Cost per hire (CPH) is the average amount of money a company spends to fill one open position. This includes all costs associated with recruitment, including time spent by recruiters and hiring managers, technology and resources used and any third-party expenses.
But before we move ahead, here’s a caveat:
The cost of hiring an employee differs from position to position—which isn’t always a bad thing if that role is more complicated or more important to fill than others. Nevertheless, the idea is to optimize and automate as much as possible to bring the average numbers down for your business.
By evaluating how much you spend on each type of hire and comparing it against industry standards, you’ll find ways to optimize your overall recruitment budget.
From job ads to employee referrals, you might have several different channels that you are using to hire.
The answer lies in calculating cost per hire (CPH).
This article sheds light on how to compute your cost per hire and how you can optimize your recruiting process. It will also dive deep into what recruitment cost per hire is, why it’s important and how you can use it to improve your business’ performance.
As the job market continues to heat up, companies are scrambling to find and hire top talent. But the cost of filling job openings is rising as well, according to a report from Harvard Business Review — and it’s not the same for all roles.
Recruitment is the process of identifying, screening, and hiring new employees for a company. The term recruitment process refers to all the steps involved in this process, from the first step of identifying job openings to the last stage of hiring and onboarding a new employee. Each of the said steps contribute toward the overall recruitment cost.
Recruitment consists of five stages:
Find potential candidates to fill the position you need to fill.
Initial interviews with candidates, usually via phone or videoconference, to assess their suitability for your job opening.
In-person interviews with candidates who pass the screening stage. The goal is to narrow down your options and select the best candidate for your job opening.
Make a final decision on which candidate you want to hire based on their qualifications and how well they match your company's culture (more on that in a moment).
Orienting and integrating new employees into your company and helping them understand their responsibilities to succeed in their new roles.
Each stage in the process requires human effort and resources, which means that each stage directly impacts the cost per hire.
Recruitment can be a huge expense for companies, especially as they scale. And that’s just for the non-human cost of hiring new employees! If you include human costs—like time spent by your HR team or hiring manager—the total cost skyrockets.
By calculating your CPH, therefore, you’ll get a better sense of where your company stands financially in terms of recruitment. You can then use this information to decide what is working and what’s not.
By comparing your current cost per hire against previous years,’ you can see how much you have spent on hiring and whether you need to reduce costs in certain areas.
The first step toward calculating cost per hire is to collect all the data about internal and external hiring costs. A total of these expenses should then be divided by the number of new recruits. That answers the following question.
As explained above, the formula for calculating cost per hire is:
The key here is to understand what counts as a recruiting cost. This will include all costs incurred when sourcing candidates and directly or indirectly related to hiring.
The average cost per hire has risen to $4,129 and in some cases, hiring a single employee can cost more than $10,000. In addition, the average time needed to fill an open position is also rising, from just under 40-days to 45-days.
Most companies allocate a sizable chunk of money to their recruitment budget. But that doesn’t guarantee that you can truly offset the cost of a bad hire.
There’s always a trade-off between cost and quality. For example, a recruiter could reduce cost per hire by lowering their standards for new applicants — but this is more likely to lead to hiring mistakes.
Without having a tab on the cost per hire metrics, you’ll just be playing a game of trial and error when it comes to making critical strategic decisions.
Below are some tips on how to reduce your cost per hire without sacrificing the quality of your hires:
Take a look at how hiring companies are finding and attracting talent online. They’re doing so successfully by using candidate tracking systems.
Candidate tracking systems allow companies to manage the entire recruiting process efficiently. They help identify top candidates, track them through each process stage and compare their qualifications against other applicants.
In addition to identifying and tracking top candidates, these systems also help reduce recruiting costs per hire by allowing companies to measure their ROI on various recruitment methods like job boards, advertising, social media and more.
Roughly 70% of the cost of a new employee comes at the sourcing stage. Also, like most industries, the best way to cut costs is to automate processes with software. Instead of manually sending emails back and forth, take the help of technology to set up an interview time with candidates quickly.
Conversational AI chatbots are a great way to engage candidates in the early stages of the hiring process by answering common questions about the role or company culture and providing them with information about their application status.
What better way to efficiently assess candidates than using computer-based tests? Automate this step using tools to help you discover top talent faster by testing candidates’ skills before inviting them to an interview.
This will help you determine if internal hires are more effective than external hires. You may want to invest more resources into employee referral programs if they are.
What better way of finding new talent than asking the one in the house? Referrals are a great way to reduce your cost per hire because it means less time spent sourcing candidates and creating job posts.
A strong employer brand can help reduce your average cost per hire in several ways. First, it makes it easier to identify and attract the best talent. Second, by promoting your culture and values, you can ensure that you only attract candidates who are the right cultural fit for your organization.
Another strategy is to outsource roles that require specialized skills. For instance, hiring a recruiting company might save your company money in the long run if it’s challenging to find suitable candidates on your own. So while outsourcing has its downsides, it can be helpful when it comes to reducing the average cost per hire.
Obviously, there are no magic bullets here. Instead, reducing costs requires finding ways to improve those parts of the process costing the most money per hire. There might be critical aspects we can pay attention to:
The first key to boosting the hiring process is efficiency. The more efficiently you move candidates through the recruiting funnel, the lower your cost per hire.
Increasing your efficiency involves reducing hiring time. You can decrease hiring time by using automation or using a staffing agency or recruiter with access to a large pool of qualified candidates actively seeking work. This can help you quickly find good candidates and get them into your organization.
The other necessary ingredient for lowering cost per hire is improving quality. You can improve quality in two ways: Increasing the quality of hire and improving retention rates.
If you can increase both these factors at once, you’ll slash cost per hire drastically because you’ll eliminate the need to constantly replace employees who leave or underperform soon after they’re hired.
You can increase hiring quality by making sure you’re hiring the right candidates for your open positions. This means developing a solid job description that outlines exactly what you want.
Ensure you know what you’re looking for from the get-go, so you don’t waste time and resources pursuing candidates who aren’t suited for the job.
In conclusion, as simple as it might sound, you need to have a clear and accurate understanding of your company’s cost per hire to get the most out of your recruitment efforts. The best way to do this is by calculating it after every successful hire.
As you make changes to your business strategy, you must make them from a position of knowledge and a firm understanding of the purpose behind each change.
The cost per hire is one area where many businesses fail in their recruitment efforts and miss out on significant gains. However, by making an effort to determine how much it costs you to find and hire an employee, you will be setting yourself up for success in all other areas of your company’s recruitment initiatives.
Originally published March 30 2022, Updated March 30 2022
The primary objectives of recruitment and selection are to ensure high-quality candidates who are culturally fit and work toward shared organizational goals and vision.
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