Originally served on February 17, 2020 @ 5:09 pm
Last Updated on July 13, 2021 by Pratik
Focusing on from where it all starts
- Alphabet’s executive chairman Eric Schmidt knows that “hiring is reinforced as the most important thing a leader does”
- Apple founder and maha-guru Steve Jobs considered the top bullet-point on his job description to be “recruiter”. Most of the corporate recruiting teams struggle with finding the right formula for investing and measuring our recruiting resources to ensure maximum impact.
- Absence of a Business Case, ROI & data driven recruitment, to map the effectiveness of recruitment efforts to business outcomes.
- Part of the problem recruitment function faces in this new digital marketplace is justifying new costs to company number crunchers, and the formula of “give me Z people and Y funds and I will deliver you X hiring success” isn’t yet an ingrained capability in all recruiting teams. One of our key goals was making this x-factor of hiring success more measurable, and bringing incontestable metrics to our executives.
- Let’s start with why we’re talking about this at all. The Boston Consulting Group found that “companies adept at recruiting enjoyed 3.5X revenue growth and 2X the profit margin than their less capable peers.”
- Any increase in recruiting output and productivity has an impact on the bottom line. This drove out intentions of analyzing and understanding where we were today, and how we could improve.
- Our methods for reaching that level sit atop three already established pillars, the first two of which are the top factors for hiring success, according to Bersin by Deloitte High Impact Talent Practice Study, 2016:
- CANDIDATE EXPERIENCE: The most important first step is to find and engage great candidates across all channels. If you’re not paying attention to how they’re treated once engaged, you’re likely to narrow your talent pool (See Employee Value Proposition Index).
- HIRING MANAGER COLLABORATION: Building deep embedded relationships based on mutual trust and value allows recruiters to align more closely with hiring managers through the entire process to drive better decisions.
- RECRUITER PRODUCTIVITY: Ensuring recruiting resources and focus are maximized to drive the necessary output for success.
- We wanted to take these concepts further, in terms of the ability to attract, select, and hire the best talent, for any role, on demand and on budget. That’s what we defined as hiring success, and that’s what we went for.
The How !
First, we did an internal audit to see where we stood ourselves. To understand how we arrived at our audit and measurement terms below, it will help to define how we calculate some of the terms we’ll be using.
- HIRING BUDGET: While most organizations measure the cost of recruiting, forward-looking organizations consider their Hiring Budget an investment just like a marketing budget to attract and grow ideal candidates and express the budget relative to the salary of people hired. Therefore, the Hiring Budget is a percentage of the total salary of new employees or New Hire Payroll (NHP).
- Leading organizations invest, on average and depending on industry, between 5 and 15% in their Hiring Budget. This can be a good measure to understand their investment versus an organization’s peers in hiring top talent.
- HIRING VELOCITY: Hiring Velocity measures one simple thing: the percentage of jobs filled on time. Why is this important? Well, it answers one simple question: Are we able to hire the people we need when we need them? It’s critical for CEOs and their executive teams to know that their decisions and plans can be implemented because they have a TA organization that can mobilize quickly and deliver results. If they can’t, taking too long to hire the right candidates hinders the organization’s ability to grow and meet goals.
- Hiring Velocity is highly correlated to Business Velocity. Consider the diagram below. Even a Hiring Velocity of 50% means you’re only able to fill half of your jobs on time. This means you don’t have as many people in the organization to help fulfill strategy and meet targets.
- At 80% or greater, velocity becomes a core competency and helps to move the business forward faster. Obviously hiring on time can have a significant impact on the business. However, it is actually less important than the metric most organizations rarely track – which is the quality of the people brought on board. Quality is always more important than timeliness in hiring. No organizations exist that congratulate themselves for hiring all their low-quality employees on time.
- NET HIRING SCORE: This is no better determinant of a company’s overall hiring success than quality because it speaks to the relative productivity and output of each hire made. This measurement is a company’s Net Hiring Score or NHS. Similar to NPS, which speaks to how loyal and expressive an organization’s customers are, the NHS, which ranges from -100 to 100, tells you what percentage of your employees are great fits (i.e. high quality) for your organization. To calculate NHS, there are three simple steps:
- Step 1: Ask Hiring Manager, 90 days after hiring of the new employee, the following question: On a scale from 0 – 10, is the candidate the right fit for the job ? (0 is Not at all, 5 – Just Ok, & 10 – Perfect Fit)
- Sttep 2: Ask candidates 90 days after they have been hired the following questions: On a scale of 0 – 10, is the job that you are assigned, right fit for you ? (0 is Not at all, 5 – Just Ok, & 10 – Perfect Fit)
- After averaging the scores, across managers & candidates, similar to NPS process, subtract the percentage of “detractors” (Poor fit > 0 – 5), from the percentage of “advocates” scores (Great fit >= 9 – 10 scores)
- This number, which will range from -100 to +100, is the net hiring score and speaks to the quality of the people the organization is hiring.
- Having spent 6% of our budget on hiring, we measured Quality of Hire with a single, NPS-like score, which we call an NHS (Net Hiring Score), from -100 to +100 where 0 is the median of current employees. We divided by department: Marketing = -50, Engineering = +91, Client Success = +22, Sales = -42, Finance = +100, Other = +50
- The outcome? -17. Which represents an average loss of $537K (Our Net Hiring Score (-17) X Our Recruitment Budget).
- With their NHS (Net Hiring Score) in hand, organizations can now easily calculate and understand the net impact of hiring quality on their organization.
- Along with the NHS input, to improve recruitment effectiveness, we had deployed the Culture Analyzer prior in the given setup. This helped us map the talent quality (in terms specific behaviors & inclinations), which would thrive in the given organizational & cultural setups, in addition to the role requirement.
The ROI Calculation
To do that, let’s make the following assumption – the worst performers in an organization create a burden of 1X their annual salary and star performers generate a gain of 2X their annual salary. These assumptions play out across most organizations and are correct (if not much higher) as top quartile employees generally out-produce their peers by a minimum of 2X and poor hires (especially in leadership) cause a great deal of organizational dysfunction and slowed momentum. The final step is to calculate an organization’s Return on Hiring for any given period of time / hires in three simple steps:
Calculate two numbers: Net Hiring Score and New Hire Payroll (NHP) – which is the total annualized payroll of the new hires for any given period.
If NHS is non-negative: Net Return on Hiring = 2*NHP x NHS (as a %)
If NHS is negative: Net Return on Hiring = NHP * NHS (as a %)
- If a company hires 20 people with a salary of $50K each, the NHP (New Hire Payroll), will be $1M.
- If they have a Hiring Score of 25, then the Return on Hiring will be $1M x 25% x 2 = $500,000
- If they have a Hiring Score of -10, then the Return on Hiring will be $1M x -10% = -$100,000
- This allows organizations to evaluate the financial impact of their hiring practices. Organizations should then compare the net return they are receiving in relation to the amount spent to recruit – i.e. Hiring Budget.
- Simply having a positive score leads to improved team productivity, faster growth, more brand awareness, better candidate pipeline, technology adoption, increased revenue, and decreased attrition.
- We found that with an increase of only 4% of the hiring budget (more on where we invested below), we upped the collective Quality of Hire to +28, and the Return on Hiring exploded to $4.2 million.
Improvisations for overall Recruitment Function
The chart below breaks down this process, and finds we are already at 32.5% of positions filled on time.
Now that we could identify our own shortcomings and measure outcomes as we addressed them, our formula to accurately measure hiring success became clear. It had to do with cost (Hiring Budget), speed (Hiring Velocity) and quality (Net Hiring Score).
The ROI of Recruitment
Let’s take three organizations that hire 10 people with a New Hire Payroll of $1MM, with dramatically different results in terms of ability to hire top-quality talent:
In the above illustration, the first organization has clearly under-invested in recruiting. They lack the ability and resources to attract candidates, managers are not getting the pipeline they need, requisitions remain open way too long, therefore the business is not agile, whereas, on the other extreme, the 3rd organization took a different approach altogether. By resourcing their hiring efforts with almost three times the amount of first organization, the Hiring Budget supported all recruiting efforts. When paired with more high-quality hires than low-quality hires resulting in a positive Net Hiring Score, Rockstars Only managed to generate an incremental $1MM return – that’s 100% return on recruitment !!
That’s how one get’s to building high performance organizations, starting right up from the first part of human capital value chain (not limited to it only)
Hiring success has to be made measurable. Every organization needs to understand their hiring process and how it impacts hiring velocity. They can then revise their hiring budget to optimize return on hiring. Whether the issues lie within velocity, spend, or quality, most companies will find their situation is a combination of the three.
The idea of talent analytics can be intimidating to recruiting leaders who aren’t yet deeply data fluent. Our goal with this case study was to demonstrate a clear, and relatively straight-forward, way that TA leaders can analyze their impact and calibrate their budgets/output for success. If we have contributed to changing that situation at all, everything will have been worth it.