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Assessment – the answer to reducing costs?

Many companies say they struggle to find the right talent. Yet very few are leveraging the many benefits of assessment, which could cut their recruitment costs significantly says Gaelle Pritchard, Head of Assessment, SH Leadership.

Many companies say they struggle to find the right talent. Yet very few are leveraging the many benefits of assessment, which could cut their recruitment costs significantly.

There are many data points that need to be considered when recruiting. Yet HR Directors tend to be judged on the speed of execution rather than quality. This is just setting them up for failure. In a world crying out for talent, the companies that focus on quality will gain a huge competitive advantage. So why aren’t more businesses doing this?

Companies are crying out for talent

Over the last few years, hiring talent has been a consistent priority for CEOs in almost every sector of the economy, driven primarily by the need for more skills and experience. PwC’s 2019 global CEO survey reported that chief executives view the unavailability of talent and skills as the 3rd highest threat to their business, with more than 1 in 3 respondents citing it as such. PwC’s 2020 report puts the figure at 32%. 

At the same time, employers are spending huge amounts on hiring. According to Glassdoor, the average cost of hiring an employee in the UK was £3,000 as of January 2020. The average time it takes to fill a position? 27.5 days. The most recent US data puts the average cost per hire at $4,129, while the average time it takes to fill a given position there is 42 days.

Now, such averages can be misleading. The figures vary from country to country, sector to sector and even month to month. Yet they are an indicator of the broad trends. Simply put, hiring is expensive and takes a long time. This is somewhat ironic, given that the main drivers for companies using outsourced recruitment over the years have been “cost savings and volume recruitment”.

Staff retention rates are slipping, and most companies aren’t measuring the costs

What’s worse, the upfront cost only gives us part of the picture, since the average annual staff turnover rate is 15% in the UK and 19% in the US. Yet, according to this 2019 article by Peter Cappelli in the Harvard Business Review, “only about a third of US companies report that they monitor whether their hiring practices lead to good employees; few of them do so carefully, and only a minority even track cost per hire and time to hire”.

From the research, it seems that most companies do not know how much “failed hires” are costing them. This is something we come across frequently with our clients. Happily, there are tools which allow you to estimate this.

Do you know how much ‘failed hires’ are costing you?

For example, when you add in productivity, logistics and other associated costs, we would estimate an average “failed hire” cost of £17,000 per employee. Bear in mind this is just an average – the costs for senior staff will be much higher.

For a business with around 200 staff, an employee turnover rate of around 10%, and team growth of 10% per year, this would amount to a total of £157,000 per year. Again, this only reflects average salaries and doesn’t account for factors such as sign-on bonuses. The real cost for your business could be much greater.

Also, let’s not forget the disruption this can cause to operations and revenue growth – much less the extra productivity costs of training new staff or the potential risk to your reputation.

Is the current recruitment model broken?

So what’s going on? Is the current recruitment model broken? For example, is it wise for so many companies to outsource their recruitment to an industry in which the staff turnover rate in 2019 (at least in the UK) was almost three times higher than the national average? (43% in recruitment vs an average of 15%.)

It would be easy to blame problems on the outsourced recruitment industry. In reality, however, the issue runs deeper than this. Outsourcing your recruitment is not necessarily the problem if you’re not measuring its effectiveness. That’s on you.

As Peter Cappelli writes in his HBR article: “An adage of business is that we manage what we measure, but companies don’t seem to be applying that maxim to tracking hires. Most are shocked to learn how few of their openings are filled from within – it is really the case that their people can’t handle different and bigger roles?”

That last point is interesting. Are companies really shocked at how few of their openings are filled with internal candidates? The outsourcing trend has been the dominant model for well over a decade.

Companies expect that external talent will give a faster ROI

Companies want to bring in the talent they need under the expectation that this will also save them time and money compared with training internal staff to plug the skills gap.

This assumption too may be wrong. Research suggests that hiring from outside your company is inherently more expensive than internal training. As Cappelli writes: “In addition to the time and effort of hiring, my colleague Matthew Bidwell found, outside hires take three years to perform as well as internal hires in the same job, while internal hires take seven years to earn as much as outside hires are paid.”

There is certainly a case to be made that this reliance on hiring talent from outside the organization is a problem. It is likely a cause of high staff turnover because employees don’t see any internal path to advancement. It means companies don’t spend the time they could on developing internal skills and fostering employee loyalty.

As we’ve seen, it also increases the costs of recruitment still further. New employees enter the company, see a lack of internal development or progression, stay for a year or two, and then leave – starting the whole cycle over again.

So what’s the answer to this problem?

To cut to the chase, there are three ways assessment can help solve this issue.

  • Recruitment and hiring: The first is to use more thorough assessments during the hiring process. Interviews can work very well to give you an idea of a candidate’s personality and cultural fit. But they fall short when it comes to quantifying their skills and behaviours. One example of this kind of assessment is using psychometric exercises – for example to assess candidates against a set of leadership criteria. When applied to selection, such assessments are a great tool for judging candidates’ potential effectiveness in the role.  
  • Organisational development. The second way is to assess your teams for skills gaps. To pick out the specific skills you may be lacking. You can then use the results to inform the search for an internal candidate. After all, the clearer you are on your section criteria, the more likely you are to find the right person.
  • Talent development. Then there’s the third way assessment can help. Once you know where you’re lacking skills, you can assess your own people for the potential to develop those skills. Understanding your skillset gaps and your employees’ potential aptitudes, you are able to use training and development to fill those gaps internally. This is almost always a far more cost-effective solution. After all, your existing staff already know the company and the market.  

Clearly, outsourcing recruitment is here to stay. It still makes sense in many cases, especially when it comes to bringing in talent for new roles you have no prior experience of hiring for. But it’s more important than ever to look at the results of what you’re doing, and to question whether you can’t develop those skills inhouse instead.

Regardless of whether your recruitment is outsourced or internal, surely it’s worth spending more time on assessment?   

For more information about assessment and how it could help reduce your organisation’s hiring costs, please contact Gaëlle Pritchard.