The True Cost of Recruitment

How much does recruitment cost? Most HR and recruitment professionals will talk to you about agency fees, advertising costs and the salaries of in-house recruiters, but is that it? Most companies underestimate the cost of recruitment by 90-95% not least when they are looking to cut costs, this often leads to terrible decisions that not only fail to reduce costs, they can even drive them up. So what are these costs, and more importantly, what can you do about them?


Headline Costs

The number most people talk about when they are discussing recruitment costs is the external expenditure on hiring. In organisations reliant on recruitment agencies this is typically 15-30% of salary, higher if they use executive search companies. Other costs include advertising, subscriptions to social media and database aggregators, attendance at recruitment shows and the cost of any in-house recruiters. Many companies seek to reduce their headline costs by taking recruitment in-house, reasoning that if they hire recruiters they can cut out the agencies. As a result they often deliver 8-15% costs compared to salaries, this is often less of a saving than they hoped for, but nevertheless looks significant. However, it’s worth noting that over 70% of in-house solutions fail to source all, or even 90% of their vacancies themselves and therefore need agencies to help, driving that average cost up to 12-20%. Another supposed money-saving approach, the typical Recruitment Process Outsourcing (RPO) solution, offers similar savings to in-house recruiters.


Cost of Recruitment

Assumes £40,000 average salary

Agency led solution (22% average)

£8,800 per head

In-house solution (12% average)

£4,800 per head

Typical hybrid solution (17% average) 

£6,800 per head 

RPO solution (12% average)

£4,800 per head

This is as far as most companies look, and so when costs need to be controlled they look to an in-house solution or perhaps to outsource, relying only on agencies if demand swamps their capability. But is this the whole picture?


Time to Hire

Most companies track how long it takes to hire people, but completely ignore it as a cost. But it is a huge overhead. Given the typical reactive recruitment environment, the average hiring time is 10-12 weeks (from job opening to accepted offer), during which time the role is unfilled. For that period there is either no productivity, or productivity is provided by diverting someone else, likely the manager, or by using contract labour. All these options have a tangible cost, and if the hiring timeline slips the cost goes up. It’s important to note here that in-house recruitment teams generally have longer hiring times than agencies or recruitment process outsourcing solutions, on average 12-16 weeks, due to a lack of extensive databases and wider industry contacts. This has a significant impact on the cost line.


Cost of Dislocation due to Hiring Time

Assumes £40,000 average salary, productivity of 3x salary, contractor rates £50 p.h.

Average time to hire - Agency or RPO  

11 weeks 

Productivity loss

£28,085

Contractor cover

£22,000

   

Average time to hire - In-House

13 weeks 

Productivity loss

£33,191

or Contractor cover

£26,000


These are big numbers, dwarfing the headline costs and, as is clear, the in-house solution is looking far less attractive: The loss in efficiency that is typical of in-house solutions, more than wipes out any headline savings.

There are a couple of ways you can impact this cost, though. Firstly, by moving away from the purely reactive model and understanding your recruitment demand, you can plan your recruitment pro-activity, which makes a significant difference. This can reduce the typical times by another 4-6 weeks. For the best results, you can take this further and operate a Talent Warehouse. By pro-actively sourcing candidates before they are needed and actively managing them you can cut hiring times to 3-4 weeks on average, with a huge resultant saving. 


Cost of Dislocation due to Hiring Time

Assumes £40,000 average salary, productivity of 3x salary, contractor rates £50 p.h.

Average time to hire – Planned Hiring

7 weeks

Productivity loss

£17,872

or Contractor cover

£14,000

 

 

Average time to hire – Talent Warehouse  

3 ½ weeks 

Productivity loss

£8,936

or Contractor cover

£7,000


Management Time

Another major cost is the time the management spends in the recruitment process, specifying roles, reviewing CVs and interviewing, and, as over 50% of offers made are rejected, then repeating the process. This cost is the same whether candidates are sourced by an agency, in-house or RPO, only a Talent Warehousing based approach really alters this, cutting management time spent recruiting by 70% on average.  


Cost of Management Time

Assumes £65,000 average manager salary

Agency/In-house/Typical RPO

 

Cost of management time (10 days per hire)  

£2,600

Productivity loss (10 days x (3xsalary))

£7,800

Total Cost

£10,400

   

RPO with Talent Warehouse

 

Cost of management time (3 days per hire)

£780

Productivity loss (3 days x (3xsalary))

£2,340

Total Cost

£3,120


Quality of Hire

We have already discussed that almost all recruitment solutions are reactive, sourcing candidates when the need arises. The immediacy of that need means that companies are entirely reliant on candidates already in the market: signed up with agencies, looking at ads, on job sites or on databases. But studies have shown that this only represents around 20% of the qualified candidates in the marketplace, and even then to access all of that 20% you have to use every agency, database and advertising medium. The reality is that companies are on average accessing only 2-3% of the available talent pool to fill any given vacancy.

Limited access, to only people who really want or need a new job, has a dramatic impact on the quality of hire. If a company is able to access the wider pool of talent, as is achieved by Talent Warehousing, there is a demonstrable improvement in quality of hire, and as a result a demonstrable increase in productivity per head of between 10-30%.

Equally important is that Talent Warehousing typically halves the time it takes new hires to achieve optimum productivity in a new role, from an average of six months to three months.


Benefit of Higher Quality Hires

Cost from Productivity impact of 6-month ramp up
(Agency/In-house/typical RPO) 

£30,000

Cost from Productivity impact of 3-month ramp up
(Talent Warehousing) 

£15,000
(unadjusted productivity)

Total Productivity boost in year 1 (Talent Warehousing) 

£21,000

Example:

Total year 1 productivity (Agency/In-house/typical RPO) 

£90,000

Total year 1 productivity (RPO w/ Talent Warehousing) 

£126,000

Relative benefit of RPO w/Talent Warehousing 

£36,000


Access to wider pools of talent delivers dramatic benefits to the company, bringing better, more productive people and getting them up to speed faster.


Attrition

Finally up to half of new hires leave within the first twelve months, and the average is over 20%. The reasons are simple, the 6-8 weeks of contact with a company of a standard recruitment process is not enough to develop a cultural rapport between candidate and company. In short, the new hire starts and only then finds out if they ‘fit’, any concerns are amplified by the pressure of the new job. Of the methods of recruitment, we’ve looked out only an approach employing Talent Warehousing tackles this, by having longer to engage with candidates, allowing them to get to grips with the culture and for concerns to be addressed. The result is a reduction in twelve-month drop-out of up to 90%.


Cost of Attrition

Figures assume £40,000 average salary, average hiring costs of 12% per head, 20% attrition in first 12 months. This is the additional cost per head to cover attrition.

Cost of repeating hire

£960

Productivity loss (11 weeks)

£5,617

Management time

£1,456

 

 

Total cost per head of Attrition
(Agency/In-house/RPO)

£8,033

Total cost per head of Attrition
(RPO w/Talent Warehouse)

£955


Review

In short, the true cost of recruitment is not just how much you pay for your recruiters, agency fees and ads, indeed this is the tip of a sizeable iceberg that impacts every facet of your company performance and productivity. A fairly typical £40,000 hire can cost well over twice that in combined headline and hidden costs, even based on average figures, and whether you use agencies, in-house recruiters or an RPO provider the bottom line is the same, hiring costs approximately double salary. Only by using proactive sourcing and Talent Warehousing to drive down time to hire, management demands and attrition whilst bolstering productivity can you really address the fundamental issue of recruitment costs.


Comparative Example Costs Per Hire

Comparative total per head recruitment costs for various recruitment methods (assumptions as above):

Agency Led Solution

£85,318

In-House Solution

£86,424

Typical RPO Solution

£81,318

In-house or RPO Solution with planned hiring

£71,105

Talent Warehousing based RPO Solution

£38,811

  -  Productivity gain from Talent Warehousing (20%)

(£24,000)

  -  Adjusted cost of RPO w/Talent Warehouse

£12,811


Leave a comment