Cost-Per-Hire is Dead – Here’s Why You Should Measure ROI Instead

Cost-per-hire is the one recruiting metric that we hear talent acquisition leaders say they use most commonly, but also the one that they get the least amount of value from.

If it’s not valuable, then why are recruiting leaders spending so much time calculating it, and focusing on improving it?

The cost-per-hire metric’s biggest problem is its inability to impact the larger picture – in no other aspect of business (such as marketing or sales) does the leadership simply focus on cost metrics.

Measuring the return on investment (ROI) of a good hire is more important in the long run than measuring the costs accrued to make that hire.

But let’s back up – what’s the story behind cost-per-hire, the value it’s bringing to organizations now, and the value it can bring to organizations when calculating ROI? We don’t have to completely throw the metric out the window, but rather look at the outcome with a wider and more innovative perspective.

Cost-per-hire is insanely simple to calculate.

The one real reason talent acquisition leader’s focus on cost-per-hire, and have been using it for so long, is because it’s easy to calculate, easy to see where improvements need to be made, and easy to use across all areas of talent acquisition.

SHRM reported the ease that talent acquisition leaders see in the metric:

“Organizations monitor and calculate cost per hire data, as opposed to other HR metrics that may be more difficult to measure, because the components which make up the cost per hire calculation are frequently easy to calculate and track.”

The formula’s simplicity comes from the fact that the information needed to make the calculation is made up of expenses and numbers that are easily tracked by any of the major application tracking systems (ATSs) or any other HR technology commonly used.

An article from The Clever Consultant collects a good list of information gathered to create the internal and external cost metric:

Internal costs include:

  • Salary (plus benefits) of internal recruiting staff
  • Expenses incurred by internal staff during recruitment (e.g., travel, lunches, etc.)
  • Reference checks, background checks and/or candidate assessment testing
  • Applicant Tracking System (ATS) costs
  • Employee referral/rewards program costs

External costs include:

  • Any outsourced recruiter fees (and their billable expenses)
  • Advertising costs (print, online, TV, radio)
  • Social media expenses
  • Fees for online access to candidate resumes (e.g. LinkedIn, Monster, etc.)
  • Job board postings costs
  • Career Fair expenses

That’s a list of things that look pretty important to an organization’s bottom line – the problem with calculating cost-per-hire is not the quality of knowledge that the metric unearths, but the fact that putting goals toward cost-per-hire doesn’t bring the whole picture into play.

Focusing on cost-per-hire turns takes the focus off what’s important – making quality hires

The cost-per-hire metric is dead, because quality of hire is what really matters. Actually, both those metrics matter. And when you track both of those metrics, you’ll ultimately be tracking the return on investment for your company.

If you’re just tracking cost-per-hire, your forcing your recruiters to care about the cost of onboarding someone first, before the impact that the new hire will produce. The cost-per-hire could average $5,000, while the impact could be much higher – Apple is a great example, as they yield $2.2 million in revenue each year for each hire.

That $2.2 million in revenue make that $5K seem insignificant, because it is. For many organizations, focusing on lowering that $5K would be a mistake.

ROI needs to be the new standard – in every other part of a business, managers never simply look at costs.

Instead of focusing on the cost to your organization, you instead compare the costs to the value of the output (the return on the investment) or the result that those expenditures produce (the quality of the hire)

ROI is better metric than cost-per-hire for the following reasons:

  • Attracting quality talent is expensive, and it should be.
  • Slow hiring can be just as costly to an organization if time to fill increases dramatically.
  • Cost per hire isn’t totally in the recruiter’s control – for example, vendor costs.
  • You can’t compare cost-per-hire with other firms or organizations, because it’s all relative to you. So what’s the point?
  • You might lose potential good hires if you look cheap during the recruiting process.
  • Lower costs will negatively impact the candidate experience if recruiters are overworked.
  • Formulas always undercut the real costs – like the employees time for making a referral, low retention rates, lack of diversity and termination.

Tracking the performance and costs of your team is crucial to understanding the impact your employees and initiatives have within your organization.

For more information on how to find out the ROI of your recent agency hires, download our toolkit.

2017-07-28T16:37:54+00:00 March 29th, 2016|

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