One needs to understand what makes up the cost of hiring before one can think of reducing it. The cost of hiring is one of the critical deliverables for those in the recruitment team. For devision making and driving down your recruitment operation cost and year end expenses, reducing the cost without sacrificing quality is very important.
Companies in different industries have different roles and amount of openings in a given year and for that budget and thinking about the cost is very important. It costs more than you think to recruit a new employee but thinking how to reduce the cost might save you a fortune.
What is the cost per hire?
The cost per hire formula is defined by the sum of all hiring costs divided by the number of hires in a certain time period.
The standardized formula for calculating the cost per hire is:
(Internal hiring costs + External hiring costs)/ Number of hires
What are Internal & External costs?
Let us explain this equation with an example so that you can understand the concept. Let’s say you were a hiring manager for a hiring company and you have 20 hires to make. Let’s say, you are a tech company and in the 2019 calendar year, you had to hire 20 of these roles in these different areas: Front end developers, Back end developers, Full Stack Developers, Business Analysts, AI and Machine learning, Blockchain developers, Mulesoft Developers, Data Science, and Cloud developer.
Let’s first start with the internal cost first. Internal costs are expenses associated with internal staff and organizational costs of the recruitment function.
For example, Company A has an internal corporate recruiter, employee referral bonus, interview costs and fixed cost. The company conducts an interview for 20 candidates. This way, the internal cost goes like this:
- Internal corporate recruiter salary – $60,000 / Fixed cost per year.
- Employee referral bonuses: Let’s say one of your internal employee referred two candidates. He/she will get the referral bonus worth $2,000 X 2: $ 4000
- Interview Cost: If there are 20 candidates for hire. 3 interviews will be conducted, each interview will be of 1 hour = 3hours per candidate for the interview. The total hours required = 60 hours. The Salary of the hiring manager – $50 per hour. So 60x hours $50= $3000 (assumption salary)
- Fixed costs such as physical infrastructure (e.g., office rental) $2000/months = $24000
So as you can see, in this example the internal costs for this tech company for 2019 = $91000
** We also assume out of the 20 roles, the corporate recruiter has hired 10 candidates through his or her LinkedIn account. The assumed hiring cost was $60,000 which eventually turned out to be zero as they were directly hired by the corporate recruiter itself.
Now, Let’s Discuss External Costs For 2019 for this tech company.
External costs are expenditures related to outside providers or external costs. It generally includes the following expenses:
- Agency costs.
Assume 3 out of the 20 candidates were hired through a recruitment agency. Their average salary is $100000. This way, the company in which they got placed will have to pay 20% of $100000 which accounts for $60,000 to the recruitment agency.
- Advertising cost:
Now let’s say 5 candidates were hired through our own advertising, so we need to count it as advertising costs. Assume that we posted ads for three months on live Job boards. If we post 5 jobs for the 5 candidates in 3 months on the mentioned platforms like- Monster $249/per month, Career Builder $375 per month, LinkedIn $300 per month, Dice $395, Indeed – $300 per job, the total cost for all of these platform in one month will be $1619 and for three months it will be around $40,475.
- Software costs for hiring. Assume that the internal recruiter is using Bullhorn and we have to count software as a cost for year end. Technology software for example for Bullhorn per user is $99 per month and for that we have to account for $1188 for 1 year.
Let’s also say as an assumption, Linkedin premium and other tech sourcing tools for the company cost us: $9899 per year
- Career Fair: Assume that we had one career fair and that cost us $1000 to hold to attract candidates.
- Traveling cost: Travelling cost is the to and fro charges borne by out-of-town candidates themselves.
Let’s assume that two candidates were hired this way and they were coming for an interview from another city. Their average to and fro traveling cost is $200 X 2 X2 times= $800.
- Relocation: Let’s say the tech company out of the point above hired these two people so based on the upper assumption it is entirely candidate’s expenses if he or she needs to relocate if selected so the relocation cost will be around $4000 X 2 = $8000
- Signing bonus: 2 people also got a signing bonus of $5000 each = $10000
Sum of money paid to a new employee by a company as an incentive to join that company
Assumed external costs total = $131362
Total Cost= $221362
Cost per person for hire: $11,118. (Total cost divided by 20)
As you can see the tech cost to hire this candidate is around $11,118 in total. Every additional $ of internal and extenal cost is a resource that could have been utilized elsewhere. Reducing the cost is thus a function of all these factors and more. It cannot be a single pronged approach but must target all cost heads proportionally and simultaneously.
COST CUTTING DURING TALENT ACQUISITION
Let us begin with the most ignored and yet crucial aspect of hiring; deciding the number of recruitments to make. This concept is referred to as rationalizing of vacancies in the HR circles. It is essential here to understand that when the line managers seek employees, it is not only in their ambit to decide how many and which skill sets they require but also to decide how to optimize talent acquisition cost without sacrificing the quality of candidates.
Internal talent Pipeline
It allows an HR to tap into information about employees already in the company who may be willing or able to take up the task/ post at hand. Internal hiring saves a considerable amount of external cost and is thus preferred for external recruitment. If one must look to hire externally, the other valuable resource comes into the picture, which is a candidate pool.
Look on Paysa, Payscale, Glassdoor to see what your competitors are paying for similar roles and it might be in your best interest if you want your candidates to stay with you for the long term, to make sure that you pay above what your competitors are paying. Talent acquisition is very competitive at this time and you have to bear in mind that having a candidate working for you, doesn’t guarantee that he/she will not be speaking to another recruiter on linkedin in a few months or a year. Refine your company culture, offer perks and pay more than industry average..
Save your upcoming candidates to projects on Linkedin projects and other tools. Having a candidate pool is a great way to attract candidates in the long term. Use Linkedin connect and not inmails and save the candidates to a pipeline for the next 6 months when you will be hiring. On linkedin, you can also create groups and invite these connected candidates in those groups and start conversations and interactions with them. When it is the right time to hire, you will have a pool already and you would hopefully not have to run ads, contact an agency, which can drive your talent acquisition cost down. You can also invite other candidates to come network at your companies and inform them when you will be hiring. When the hiring is particular, it can save a large amount of external cost for the company to tap into these people rather than having an open lengthy hiring process. Thus, of course, is situation-specific.
Planning Advertisement Costs
Can you use a job aggregator to save on recruitment cost instead of putting jobs on all sites? Would Zip recruiter be an example that you could use to save cost?
Another crucial aspect where companies can save on the internal cost of acquisition is the way they frame their recruitment advert. Check out Textio.com where you can write better description of your jobs which can more people to engage with your jobs. The company is spending either way of putting up an advert on offline and online platforms. The clarity and directness in the same can save the company the task of filtration later on and thus on internal recruiting costs. This may or may not result in an increased external loss, but one must analyze the balance while taking this decision.
One last aspect that can be looked into is to lower the hiring costs immediately is the denominator of the metrics. There are individual fixed costs to every hiring drive in any form carried out by a company. Thus, it becomes crucial for the company to ensure that the hiring done on one trip justifies these fixed costs. Increasing the number and breadth of the hires in each drive can reduce the cost per hire and therefore save the company money in the long run.
Apart from the above, it is necessary to note that each company can adjust aspects of its hiring costs based on its unique circumstances and the above can serve as a broad guiding path for the same. Each hiring team must carefully study their own needs and costs and conclude where all the money and resources are being used to less than their optimal effect. These can then be turned into aspects of change for this company.
Employee Referral Program:
Employee referral programs are another way to save money on hiring. According to one study, a regular hire can cost in between $4000-18,000 while a referral costs only nearly $1000. Let your employees invite potential candidates who meet the skills that you need at your work to learn more. Keep in mind that a developer who is in the tech community might have other friends who might know the same tech stacks as example. Of course, note every referral will turn out to be a hire but it is a definitely a door to keep open. According to another study, the referral programs also help you get a steady stream of high caliber candidates and help them access so-called “passive candidates” who are much tough to reach through traditional recruiting methods.
Off Shores Partner RPO:
Local recruitment firms can help you save some money on the hiring process and meet your candidates in person. Compared to the hiring done through other vendors, RPO charges less.
For example, you hire through Company A with the expenses worth $15000. However, RPO only charges $1000 per month. So if you have only one person working for you in the example above, and you are paying your internal recruiter 4 k per month having 4 people working as RPO can speed up your recruitment process and save you on cost.
Perhaps one of the key benefits of an offshore RPO partner is scalability. Whether the economy is in an ideal environment for acquiring for candidates or replacement hiring, recruitment agencies can minimize hiring costs by teaming up with offshore RPO firms that can use innovative recruiting strategies, extensive database, skilled recruiters, and latest recruiting technology. Offshore RPO providers have proven methodologies to pick quality candidates through interviews and find out if that candidate is compatible with the recruitment firm’s clients. Their network includes the right crowd and the right enterprise to gain knowledge of people and companies to find out what they are experts in.
Hiring Through Social Media:
Do you know how to use Xray Search on Google. If not, you should look into it. Savvy recruiters know the importance of social media to access top talents. In fact, over 90% of all recruiters now utilize social networking in their recruitment process. Check out Seekout.io and amazinghiring.com for discovering tech talents as example. This tool allow you to search for candidates on 50+ social media sites such as Stack Overflow, Github, Kaggle, Facebook, Twitter and many others. You can also use OctoHR on Github to discover candidates email address. On github, you can also go on a candidates repositories, and go on one of the commits that the person made and in the address bar you can add .patch to the link and discover the candidates email address. Apart from generating brand awareness and getting you quality candidates, hiring through social media also minimize the hiring cost. Social recruiting is cheaper than most hiring methods. On facebook, if it is not a very specific jobs, you can also run ads which might be less expensive based on someone’s job title and discover more candidates and at a cheaper cost than on indeed and on other job boards.
Focus on your candidates experience while interviewing. Be on time for interviews, prep them before an interview and make sure you can inform them who they will be speaking and show them that you care during the process. All of these things can save you a bunch and also your time and increase referrals even though the candidate might not get an offer. You can also track your recruitment data using hubspot to see how many people are booking time to speak to you after initial reach outs and such. All of these metrics are important. As we mention in this new decade, data is more valuable than oil…
The role of AI is important in the hiring process. It can streamline or automate some part of the process especially the first part of the process. If you are a company that have lots of jobs to fill having an early stage AI process to screen candidates and maintain a positive experience for the candidates. In the future we can see the likes of voice screening applications built on Alexa as example. For example, it can learn resumes to auto-screen candidates or conducts sentiment analysis on job descriptions to identify the biased language. Some AI tools create interview questions to determine the caliber of a candidate. Some of the renowned AI tools for hiring are Maya just to name a few.