Candidate Quality - the ROI
David Earle

Two weeks ago we explained the power of hiring quality as a business metric. Last week we reviewed a process for evaluating the quality performance of individual recruiters. This week we turn quality measurements into business metrics. The two most important business metrics to focus on are productivity cost and vacancy cost.

• Productivity cost calculates the monetary difference between employees doing inferior work and those doing superior work.
• Vacancy cost calculates the total cost of turnover, which includes not only the direct recruiting costs of finding replacements (cost per hire), but also the additional costs of separating former employees, the vacancies themselves, management and training costs, and the reduced productivity of new employees while they ramp up to their new jobs.

The two metrics are linked because vacancy cost has a productivity component, but we’re making this distinction:

• Vacancy cost deals with the short-term impact of losing someone, then filling that vacancy with a fully up to speed replacement.
• Productivity cost illuminates the long-term impact of hiring merely adequate performers instead of great performers.

Is the ROI of quality really staffing’s responsibility? Not according to the traditional model followed by nine out of ten companies today. That model only suggests tracking time-to-hire, cost-per-hire, candidate qualifications and hiring manager satisfaction. Certainly those are valid measurements of operating efficiency, but while they are useful, they aren’t going to interest senior executives for very long, if at all. Those executives are paid to manage the big numbers on a corporate P & L statement and the people who control those numbers.

We need to prove that staffing people are among those people.

Productivity Cost
Productivity is easy to measure for some kinds of positions and harder for others. Let’s look at two uncomplicated examples.

Other examples:

• Field service reps can be compared based on either the number of clients they service in a day (lower service cost per client) or the value added contracts they sell (such as warranties).
• Assembly teams can be compared based on defect rates linked to a cost per defect
• Creative teams can be compared based on net audience impressions linked to advertising rates
• Executive assistants can be compared based on their political and time management skills linked to their bosses’ productivity. (Some assistants are so valued that their executives will not make job changes without bringing them along.)

The challenge in calculating productivity differences isn’t so much in the math, it’s in defining what it means in terms of bottom-line dollars and cents when one person does something better than another person:

• Does it lower costs (fewer claims, fewer defects, improved efficiency)?
• Or does it improve revenues (higher sales, higher retention, higher margins)?

Here’s an actual, if somewhat extreme, example:

A successful, privately held company was worried about losing a top operating executive who had been with the company for years. The compensation committee ran a number of “what if”  scenarios based on his departure and concluded that his loss would affect a minimum of $50 million in annual revenues for at least three years. They recommended, and the CEO signed, a bonus check for $6 million.

Vacancy Cost
Vacancy cost is a number we sense but too often don’t acknowledge. We do track the tip of the iceberg, cost-per hire, but we accept the loss of other factors because they appear unquantifiable. How should lost institutional knowledge be measured, for example?

One way is to carefully analyze what it takes to bring a new hire up to the same efficiency level as the departed employee. A good analogy is sports. No one, regardless of talent or experience, can walk in off the street and instantly blend into a new team with perfect efficiency. There is always a learning curve, ranging from superficial things like learning names, organizational charts and product lines, to complex things like adapting to company culture, managers’ personalities and customers’ histories. High performance depends on efficiency, and efficiency always requires learning.

We lose money when efficiency walks out the door.

• First, there’s the money we invested in lost learning. That money may not appear consequential because it is “history,” not on this year’s budget, but it does represent an investment that can no longer produce a return. It is a very real inefficiency.
   
• Second, we lose management time. This is often overlooked, but any experienced manager will verify that new employees require more management attention than experienced ones. Does overhead actually increase, perhaps not, but it is diverted and that diversion represents a trade-off. If that attention were directed elsewhere, there would be other benefits.
   
• Third, there are the direct training costs for the new hire. We may possibly save by hiring someone who already has the MBA that we paid for last time around; but the counterpoint may be an expensive familiarization tour of manufacturing facilities, research labs, customer sites, and distribution centers that we need to pay for again.
   
• Fourth, there is the productivity loss while our new hire comes up to full speed. For some positions, this may only stretch over a week or two and be experienced as work pile up, or as an overtime cost. For top executives, on the other hand, it may stretch up to a year and be experienced as delays in approvals or spending, changes in priorities and even project cancellations.

In our January 21st UPDATE, we outlined the vacancy cost calculation for a $52,000 per year financial analyst. In response to readers asking for a more fully worked out example at a higher salary level, here is one for a $75,000 engineer.