Monday, April 26, 2010

Cutting Staffing Costs to a Fault

"Our cost per hire rose this month by eight percent," the CEO said to the Director of HR in a way that the statement was more a question that must be answered.

"That's easy to explain. First we...," you being and follow it with a list of reasons why the costs rose, including the bombardment of resumes and the use of an executive search firm for that high-profile opening in Marketing.

Has this happened before? Has it been followed by a request to reduce costs starting now?

While I understand the need to watch costs/operating expenses, I wonder if organizations that are now hiring again are presently at a point where cost minimization is detrimental to organizational success.

Let's look at cost per hire as the intro showed. This cost includes all the costs that go into hiring new employees. It includes but is not limited to:

  • cost of the time spent preparing, interviewing, and deciding on applicants

  • cost of job postings

  • cost of administering employment or skill assessment tests, background checks, and drug tests

  • cost of any travel, lodging, or meals

  • cost of outsourcing to recruiting firms

All these costs exist for a good purpose: to get the best employee for the position. So why the minimization of costs? HR is still viewed as a cost center because it doesn't generate any revenue. If the costs are going up, and nothing can offset them, then they need to be reduced, right? It truly depends on the strategy of the company, but for the most part, I have to say minimizing costs is the wrong move.

The right move is to learn where the costs need to go, move them there, and then measure the results, keeping it all in line with the business strategy. To shift the costs, HR and management need to determine a hierarchy of positions based on the position's ability to generate revenue, decide the organization's future, and keep the business competitive. Based on this hierarchy, the combined partnership of HR and management can determine how it spreads the costs of recruiting. After cost decisions are in place and hiring begins, it is going to take time to see the results. This is going to extend beyond the one month that the CEO in the narrative gave. At a minimum, I recommend measuring for positions 6 months after they've been filled because it may take this long for a new employee to understand the tasks of the job and the social and political aspects of work.

I'd seriously recommend the idea of scrapping the cost per hire in favor of other measures such as:

  • percentage of employees in the top tier of our hierarchy still employed after 6 months, 1 year, 2 years, etc.

  • percentage of employees in the top tier of our hierarchy performing above, at, or below expectations

  • percentage of employees in the top tier of our hierarchy hired through referrals who remain, perform at or above expectations

  • percentage of employees in the top tier of our hierarchy who leave voluntarily or involuntarily

Remember, hierarchy isn't based on org chart layout; it is based on importance of the position to the success of the company. And notice that I only mention the top tier. These measurements can address the other tiers as well.

The point that we can make from this is that recruiting isn't just about how much is spent hiring new employees. It is about smart hiring and measurable results. If we can determine that referrals lead to a 90% employment rate after 180 days with strong performance results, then we can work to cut recruiting costs in areas that aren't giving the same results.

It is also worth noting that organizations can save on costs in the selection process if they eliminate staffing elements that aren't necessary for each position. Not every position needs a background check* or a job skills assessment test. Determine which positions need which elements and save on costs that way.

Finally, if the concern is about cycle time -- time to fill a position -- my recommendation is to not be overly concerned about it. The time will make some people worry, but organizations shouldn't press the issue of cutting cycle time (just like cutting costs) just to get the process over or because a fear looms that the req will be closed. It will only result in the wrong hire which will create an opening later on, increasing the costs by repeating the staffing process over again.

To wrap this up, the idea here is to measure costs, adjust them appropriately, and have the numbers justify the reasons why the costs are as they are.

I'd love to hear what the professionals have to say.

Thanks for reading.

* To avoid discrimination claims, if a position does require a background check, an employer should check everyone, not just one or a few finalists.

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