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Recruiting Costs Too Much!


by John Wentworth
Wentworth Recruiting

Read John’s bio on the HR Performance website

upsidedownworker

“Costs too much!” the CFO growled.

“I agree,” the VP of Logistics chimed in.

“How much should recruiting cost?” Jim asked.

“Less,” both of the others said.

“Oh, you are a bunch of help,” Jim said cheerfully.

“You need to take this seriously,” the CFO threatened.

Jim pulled out a piece of paper, a report by Staffing.org, and read:

The overall Recruiting Cost Ratio for employers has fallen to 9.5%, with a range of 7.8% to 11.2% and relatively little variation. The average for suppliers remains at 14.2%, close to last year’s overall measurement.

“We average under 10%,” Jim said.

“That’s above average,” the CFO barked, as only CFOs can bark when complaining about cost.

“And we have the highest productivity we’ve ever had and no turnover. Not a little. Not less than average. NO turnover.”

“No turnover. So what?”

“The Department of Labor says 2008 separations were 48.7% of total employment! One out of two employees leaves! We have zero turnover. Some people say an employee turning over costs 30% of that person’s pay, some say a lot more. Let’s take the low number. Logistics hired 50 people last year. The average salary was $70,000, so if one of our people left, it would cost $21,000 to replace them, pay for lost productivity, training, cost of recruiting, etc. And let’s say half your people turned over. 25 times $21,000 is what?”

The CFO scribbled. “Just over a half a million dollars.”

“What was our cost per hire?”

“You said it was around 10%.”

“Yes. 10% of salary and zero turnover. How much is 10% of salary?

The CFO got busy again. “Fifty hires at an average of $70,000 is $3,500,000 in salary. Ten percent is $350,000.”

“And zero turnover saved us how much?”

“$500,000.”

“So I can’t promise you that we would have had that much turnover, but if you accept both averages, it looks like our recruiting made you $150,000 this year in avoided expense.”

The CFO and VP of Logistics weren’t happy, but they were stumped. So Jim left.

“It’s never that easy,” Jim told his wife that night. They were sitting on their deck, enjoying the last light of the day. Their kids were playing in the yard.

“What do you mean?” his wife asked.

“Around four, the staff analyst for Logistics strolls in my office and drops the news on me that the cost of talent acquisition isn’t the issue at all. They were just whupping on me because they could not whup on each other.”

“Hunh?”

“Logistics is over budget. The villain is that they hired too many people.”

“So why are they beating up on you?”

“Because the CEO has made them promise to be nice to each other. So the real issues are not surfacing because they can’t figure out how to deal with them without getting grumpy at each other and getting the CEO mad at them.”

“You work with a bunch of children.”

“And those very same children sign the paycheck that pays for this palace, your jewels and the fabulous round-the-world trips we take all the time.”

“Ho. Ho. So can you do anything?”

“Maybe yes, maybe no.”

When Jim went to work the next day, he started his sleuthing.

The CFO told him, “I have a directive from the CEO to make sure that we do not spend more than we can afford. The staffing levels are too high, too expensive. So you and yours are the choke point. I’m going to cut your budget.”

“What will that do?”

“It will save the company money! And keep you from hiring more people.”

That didn’t make any sense to Jim, so he left and went to the SVP of Operations.

“We need the people. We are getting new business and we have to staff it. You need to keep filling our jobs. My people are dropping like flies we are working them so hard.”

“Do you ever talk to the CFO?” Jim asked her.

“All the time. Why?”

Not being sure of his ground quite yet, Jim slipped the question. “Just asking.” Then he left.

Sitting on the deck again that evening, Jim said to his wife, “This is too absurd to be true. The CFO really wants fewer hires. He tells me but does not tell the line people. And he wants to cut my budget so I don’t have enough money to fill the jobs.”

“Why doesn’t he just talk to the line people?”

“Dunno, but there must be a reason. Gotta find out. This is a lot harder than it needs to be.”

“Dinner is ready,” Jim’s daughter, who had volunteered to cook that night, yelled from the kitchen. Jim and his wife gathered up their things, looking forward to a fine meal.

“You daughter cooks?” Sarah Hockney, the CEO, asked Jim. They had worked together off and on throughout the years and liked and respected each other.

“She’s been taking classes and thinks she might go to the Culinary Institute.”

“Wish my kids cooked. I think their MacDonald’s addiction blinds them to that ambition.”

“Yeah, but maybe they’ll go to a state school, so you’ll trade fine food for low tuition.”

“Never thought of it that way. So why are you here in my office? What are you going to try to torture me with?”

“We have a problem and I need your help.”

“I don’t remember your ever coming into my office when that was not so. What is it this time?”

“Your operations people are getting more business and feel strongly that they need to staff up. The CFO feels that staffing levels are already too high and, following a directive he ascribes to you, is getting ready to cut my budget so I cannot provide the recruiting service your operations people need. He also says I cost too much.”

“How much do you cost?”

“Ten percent of salary.”

“That’s pretty good. I seem to remember that the national cost per hire average was higher.”

“It’s about the same, but it’s a squishy number. There is no standard for what data go into it. Everybody does it a little differently, depending on whether including data or excluding data gores their ox.”

“Funny how that works.”

“It’s also squishy because different jobs are variously difficult to recruit. So comparing the cost per hire of hiring teenagers to work at a movie theatre – big supply, low requirements – to hiring programmers in some esoteric and rare software like Ruby on Rails, is apples to oranges.

“So I don’t mean to hold out the numbers as gospel, but we are about two tenths of a percent over a reasonably reliable national average. And, we have no, count them, zero, turnover of the people we hired last year.”

“So your costs are OK.”

“I think so.”

“And no turnover should be saving us a ton of money in replacement, training, lost productivity, supervisor’s time, etc.”

“I think so.”

“And you have talked to all the parties concerned?”

“I have, but they do not seem to be talking to each other about this. I think this is an unintended consequence of your ‘play nice’ directive.”

“I am consistently astonished at how people can find ways to screw up even the most simple and direct instruction.”

“What should I do?”

“Analyze the problem for me,” Sarah told Jim.

“There are two problems: number of hires and the resulting salary cost and the cost of acquisition. The second is about 10% the size of the first. Both problems have two parts: total cost and run rate. I’m sure you have a formula that tells you how many people you need for how much business you sell. So that gets us to total cost. I have not traditionally been involved in that, but I can be if you want.”

“Keep going. You are now going to talk about run rate.”

“Yup. I’m sure we can plan out when new hires should be on the job. Once we do, we can lay out a schedule of salary and acquisition costs. The CFO will want to stretch the hires out to reduce the cost this year. Your ops people will probably want it sooner, but maybe they will be sensible.”

“Can you make that schedule?”

“Consider it done.”

“Thank you for your visit.”

“Thank you for your help.”

Sara went to work with her people, constructing the issue for them. The CFO was, in fact, being very protective of cash, but was not focusing on his putting the new revenue at risk having too few people to do the work. The CFO was also conveniently ignoring the fact the requisitions for the jobs had been approved by all the needed individuals, including him.

The operations people were being reasonable, having already built a schedule of when they wanted their people to be in their seats.

The sales people, on the other hand, were chuckling and feeling mischievous about all the trouble they had created by selling so much business. And, being commissioned, they were chuckling all the way to the bank.

Jim got his hands on the schedule and priced it, cost of acquisition and salaries, all based on fill dates.

He took it first to the head of HR who nodded. He understood the problems and was very glad that Jim was the front person on this. Jim then took the spreadsheet to the CFO.

“This is the schedule they want. Every requisition has been approved. The analysis shows when each person will start. If you look at the weekly cost graph you will see a huge bump in the middle of the year, but then you will see that once the jobs are filled, the cost of recruiting goes to nearly zero.”

“That’s too much money,” she CFO growled.

“It’s the same amount of money if we do it on their schedule as it would be if we did it more slowly. We just spend it faster. But it’s the same amount.”

“That’s not true for the salaries, though. The sooner the jobs start, the more it costs us.”

“True,” said Jim, “but these staffing levels are consistent with the business we’ve booked. We can’t do the work without the people and the deadlines came from the client. Our ops people didn’t just dream them up out of thin air.”

Some months later, the CFO growled, “Costs too much!”

“I agree,” the VP of Logistics chimed in…again.

This time they were not talking about the cost of staffing. They were talking about the cost of dinner which they had agreed to split to celebrate a banner year. Sales had booked all the troublesome business. Jim’s analysis had created the platform for a rational dialog between the CFO and the operations people, so recruiting had been allowed to get their job done.

The cost per hire had dropped, in fact, to 9% of salary and they still had no turnover.

Their profit for the year was great. They had beaten all their client deadlines, in great part because they had talented people on board when they needed them and they stayed, so time, money and energy did not need to be diverted to replacement and retraining.

“Easy children,” the CEO said. “I’ll pay.”

She smiled at Jim.

“But before we end, I want to single out Jim for helping to break up the log jam that was threatening to keep us from getting people on board. Jim, thank you.”

“You are welcome,” replied Jim. “Does this mean you are going to recommend to my boss that I get a raise?”

“You cost too much!” the CFO growled, grinning from ear to ear.

“I agree,” the VP of Logistics chimed in also grinning.

The entire group raised their glasses in a salute.

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  1. Mark
    June 26, 2009 at 3:27 pm

    John,

    Thanks for the novela. Can you reveal the name of the company that the article is based upon so I can short its stock? Not only would such an entity not know the cost or value of a competent talent acquisition effort, but they also obviously need a new CEO to lead the senior leadership team to help them decide what human resource level is required to run the company.

    Best regards,
    Mark

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