The Cost of a Bad Hire
Ever wonder what that last bad hire cost your organization? Have you ever considered how securing the services of a professional recruiting firm, even in instances where surplus talent may be available, might actually be a value-added proposition for your company? A quick survey of general hiring costs and the costs related to bad hires may help to provide some needed perspective and actionable guidance regarding your next hiring decision.
We recently visited with the CEO of a manufacturing company that posts approximately $20M in annual revenue. We had been retained to fill a specialized engineering position that was left vacant after the dismissed employee was terminated due to poor performance.
What is interesting about this case was that the dismissed employee had gone through a pretty exacting internal screening process before being hired. Individual and group interviews were conducted, personality and intelligence tests were administered, and ultimately a consensus decision was reached to hire the individual in question. Two years later the company was again seeking to fill the position. The costs to the company for this bad hire? The company estimated an astounding $2.5M! Not a small sum for any organization and certainly not for a company of this size.
What prompted the termination? It wasn't what she did. She satisfied the basic requirements of the position. It was what she didn't do. She really didn't excel and by all accounts could have done much, much more to help the company move forward. How could such a hiring mistake occur? Well, bad hiring decisions can happen to anyone but often such costly mistakes can be avoided by well designed internal hiring procedures or enlisting the services of an experienced recruiting firm.
On the surface outsourcing the recruiting function to a third party may seem like an unnecessary expense, especially in today's labor market where there may be a large pool of available talent fitting your particular needs. However, before deciding to utilize in-house resources for your next hire you may want to consider what a growing body of research has to say about bad hiring decisions. Outsourcing the hiring function can not only save your organization money but also make you money in the long run. But before we consider this information, let's first look at the standard costs involved in hiring a new employee:
Basic Activities / Costs Related to Recruiting and Hiring
- Outlining the specifications for the position (job description, compensation package, etc.)
- Writing and placing the ad
- Handling phone calls
- Receiving and organizing resumes
- Reviewing resumes
- Arranging interviews (how many first interviews would need to be scheduled and how much time would it take to coordinate schedules and possible re-schedules?)
- Conducting first interviews
- Developing a short list of candidate for second interviews
- Additional testing of short list candidates
- Arranging second interviews
- Conducting second interviews
- Performing reference checks
- Extending an offer
- Sending rejection letters
- Other specific hiring and assessment related activities
Determining the costs related to the previous activities depends on several assumptions:
- You get a good response to your first advertisement.
- The first candidate offered the job accepts and starts.
- The hired candidate works out for the long-term.
If any of these assumptions fails to hold true then the costs can go up substantially.
Now consider the costs related to bad hires:
- HR time and other recruiting / interviewing costs (see above)
- Salary and benefits covering the period of time the poor performing individual was employeed
- Training / Orientation Costs
- Productivity Losses
- Lost customers / market share
Other related expenses:
- Negative effect on co-workers’ morale and productivity (difficult to measure but can be very significant)
- Unemployment compensation, legal fees, severance pay
- Additional recruitment and training fees which must be repeated with a new hire
Want to determine what that last bad hire can actually cost your organization?
Here is a Bad Hire Calculator
If you are interested in increasing your organization's profitability, the services of a professional recruiting firm can save you money and help you maximize your bottom line. At CSI, we can help you:
- Reclaim time;
- Find better qualified candidates;
- Objectively assess candidates hard and soft skills based on empirically based testing criteria;
- Increase retention rates;
- Provide the safeguard of a guarantee period; and
- Shorten your replacement cycle.