written by Daniel Waltham

Responsible for leading FourthLine’s Talent Services business. Dan takes a lead role in customer engagement, identifying, creating and designing innovative solutions to help our customers at every stage of their hiring process. Fifteen years of experience in the sector as a hands-on recruiter and manager of interim and permanent recruitment businesses.