Cost Per Hire - The Death Knell of Outsourcing

Firstly, thanks. Had an amazing response to my last post on Innovation and it wasn’t the usual heavy handed legal letters (you know who you are).  In fact my heart was warmed by the number of recruiters who clearly are thinking their world needs to change, bring it on! Lot of recruiters ask me how do i deal with RPO’s?  The likes of AMS, Lorien, Ochre House and Hyphen.  Got to say I am at a loss with this one, I would love to be able to say that outsourcing is misunderstood and there are some amazing relationships to be had but you know I can’t.  I personally refused to outsource the Nortel Networks in-house team and resisted the outsource of the Energis team, until told to.  When I did, I can tell you right now our Cost Per Hire (CPH went down), so why the regret? Simple, the quality of hire went South faster than the cost.

That was slightly unfair, the biggest issue is  and was not caused by the RPO but by accountants and the simplicity of the key internal resourcing Key Performance Indicator (KPI), that of Cost Per Hire (CPH). 

I have not found one in-house or outsource team whose key KPI is quality of hire! Cost per hire, yes; time to hire, yes; interviews : offer, yes but never quality of hire.  The first three are absolutely no measures of quality.

We are frequently asked to review recruitment processes within organisations, we are never, ever asked to reduce cost of hire, our remit is always to increase the quality.  In the end, as with most things, people will pay more for quality.

A classic example is an organisation whose outsourced partner had managed to decrease the Cost Per Hire (CPH) to £1,500 for their 250+ sales people they hired every year.  On the face of it an astounding result, actually if you know anything about recruitment, it’s not astounding at all, it’s unbelievable, no really, totally unbelievable.

The simple fact is that hiring the right talent for your business cannot be measured in CPH, it has to be total employee cost.  In this example over 50% of the hires left in the first year, at a cost to the business of £1,000,000 in wasted training costs and ultimately further £millions in lost revenue, oh plus you have to hire them all again at £1,500 per hire. In this example the CPH was driving the wrong behaviour, as it always does, and the business suffered.

So my recommendation? Do away with CPH as a KPI for an in-house or outsourced team, it’s irrelevant. Still don’t believe me?

When I took over the resourcing team at Nortel Networks my budget was $10,000 per hire. Yep a reasonable £5,000 at the time, with 3,500 hires to make, my £20M budget was a sight to behold...however it simply wasn’t true.  The CPH was actually $65,000, let me rephrase that, the total cost impact of hiring for the business was $65,000 per hire, caused by mishires, leading to wasted management time, cost of missed revenue, impact on team morale, leavers etc. So in-house or outsource, that’s one for your conscience but whatever you do, don’t use Cost Per Hire as your KPI, it’ll doom the whole thing to failure.

PS: I did in 9 months get the total cost impact of hiring at Nortel down to $10,000 per hire but that’s another story...

This blog was originally produced as a 'Blog with Bite' for Recruiter magazine.

Comments

[Management Dissertation]

Whenever i see the post like your's i feel that there are still helpful people who share information for the help of others, it must be helpful for other's. thanx and good job.

[Saleem Qureshi]

Insightful article...one question I want to ask that why companies don't leverage on technology to reduce their cost per hire and to speed up their work? It's true that taking CPH as KPI even if its outsources is irrelevant until the out-sourced party is not using new technology to assess the talent.