ROI – the return on investment calculations for recruiting

I really enjoyed the NCHRA class on ROI (the return on investment) for HR.  LaTonya Olivier of TPO (www.tpohr.com) taught this to a group of about ten HR people in Fairfield, July 1st. 

Volume button with red light turned on maximum

We learned how HR ROI is usually just

Revenue – (Expenses – Pay and Benefits)/ Pay and Benefits 

which does not take into account a number of costs like contingency workforce, absenteeism or turnover.  Measuring needs to take all the right pieces of information that will produce a useful number – one that will allow for setting targets that will make the company better than its competition. 

But you really must not compare apples to orange – ROI on the R&D team cannot be measured with the same yardstick as ROI on the manufacturing division.  ROI on HR in general will not use the same yardstick as ROI on the recruiters and ROI for recruiting is very different depending on the position being recruited and the size of the company and the size of the HR staff.

Large companies which are either rapidly growing or have a typical turnover will have an HR team including some people devoted exclusively to recruiting/staffing/talent management.  The positions will mostly be individual contributors with similar skills making less than $50-75,000 annually and can be best filled using postings.

These companies use one set of ROI factors:

cost of the in-house recruiter (total comp and benefits and overhead (office, desk, computer, phone, web access and job board access)/days worked,

cost of this particular hire (advertising cost, processing of the hire, any travel or expenses),

the response time (date of first interview minus the date of the job requisition),

the time to fill (date the new hire starts – date of the job requisition),

“hit rate” or number hires/ number of applicants,

the quality of the hire as measured in retention after the first year and/or promotion after the first year. 

This allows an ROI calculation of recruiter effectiveness to be done for each recruiter.

Recruiter Effectiveness = Cost of recruiter + cost of this hire + response time + time to fill + hit rate + quality of hire/number of days worked by this recruiter on this job

Small companies which need only a few people at a more senior level will usually not have in-house recruiters and will depend on a small HR team or just one person and an administrator for all HR functions.  The jobs that this person will have to fill will likely be both a few multiples and those that are not multiples.  The HR person will be quite busy with all the other HR functions and may have rusty search skills.

The factors useful for deciding on the ROI for using an external recruiter will not need to include overhead or benefits
but does need to include the cost of the lost opportunities and overtime sustained by the company during the time it takes to decide to use a recruiter measured against the search fee paid to the recruiter. 

The maximum time to first contact  and the general “hit rate” should be able to be predicted by the recruiter generally, although many times a good recruiter can minimize the time and increase the hit rate. 

The time to fill will depend on HR and the hiring manager and their time commitments as well as how well the recruiter is doing. 

The quality of the hire has as much to do with the clarity of the job description and the quality of the communications between recruiter and hiring manager as it does to do with length of employment. 

Many of these senior roles do not have a clear career path to promotion in the very first year.

So the ROI for the effectiveness of an external recruiter will be:

External Recruiter Effectiveness = (RF-(LO+O))+ QC +AHMHR+MTFC+MTAC+mHR)/DtoH

Least External Recruiter effectiveness = (recruiter fee – lost opportunities and overtime by hiring manager and staff to do the job that is empty) + quality of communication and job description (on a scale of 1-10) + availability of the hiring manager and HR contact (on a scale of 1-10) + maximum defined time to first contact + maximum defined time until all potential candidates contacted+ minimum defined hit rate (or resumes of qualified, interested candidates/number of potential candidates contacted) all divided by number of days until hire.

My usual recruiting effectiveness  =

($25,000 fee –  cost of hiring manager’s time and team’s over time since the position was first identified) + 9-10 quality of communication + (unknown but usually at least an 8 quality of availability) + maximum 60 business hours of identification + maximum 60 business hours of contact + (3-12 qualified, interested interview-able candidates/200-400 potential candidates from qualified companies / 6 weeks of work (120 business hours spread out over 6 weeks to give the candidates time to respond) on this search

or (($25,000 – x) +10 + 10 + 120 business hours + 0.03)/ 120 business hours

or ($25,000 – x) + 140.03 /120 expressed as a percent

or 116% effectiveness on a $25,000 fee

Would this be a good return on investing in an outside recruiter? If you need some help, please do email me at connie@hamptonexecutivesearch.com

Cost-to-Hire, HR and Hiring Managers, Unbundled search ,

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