So. Cost per hire...Cost...per..hire. Its the big one right? It's the driving force behind all the hard work of us data driven recruiters.
More hires for less effort = lower cost per hire. Higher offer accept? Lower cost per hire. Less agency spend? Less cost per hire.
So, simple question... why do most businesses measure cost per hire about as well as Sam Bankman Fried balances his books?
Lets get right royally into it...
Oh before I forget theres a present for you at the bottom of the newsletter so keep reading.
So, what is Cost per Hire?
Cost per hire (CPH) is a fundamental metric in recruitment. It shows us the financial investment required to bring a new employee into an organisation. It provides a clear picture of the total expenses associated with the hiring process, from job advertising and agency fees to internal recruitment costs like salaries and time spent by hiring managers.
As recruiters, measuring cost per hire can give us a method of modelling costs during a scaling period and help us communicate our needs and requirements to leadership.
Need a new ATS ? Leadership don't care. Need a new ATS, automating the top of funnel and offer management to bring cost per hire down 20%, saving the business £75,000 over a period of 2 years? Leadership would be pretty happy with that methinks.
The Value of Cost per Hire as a Metric
Cost per hire is more than just a number; it’s a strategic metric that offers significant value to businesses. By accurately measuring CPH, companies can gain a deep understanding of their recruitment costs, enabling better decision-making and resource management.
- Budgeting and Resource Allocation: Allows companies to allocate resources more effectively. By analysing CPH data, organisations can identify the most cost-effective recruitment channels and focus on strategies that yield the best returns. Benchmarking and Industry Comparison: Helps businesses assess their competitiveness in the talent market. This comparison can reveal whether a company’s recruitment costs are aligned with industry standards or if adjustments are necessary. Recruitment Efficiency: Highlights trends and inefficiencies in the recruitment process. A rising CPH might indicate challenges such as difficult-to-fill roles or inefficient processes, prompting further investigation. Strategic Hiring Decisions: While reducing CPH can be a goal, the metric should not be viewed in isolation. A lower CPH isn’t necessarily better if it leads to lower quality hires. Investing more in the recruitment process to attract top talent can yield long-term benefits, making strategic investments in recruitment worthwhile.
However, it’s important to recognise that CPH has its limitations. Accurately tracking all costs can be a nightmare, and CPH alone doesn’t account for the quality of hires or other important metrics like time-to-hire or employee retention. So, it should be used alongside other metrics for a comprehensive view of recruitment effectiveness.
Different Ways to Calculate Cost per Hire
1. Simple Calculation Method
The most straightforward way to calculate CPH is using the basic formula :
Cost per Hire=Total Recruitment CostsTotal Number of Hires\text{Cost per Hire} = \frac{\text{Total Recruitment Costs}}{\text{Total Number of Hires}}
This method is easy to implement and provides a quick snapshot of recruitment costs. It includes all direct expenses such as job postings, recruitment agency fees, and referral bonuses.
The main problem with this method is it is the laggiest of lagging indicators. If you think about it, the data is only accurate at the end of the year when all the hires are made.
It's like figuring out how much gasoline you need to set your house on fire, by setting your house on fire. You only get the answer once the damage is done.
For a business to rely on this method during a scaling phase they are exposing themselves to potentially massive overspend, or the opportunity cost of a massive underspend (ie, had we known we had that extra budget we could have offered a bonus to retain that superstar who left this year)
Pros:
- Simplicity: Easy to calculate and understand, requiring minimal data. Quick Insights: Offers immediate insights into recruitment spending, useful for basic budgeting.
Cons:
- Lack of Detail: Oversimplifies the hiring process, not accounting for different role complexities or geographical variations. No Quality Measurement: Does not consider the quality of hires or the efficiency of the recruitment process
2. Slightly More Detailed Method
For a more nuanced understanding, companies can adopt a more detailed calculation approach:
Cost per Hire=(Internal Recruitment Costs + External Recruitment Costs) + (Time-Based Costs + Opportunity Costs)Total Number of Hires\text{Cost per Hire} = \frac{\text{(Internal Recruitment Costs + External Recruitment Costs) + (Time-Based Costs + Opportunity Costs)}}{\text{Total Number of Hires}}
This method includes internal costs like recruiter salaries and office space, external costs such as job board fees, and time-based and opportunity costs like the time spent by hiring managers and the potential revenue loss from unfilled positions.
Pros:
- Comprehensive Insights: Provides a detailed breakdown of costs, allowing for more informed decision-making. Customisation: Can be tailored to include specific cost elements relevant to the organisation.
Cons:
- Complexity: Requires extensive data collection and analysis, which can be resource-intensive. Potential for Inaccuracy: The inclusion of subjective costs like opportunity costs can lead to variability in results and potential manipulation.
3. Operational Cost Per Hire
This is a method that calculates the operations cost per hire from the bottom up.
To calculate the operations cost per hire using the formula where the Cost per Hire (CPH) is determined by multiplying the number of interviews required to make a hire by the cost of each interview, you can use the following formula:
Operations Cost per Hire=Number of Each Interview to Make a Hire×Cost of Each Interview\text{Operations Cost per Hire} = \text{Number of Each Interview to Make a Hire} \times \text{Cost of Each Interview}
For example, if each screening interview costs £10 and it takes 14 screens to make one hire, the cost of screens per hire would be £140.
\text{Cost of Screens per Hire} = 14 \times £10 = £140This formula can be applied to all stages of the hiring process, where you multiply the number of actions (e.g., interviews, assessments) by the cost per action to determine the total cost associated with that stage for making a single hire.
Pros:
- Granular measure of effort to make a hire : You can look at the total operations cost to make a hire, or just an individual stage. This allows us to see any outlier costs in the process. For example, two senior engineers with a salary of ~£70,000 attending one tech interview. That tech interview costs the business £67 of salary, not including the opportunity cost of 2 hours of engineering time. For 10 hires, thats £670 and 20 hours engineering time, 100 hires, £6700 and 200 hours engineering time. Based on real time data : We are using our up to date volume and conversion to calculate the operaitonal cost, this means we can make more accurate forecasts for costs.
Cons:
- Not Total CPH: This only calculates the operational cost to make the hire, it doesn't include the cost of software, additional fees and expenses. Salary not always accessible: you need to use salary data to more accurately calculate operational cost per hire. this is sometimes inaccessible to everyone in the business.
So What Did We learn
Cost per hire is a vital metric that, when used effectively, can provide significant insights into a company’s recruitment efficiency and financial health. it allows us to optimise our recruitment strategies, improve resource allocation, and make data-driven decisions that align with the businesses long-term goals.
BUT, it’s crucial to use CPH alongside other metrics to gain a complete picture of recruitment effectiveness and ensure that cost-saving measures do not compromise the quality of hires.
Uncle Luke Uncle Luke! You promised me a present!
I certainly did. Remember when I gave you the Process Lab to play with? Well ive updated it with new inputs to calculate the operational cost per hire.
Page one is Process Lab V1, Page two is a simplified cost calculator, page three is a more detailed version. It's rough and ready but fun to play with, just like me.
Here's the link and a video explainer :
Process Lab V2.0 - Operational Cost Calculator
Workshop Update
I've delivered about a dozen workshops on data-driven recruitment this year, all from just inbound enquiries after a LinkedIn post piqued their interest. Well this week I have officially launched a full two hour workshop on Data-Driven Recruitment - Make more hires with less effort using data.
It's intended for recruitment teams who are always expected to do more with less and is designed to give your team the tools to make more hires in less time and gain back some work/life balance.
If you think your team could benefit from some support on data driven talent acquisition, then register interest here :
The Data-Driven Recruiter Workshop
My lovely newsletter readers earn their company a 15% discount for being awesome.
Well... that's issue sixteen. If you have any questions about it, or any feedback on this issue of The Data Driven Recruiter, grab me on LinkedIn for a chat.
I'll see you next week!