What’s the cost of recruitment?
This is a question we discuss when talking with HR and recruitment leaders. Most organisations have an idea, but to get a specific figure usually requires painful analysis of agency invoices, frequently squirreled away in obscure places. The best organisations can clearly articulate their recruitment cost as a ‘cost per hire’ or ‘cost as a percentage of salary’. The second, more perplexing question is ‘how do you measure it’?

 
Most organisations will include the cost of recruitment agencies (the predominant source of the cost). Some will also include advertising, travel costs and the cost of the recruitment team but few will go beyond this, which can be a mistake.
 
Our research uncovered that more than 50% of recruitment costs are indirect. This predominately includes the cost of hiring managers and HR’s time in the process, which is an important role. However when managers are conducting 10 interviews for each hire, it’s easy to see how the costs stack up (we calculated the Hiring Managers time usually cost on average £2500 per hire). Whilst business leaders accept that interviewing is an integral element of a manager’s job, those who are directly revenue generating / working on billable hours will soon resent the cost of the lost earning opportunity. However the indirect cost in only the ‘tip of the iceberg’
 
What isn’t measured can’t be managed!
Many organisations will rely on contractors / contingent workers to support their operations. However, a number will also use a contractor as an alternative to permanent recruitment and this is where the costs really mount up.
 
Firstly, we need to explore why managers choose the contractor route over permanent. Our research uncovered two key reasons:

• Headcount approval – usually hard to achieve for permanent hires but surprisingly easy for contractors
• Talent availability – managers frequently comment that it’s easier to secure a good quality contractor over a good quality permanent employee

Back to the costs; let’s assume most contractors charge a 30% premium to their equivalent permanent salary and that an agency margin adds another 20%. On average therefore the cost of recruiting a contractor over a permanent can easily be 50%. And if the contractor stays for many years so does the cost. Our analysis suggests that the margin paid to contractors can be upto 5 times their annual spend on permanent recruitment. Add in the premium contractors charge and most organisations will be wasting many millions. If that wasn’t enough, many organisations are poor at tracking their contractor headcount.
 
We’ve undertaken numerous projects with customers to help assess and understand the true cost of contractors. In a recent engagement we identified that the actual number of contractors was 300 percent that which the client was aware of. In monetary terms, over £60million was been spent on contractors which the business was unaware of; £20m of which was as associated with the contractor premium and agency margin.
 
Brining this analysis through to its logical conclusion, we can see that the organisation was spending £20m on recruitment which it could have saved.
 
This begs the question; do you really know what your cost of recruitment is? 
 
Paul Daley is the Director for HR Consulting and Services at Ochre House – www.ochrehouse.com