SESSION 1: The Value of Talent: calculate your cost to hire and learn how …
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Grow Your Business By Hiring The Right Talent - 3 Sessions Led by Paula A. Soileau, CPA, Co-Founder, CEO Affintus LLC The overall success of every organization depends on the employees doing the work. In companies of all sizes, talent management is at the top of owners’ and executive’s to-do lists - they see talent as a significant competitive asset, but report their frustration with long hiring processes and unpredictable outcomes. This series shows business owners and managers how to improve their hiring success fast. Most small and mid-sized companies focus time and resources on finding the “right” employees – the people they need to grow the business. But three out of four businesses report making at least one hiring mistake that cost thousands to fix. Hiring the wrong people can dramatically affect the bottom line as well as client relationships and company culture. “Especially in smaller businesses, the impact is more dramatic and mistakes become more critical,” Says Mark Hamilton, CEO of Bell Tea & Coffee Company, a 100-year-old company. The majority of business leaders believe employees can make - or break - the business. Participants in this series learn how to adjust their hiring systems to reduce the time and cost of hiring while identifying the candidates who really will make the best employee. Figuring out how much you spend to hire someone is eye-opening. Most companies do not track this critical expense. In this session you will find a simple method for calculating cost-to-hire and then brainstorm ways to reduce the cost and time-to-hire.
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SESSION 1: The Value of Talent: calculate your cost to hire and learn how …
- 1. Affintus The Value of Talent …calculate your cost to hire and learn how to reduce it October 5, 2012 | Paula A. Soileau, CPA ©2012 Affintus, LLC
- 2. Why does it cost so much? Challenges – Finding the right candidate takes too long Who, what will be successful in a position not easy to determine, and how does manager know which candidates are best Social media results in lots of candidates Internal processes may be inefficient Employers settle for “good enough” Difference between “good” and “great” performers can be significant, but hard to know who will be “great” People have biases Recruiters, Hiring Managers, Business Owners - we are drawn to what is most familiar, what is most like us which does not always reflect what is best in certain jobs Often rely on subjective “data” (i.e., resume, LinkedIn profile)
- 3. Factors That Affect Hiring Costs Turnover rate Number of hires in a year Time to hire / time positions vacant Time to learn job / ramp up The hiring process itself (efficient vs. inefficient) Average salary
- 4. So which ones do you work on to impact business results? Turnover rate Number of hires in a year Time to learn job / ramp up Time to hire / time positions vacant The hiring process itself (efficient vs. inefficient) Average salary
- 5. Cost To Hire …a simple calculation a) Number of Employees 2011 b) Estimated hiring in 2011 # of hires or placements c) Average hiring rate % =b/a d) Average Annual Salary $ e) Average cost per placement 25% % of salary f) Cost of Placements 2011 $ = (.30 X d) X b
- 6. Measuring Cost To Hire Impacts Business Results SAMPLE CALCULATION a) Number of Employees 2011 100 b) Estimated placements in 2011 # of hires or placements 15 c) Average Turnover Rate 15% =b/a d) Average Annual Salary $ 50,000 e) Average cost per placement 25% % of salary f) Cost of Placements 2011 $187,500 = (.25 X d) X b
- 7. Measuring Turnover Rate Impacts Business Results Formula Turnover or Retention = (NSFY / AEFY) * 100 (company-wide and for each dept.) NSFY = Number of separations during the fiscal year AEFY = Average number of employees during the fiscal year
- 8. Measuring Time To Hire Impacts Business Results 2 Formulas TF = RR – OD Time to acceptance TS = RR – SD Time to start TF = Time until offer acceptance TS = Time until new hire starts work RR = Date requisition received OD = Date offer accepted SD = Date new hire starts
- 9. Measuring Estimated Cost to Interview Impacts Business Results Formula Estimated Cost to Interview = C*($M*Mhr) + ($R*Rhr)+$Trav C = total number of candidates interviewed $M = mean manager salary per hour Mhr = mean number of hours manager spends on interview-related activity per hire $R = mean recruiter salary per hour Rhr = mean number of hours recruiter spends on interview-related activity per hire $Trav - Expenses per candidate: travel, meals, etc. Note if multiple employees involved in interviewing, Mhr or Rhr in the formula should be adjusted to reflect number of total hours for all managers or other employees
- 10. Measuring Productive Workforce Impacts Business Results Formula PW = HC – (%pNH) PW = Productive Workforce HC = Head Count %pNH = New Hire Productivity Estimate
- 11. Human Capital Metrics Impact Business Results
- 12. FACT 48% OF NEW HIRES FAIL TO MEET TARGETS WITHIN 18 MONTHS
- 13. FACT MANY RESUMES CONTAIN ERRONEOUS INFORMATION
- 14. FACT FEW NEW HIRES BECOME HIGH PERFORMERS
- 15. Hiring is hard…
- 16. Cost by firm size ̈ Blatter, Marc et al. 2009. The Costs of Hiring Skilled Workers. Working Paper No. 15. Bern, Switzerland: Institut fur Strategie und Unternehmensökonomik.
- 17. Better (and Faster) Hiring in 3 Steps Clarify requirements and needs of the job Be clear on what the job is and is not (don’t use a moving target or “figure it out later” approach) A Job Description is useful! Analyze top performers Apply objective process first, then more subjective criteria later Reduce reliance on the resume - self-reported, subjective Understand limitations of resumes and interviews Look for “natural” talents and abilities; skills can be taught Structure interview Behaviorally-based questions – example of when candidate did X Take notes, rate responses If there are personality “quirks”, don’t think you will change or “fix” the person later – consider how important or unimportant - be honest ** Bonus – when hiring, help managers plan entire process (schedule upfront) – use key human capital metrics to improve results
- 18. Better Hiring Impacts Business Results 50% 50% 10% 10%
- 19. More from Affintus on Impacting Business Results Oct 12 The Limits of Experience and Education: learn why not reading a resume is the best start to better hiring Early in their careers, most execs and managers learn that prior work experience and educational background are key factors in job success. But it turns out that neither is related to future success on the job! In this session you will find out what factors you should look for in potential employees. Oct 19 The Value of Behavioral Interviews: learn how to interview to find out what you really need know as fast as possible You have probably read a lot about interviewing and how important it is to “get to know” the candidate face-to-face. The problem is that most interviews turn out to be a conversation rather than a fact-gathering activity. In this session, learn how to create questions that really get to the heart of what you need to know to make a hiring decision.
- 20. Affintus Great people data. Great business results. paula@affintus.com | Paula A. Soileau, CPA | 1-866-429- 4351 https://www.facebook.com/affintus https://twitter.com/affintus @affintus http://www.youtube.com/user/affintus Visit Our Blog! http://affintus.com/blog-affintus/ ©2012 Affintus, LLC
Editor's Notes
- Finding the right candidate takes too long : 55% of respondents involved in hiring at their company reported that filling a vacant position typically takes longer than 60 days, and 43% reported that open positions aren’t filled within their required timeframe Employers settle for good enough: almost half of respondents involved in hiring report settling for a candidate that was just “good enough” because finding the right candidate took too long more than 60% of respondents, job-seekers and employers said that their experience with the hiring process has been less than positive Inefficient hiring impacts more than HR : 70% of people surveyed indicated that their company includes at least three employees in each hiring decision Candidates give up before applying : almost half – 46% — of respondents have chosen not to apply for a job they are interested in due to an application process that was “too lengthy or complicated” And it’s not that HR and managers aren’t working hard. And it’s not that job seekers aren’t doing their best to connect and market their abilities. It’s that we haven’t prioritized this as a “must fix.” Leveraging technology to match supply and demand is a no-brainer. People have biases that make it difficult to evaluate who is good, who is great, especially if they are not like “us”
- Hiring does cost businesses a lot of money – here’s what impacts those costs Turnover rate – higher turnover rate translates into more hires to replace those leaving Number of hires in a year – either to replace those who left (see turnover rate), or due to growth of company (new positions) Time to hire – the longer positions remain open, the more lost opportunities, lost business, lost revenue, lost productivity – open positions cost the organization, so the longer the position is open the higher the cost Time to learn the job – employees who are “average” will likely take longer to learn the job and to reach acceptable level of productivity. The hiring process itself – how efficient is the process – how many candidates does the company have to look at, are there automated systems, how many people does HR screen or does the hiring manager interview to reach a decision Average pay within the organization – higher average pay translates into higher hiring costs According to a 2008 SHRM study, the cost to replace and hire new staff may be as high as 60% of an employee’s annual salary, whereas total costs of replacement, including training and loss of productivity, can range from 90% to 200% of an employee’s annual salary. Turnover Rates Within Key Industries In order to get a better sense of how turnover affects organizations in key industries in the United States, data from the 2011-2012 SHRM Human Capital Benchmarking Database were analyzed by industry. Industries with the highest turnover rates were services—accommodation, food and drinking places (35%); arts, entertainment and recreation (27%); and retail/wholesale trade (22%). Industries with the lowest turnover rates were high-tech (11%), state/local government (9%), and association—professional trade (8%) and utilities (8%), which were tied for third. Across all industries, the average turnover was 15%. Table 1: Productivity Metrics Avg Revenue Cost- Industry Turnover per FTE Per-Hire Services - hotel, food, bev 35% $183,173 $1,062 Arts, entertain, recreation 27% $188,817 $1,394 Retail/wholesale trade 22% $523,529 $2,549 All industries 15% $339,785 $3,196 High-tech 11% $207,763 $3,357 Government 9% $204,594 $2,293 Assn -professional/trade 8% $294,582 $5,582 Utilities 8% $413,086 $3,936
- Understanding which factors you can control, and how, will help to manage the overall costs of hiring Turnover rate – yes – every person who walks out the door is costing the company money – lost institutional knowledge, time invested in training, impact on other employees during vacancy Number of hires in a year – yes – manage turnover rate and the number of hires will be positively impacted Time to learn the job – yes – focus on hiring “great” and not settling for “good enough” – employees who “fit” the job will be more productive and learn their jobs faster Time to hire – yes – manage the time to hire, and costs of hiring is reduced – productivity higher The hiring process itself – yes – more efficient processes will result in faster time to hire, and fewer resources required to complete the hiring process (why spend 10 employee hours interviewing candidates numerous times if a more efficient, more effective process is available) Average pay – can be controlled, but may not have desirable impact Changes to all factors above other than average pay can be done without negatively impact corporate performance.
- Calculating an approximation of costs to hire/place employees within an organization requires 3 data points: Number of Employees Number of hires Average Salary
- Example For a company with 100 employees, and 15 hires in a year, with average salaries of $50,000, the cost of hiring and placement is $187,500
- Turnover or Retention = (NSFY / AEFY) * 100 (company-wide and for each dept.) NSFY = Number of separations during the fiscal year AEFY = Average number of employees during the fiscal year Value of Measures: Employee turnover is defined as “the rate at which employees enter and leave a company in a given fiscal year.” HR professionals and organization executives focus on turnover for three main reasons: it has significant cost implications; it affects overall business performance; and it has the potential to become difficult to control, resulting in a talent crunch, where it is hard to find quality candidates with the skill sets required to fill open positions.
- Measuring Time To Hire Can use 2 Formulas: TF = RR – SD ( Time to acceptance) or TS = RR – SD (Time to start) Value of Measures: Helps identify the value of lost time due to vacancy, especially if you know staff and management cost factors (TF x MT or ST where MT = Management time and ST = Staff time) Can be the beginning of a process improvement effort, especially if you choose to break down the component steps of the recruitment process to further analyze the cycle time
- Measure: Estimated Cost to Interview Formula: Estimated Cost to Interview = C*($M*Mhr) + ($R*Rhr)+$Trav Value of Measure: Helps identify the value of time spent in the hiring process, especially given that many companies use multiple interviews and interviewers in the process. Can be the beginning of a process improvement effort, especially given the limitations of interviews in predicting the probable success of candidates.
- Measure: Productive Workforce Formula: Productive Workforce = HC – (%pNH) Value of Measure: think about the last time you started a new job – how long did it take you to do the new tasks? How long now? How long did it take to master the new position? New employees are a drain on internal resources until they are up to speed on their jobs. typically takes from 2 – 18 months, depending on the nature of the position. This number takes into account the learning curve that all new employees have. How many have we hired and what is the estimate of where they are vis a vis a fully productive worker On average new employees might be producing at 70% during the first 6 months. HC = 100 20 hired in the first 6 months of the year – and they are producing at about 70 % (You will have to estimate this for your org, and for each position) PW = about 86( new hires are producing like 14 people, not 20) HC = a number and it is important to track this number PW = what you really have re: productivity and results This measure supports the understanding, esp at the mgr / exec level, the impact of being fully staffed as well as the impact of new employees on productivity. When people are new, there is a learning curve that draws on internal resources. Real impact = $$$ and productivity – just because you are fully staffed doesn ’t mean you are getting the work done…the more complicated the job the longer the learning curve…etc.
- Human Capital Metrics Can improve business results if you know where you are, and what impacts those results. Improvements in turnover, time to hire, time to learn a job, etc. all have an impact on costs of hiring, and more importantly, all have a huge impact on business results.
- Average Resume accuracy The resume is a good marketing piece for the candidate – it tells you where they have worked (which you can check) and it gives you some idea of the work they have been responsible for. The resume does not tell you if the work they have done in the past relates to the work at your company and it does not indicate the quality of the work
- If you have ever said, “Now, remind me…why did we hire this guy?” you are ready to use assessments. Not very many new hires (selected by traditional approaches) will become high performers… they key is find a way to hire people for their inherent abilities (ones that can't be taught), such as personality, learning style and company culture match.
- Three out of four small and medium-sized business owners report having made a hiring mistake that cost them thousands of dollars (and many hours) to fix. Some have even made the mistake more than once, like the exec who hired and fired his best friend - twice. True story... When 20%-50% of resumes contain erroneous information and hiring based on interviews has about the same success rate as flipping a coin, it is hard to make a data-driven decision. We know that selecting someone who will match your culture and have the right attitude for the work is the best way to make a talent decision. Think Southwest Airlines - They figured out what skills and abilities make their star performers shine. They have designed ways to identify which people have the qualities, then they teach them job duties after hire.”
- Better (and Faster) Hiring in 3 Steps It’s difficult to hire the right person if you’re not clear on what the job is – Hiring is partly an art, and a science. To apply the science part, using objective processes first enables managers to narrow a pool of candidates to those who are the best fit (and not necessarily those with the most experience), and then use of subjective criteria / processes are more useful later in the process. Remember, you can train someone a skill (how to speak Spanish, how to perform math calculations, how to program in a certain computer language – if they have certain cognitive abilities. What you cannot teach or train them to do is be a different person. They are who they are, and thinking you will train them to work well with others if that’s not a natural preference could be an uphill battle. Skills = can be taught Personality ≠ not likely to change Interviewing – has limitations Free form interviews where interviewers just throw out questions that come to mind are not reliable in terms of predicting future performance or success in the job. Structured interviews require planning, practice and are not easy to conduct effectively.
- Finding people who are a good match for your job results in significant impact to the bottom line.