Cost Per Hire Calculation: Are You Accounting for Opportunity Costs?
Your talent acquisition team’s average cost per hire is a metric we’ve discussed before. It’s a great way to bring together all of the costs associated with filling a vacancy, summarizing them in terms of the average amount spent. Cost per hire lets recruiters demonstrate the economic value (or lack thereof) of their efforts.
But knowing how much it costs on average to hire someone new won’t give recruiters the full picture. In an era when the time to fill an open position continues to increase, talent acquisition leaders also want to know the flip side–what’s the cost of that time spent without a new hire? Recruiters may bring their average cost per hire down to acceptable levels, but those savings won’t mean much if more resources are lost due to a lengthy vacancy.
So we decided to rethink the cost per hire metric, adding in the opportunity cost of not hiring someone. Leaving a position open can lead to lost productivity and greater stress for your existing employees. While these factors are not always easy to quantify, we think a cost per hire metric that takes into account, or at least can be compared to the cost of not hiring, will better serve any data-focused recruitment team.
What’s Missing from Cost per Hire?
The cost per hire metric already takes into account a variety of factors. Recruiters need to know all the external costs (all outside spending on recruitment) and internal costs (all internal spending on recruitment) associated with filling a vacancy. These range from advertising and travel expenses to your staff’s salaries and talent acquisition software.
But none of these figures consider the costs that leaving a position open can create. An unfilled role often means responsibilities are transferred to existing staff, increasing their workload and reducing their overall productivity. This in turn can lead to resentment in the workplace and declines in customer satisfaction. One open position may not seem like a big deal, but if it ultimately leads to lower profits and less creativity in the workplace, the costs cannot be ignored.
Consider the costs of open requisitions at a hospital, or on a high volume sales team. One person can make the difference in reducing emergency room wait times, or closing enough deals before the quarter ends. Every organization will need to consider the open positions they have, and determine which costs, if any, will arise as long as that role is unfilled.
Cost Per Hire Calculations
Let’s review the original calculation for cost per hire first:
Cost per Hire ($) = [Total External Costs] + [Total Internal Costs] / Total Number of Hires
So your cost per hire is already adding up all the expenses of sourcing, recruiting, and ultimately hiring someone new. Next let’s look at one simple way to calculate the costs of not filling an open position:
- Step 1: Find Annual Revenue Generated per Employee = Annual Company Revenue / Number of Revenue Generating Employees
- Step 2: Calculate Daily Revenue per Employee = Annual Revenue Generated by Employee / 365 days (or total number of days per year spend generating revenue)
- Step 3: Determine Revenue Lost per Unfilled Job = Daily Revenue per Employee X Average Days Positions Unfilled
- Step 4: Find Total Revenue Lost for All Open Jobs = Revenue Lost per Unfilled Job X Number of Open Jobs
- As with any metric, recruiters will need to set a specific time period over which to calculate their cost of not hiring. And after repeated sessions of calculations, company benchmarks can be set and comparisons can be made to previous time periods.
Of course, you could dive deeper into this specific cost of not hiring formula by breaking down revenue by specific job functions.
The last metric recruiters should include when doing a deep dive into their cost per hire is time to fill, which can be calculated as follows:
- Time to Fill = Total Number of Days Job is Available and Unfilled
- Average Time to Fill = Total Number of Days of Open Jobs / Total Number of Jobs Open
How Can Recruiters Use These Figures?
Now that you have your cost per hire, your cost of not hiring, and your time to fill metrics on hand, what should you do? The first step is to compare your cost per hire versus the cost of not hiring. How much, if anything, are you losing by not filling an open position? And how does that stack up next to the amount you spend on average to hire a new employee?
Recruiters should strive to bring both of these costs down (within reason). By accurately measuring these metrics, you can start identifying inefficiencies in your methods, and learn which aspects of your business are most susceptible to the cost of a vacancy. Then by calculating your average time to fill, you can start projecting how those costs might go down if you reduce the time it takes to hire someone new.
Your cost per hire is important, but it needs to take into account the contribution an employee makes to the value of your business. So if recruiters can see that loss of value, expressed as the cost of not hiring, it can be easier to make the case for better recruitment strategies and resources. Investments in things like your talent pipeline and the candidate experience, combined with better communication between recruiters and hiring managers, can all come about from a fuller picture of your cost per hire.
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