The True Cost of Poor Recruitment

For many of our industry specialisations we are in a candidate led market, so much so that our clients are finding it very difficult to make the right appointments.

All well run businesses can be expected to manage their costs, which is a key factor in remaining successful, however sometimes understanding the true cost of something means looking a little deeper into the matter. When it comes to paying for the recruitment and selection of people into their businesses, some organisations are resisting the immediate cost of paying for psychometric testing or assessment services without perhaps fully understanding the negative impact that this can bring.

A survey conducted by Jobsite.co.uk (Dec 2008) found that UK’s small and medium based businesses are wasting £69m on poor recruitment decisions. According to their research SMEs invest £30m annually on recruiting 250,000 employees and more than 1/5th of these have to be replaced within a year. And it is not only SMEs that are falling into this trap. A report by Talent Q (2007) found that poor recruitment decisions add up to a £5bn bill for employers every year.

Many businesses recognise that people are their best asset, but some - despite the range of robust, valid recruitment and selection tools available to them - are motivated by a desire to save costs, time and resources in the short term. The recruitment tools these firms choose are often low-cost at face value, but ineffective in helping to source the individuals needed to achieve business growth: these individuals are the people required to drive business forward and achieve outstanding results for shareholders and stakeholders.

Of course, it is true that no recruitment or selection tool can predict perfectly every time whether a candidate is going to work out in a role, but it is well known that some tools are far more effective than others. A study conducted for the Journal of Occupational and Organisational Psychology by Mike Smith and Ivan Roberts found that the most valid recruitment methods are assessment centres, ability tests and competency-based interviews.

The methods found to be least effective (with a less than 20% chance of predicting accurately), included unstructured interviews and discussions based around work experience and professional qualifications; unfortunately these were the ones most commonly used by the businesses they surveyed.

The amount of resource and cost required for more effective selection tools is higher, with assessment centres being the most ‘expensive’ at face value. For some businesses it is not immediately obvious why they should invest such expenditure, but making selection decisions without robust data is not far removed from pure guesswork.

Understanding The Cost

So how do businesses begin to understand the cost to them of getting their recruitment decisions wrong? One clear sign is that candidates who are unsuited to a role often leave within a year. The costs of this are both direct and indirect. In 2009 the Chartered Institute of Personnel Development (CIPD) conducted a study that found the average cost of a leaver to a business to be £6,125 with this amount rising to over £9,000 for more senior managers. The impact on the business included:

• Costs for administration of the leaver
• Recruitment and selection costs for the leaver and new employee
• Cover while the role is vacant
• Disruption to team and customer
• Opportunity costs to the business
• Training and development of the leaver and new employee
• Induction of the leaver and the new employee

These costs do not take into account that for many of these placements a recruitment fee has been made to an employment agency which, depending on the seniority of the role and contract in place, usually ranges from 15-30% of the annual salary. Therefore, for a senior role this fee can be £20K and above.

Take into consideration that on average a new employee can take up to 6 months to become operationally effective and perhaps the costs of using a more robust selection process start to seem less expensive after all.

The Legal Risk

A further potential cost and risk to the business which should be taken seriously is the difficulty in defending a challenged recruitment decision whilst using poor selection methods. Businesses can be found guilty of either directly or indirectly discriminating against applicants and claims of ignorance or lack of intention are no protection from prosecution. A job applicant can take a business to an Employment Tribunal, even though they did not become an employee, if they believe that the reason they were not successful was for discriminatory reasons.

Without any data demonstrating that the candidate has been measured against objective criteria by trained personnel using reliable and valid recruitment tools, businesses run the risk of large fines (uncapped for successful claims of discrimination) should a tribunal find against them, together with the negative publicity that such a finding would always bring.

Finding the Candidate 

So, what steps should a business or hiring manager take to ensure that they measure a candidate’s potential for the role as effectively as possible? A check list of steps includes:

• Ensure there are clear role descriptions and person specifications for vacancies. Be clear about the technical skills, behaviours, personal attitude and attributes that will be required to meet the accountability of the role
• Seek advice about which selection tools will measure the capabilities required
• Investigate if psychometric tests or questionnaires would be suitable for vacancies and at what stage in the selection process they will be used
• Put in place a clear and robust competency and business skills model to set out clearly the behavioural and business skills criteria that need to be measured at recruitment
• Ensure all those involved in the recruitment process have been given the appropriate training
• Use assessment processes for more senior roles where the negative impact on your business of a poor selection decision will be even greater
• Ensure that all steps of the recruitment process are well documented 

In addition to protecting your business against the negative consequences I’ve discussed, using a superior hiring process will bring big returns on the investment, including high performing employees who consistently deliver better results into the business, a lower attrition rate that will ensure disruption by leavers is minimised and an overall drop in recruitment costs in the long term.

With thanks to Rose Bevan, Talent and Resourcing Associate, for her contribution to this post.