Recruitment Cost: Often misrepresented in absence of holistic approach

Recruitment Cost: Often misrepresented in absence of holistic thought

Summary

Recruitment cost is important for all organization. Some costs are direct, some are indirect.

All organizations need to ensure that they build up a cost effective process over a period of time. This can be done by building a scalable and cost effective process. The targeted processes for improvement shall be from the quadrant making the maximum impact on cost of talent acquisition. Any company can strategize depending on repeatability and scalability of process to optimize the hiring cost.

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Early in the morning while handing over my cup of tea today, my wife asked me for twenty thousand rupees to get some household things; essential for smooth running of the kitchen and household. Obviously my first answer was a “no” as I found that amount to be obnoxiously high. Not anticipating a possible rebut, I was taken off guard when was asked that “do you really have an idea that how much goes into running the household?” That was followed by a list of regular daily, weekly and monthly expenses and some miscellaneous heads which we will incur this month. This monologue-ish discussion was like a haunting reminder of my last evening’s discussion with my head of HR when I presented him my figures on cost of hiring. My financial acumen was challenged twice in less than half a day span.

I tried to make a proactive approach to join the band wagon of all recruitment heads who talk about latest fad, ‘cost per hire’. My over enthusiasm and tall claims of maintaining cost per hire in mid- four digits fell flat when he mentioned that within three quarters, the recruitment expenditure has crossed the allocated budget for the entire year. Cost per hire as per my data and his were almost in ratio of 1:2. The impression gone to him must be that either I was completely wrong with my data or I am trying to misrepresent the fact. Either way, my professional image and next year’s recruitment budget planning were all set for a hit. Hence it was time for a deep dive into the issue and look at some of the grave mistakes I made.

Support functions are the cost centers and hence most of the organizations track the expenses marked against these heads closely. The manhattan of recruitment cost is invariably taller than all other functions in Human Resources, even if it is conservatively marked. However, we still miss out on certain expense heads while calculating or budgeting the hiring cost thus leading to a war of emails between recruitment team and finance department. Sometimes, miscellaneous small factors collectively are so impactful that our entire planning can collapse if these factors are ignored. It is important to look at things in total and not to overlook even small contributors. Later, based on impact they can be considered or ignored. Let us look at all the possible costs incurred during hiring.

The recruitment cost can be divided into two major types- direct and indirect costs. Direct cost is cost incurred to directly produce the offers. Referral bonus, payments to consultants or recruitment advertisements can be termed as direct costs. They can be further classified as fixed and variable- fixed being one-time cost for the year like payments to job portals while variable costs are costs incurred per hire.  

Indirect costs are the cost which enables a person to join the organization rather than directly contributing towards hiring process. Costs like relocation, administrative cost, infrastructure cost salary of hiring team and travel cost of interview panel and candidates are typical indirect expenditures. Indirect costs are often missed out while calculating cost per hire and hence people see considerable difference in their estimates and actual figure provided by the finance department.

Break up of Recruitment Expenditure

Figure: Classification of Recruitment Cost

Direct Cost

Payments to Job Portals: Job portals are key source of resume especially where volume hiring at lower level is involved. Typically organizations pay an annual subscription fees for the same. Since the cost for the year remains fixed irrespective of benefits reaped from the portal’s database, the cost is considered as fixed cost for the year. If we can manage to get more people from portals, cost per hire can be reduced considerably.   

Recruitment Advertisements/ Job Fairs: This is very similar to job portal cost. Most of such expenditures are planned as a company fixes the number of advertisement they will go for or job fairs they will participate in. These calls are taken mostly in the beginning of the recruitment period thus it can safely be considered as a direct fixed cost.

Payments to Placement Vendors: Most of the mid to senior level hiring is done from the profiles received from the placement vendors who specialize in getting in touch with active job seekers and providing the relevant profiles to the employer. Complex skillsets are also hired through placement consultant. In turn, they take certain fees per hire they provide to the company. Overall cost is directly proportional to the number of hires a company takes from the vendor.

Employee Referral: It is similar to payment to vendors but here payment is to employees who help in bringing right candidate to the interview process. The payment here is also on per hire basis. This cost is more beneficial in long run as it gives a sense of ownership and helps in creating a stronger cohesive bond among the employees.

Welcome Kit and Other Joining Goodies: At the time of joining, many companies incur certain costs on welcome kit, induction training and other goodies offered at the time of joining. In order to be employee friendly and show the new employee that he is welcomed in the organization, these days a lot of companies are spending significantly to showcase them as better employer compared to their competitors.

Indirect Costs

Candidate/ Interview Panel Travel: Candidates or recruitment panel often travel for the closure of position. The cost of travel includes lot of associated price tags like stay in a hotel, food, local transfers etc. Generally for senior level hiring, associated costs tend to go up.

Settling allowance/ joining bonus: To attract people in competitive market and yet maintain an internal parity with existing employees, employers do offer a settling allowance or joining bonus over and above the offered salary with a certain locking period. This cost also helps in retention of new employee.

Relocation Assistance: When a person joins the organization from other city; most of the organizations arrange for initial accommodation, relocation of goods and family, finding accommodation and other related expenses. These expenses are pretty high per candidate and hence any organization would like to keep it to minimum or confined to critical or senior profiles only.

Administrative Cost: Administrative cost can be fixed or variable. However, often it is variable as it is impacted by number of people joining the organization. This is miscellaneous expense head where costs can be related to documentation, background verification, joining formalities etc. However, some portion can be part of indirect fixed cost as it is minimum cost which an organization had to bear.

Venue/ Infrastructure Cost: Many a times an organization needs to hire a venue or interviewing facility for recruitment mainly owing to lack of infra-structure. The volume of candidates to be handled, seniority of candidate or location of candidate may lead to hiring of infrastructure as one of case. Thus, this cost may be unavoidable at times but due to being sporadic in nature, cannot be correlated to overall recruitment expense. 

Salary Cost: Most important, yet most ignored. Recruitment team’s salary shall do justice to the volume and complexity of hiring done by the organization. The number of people in talent acquisition team and kind of talent hired shall deliver value to the organization. Apart from salary, other overheads like cost of occupying a seat, medical and statutory benefits offered also cannot be ignored completely. Hence talent acquisition managers shall be adept to optimize the productivity within the given budget.

How companies manage their cost

Any company would like to have minimal financial dent on their pocket while getting their resource on-boarded. Money saved can always be showcased as returns of amount invested, be it shareholders for large firms or venture capitalists for young start-ups.

Lot of organizations, especially global IT software firms, has dedicated sourcing team to ensure that recruitment pipeline never runs dry. As nature of profile is defined and often repetitive, internal sourcing teams do a wonderful job as they mature over a period of time. There can be times when direct costs like referral bonus and placement consultants’ fees may not be curbed entirely and an organization shall be prepared for the same. Some companies also have innovative referral schemes or a slab based agreement with placement vendors to reduce the amount paid per hire.

Depending on the infra-structure and size of company, some of the administrative and indirect costs may not be applicable. For instance, many companies have built their own interviewing facilities and guest houses. These steps are taken keeping some long term plan in mind. Though it may appear a very minuscule amount but for bigger companies, it can be significant. In India, a fortnight’s accommodation to newly joined person may cost anything between twenty to forty thousand rupees to the company. Hence, if a company is hiring two hundred people from other locations, the impact can be in excess of sixty lacs per annum. Hence, many companies have decided to create their own lodging space. Depending on economies of scale, organizations often land up in a deal with travel agents, hotels, cab services and other hospitality sector vendors.

Some self-help portals also help in curbing administrative cost. These portals can be used to generate employee id, upload recruitment documents and other similar jobs which require least guidance or human intervention. This helps many organizations to partially eliminate the administrative cost. 

The salaries of recruitment professionals have significant impact on overall cost of recruitment. Hence lot of organizations where processes are not matured and more manual, believe in higher number of contractual professionals. Matured organizations where processes are automated, go for lesser number of people in their team but look for skilled professionals to manage the process. These calls also depend on type and number of profiles a company is looking for and the work environment of the geography. Where lesser skilled people are hired and manual work is more, a contractual but large recruitment team may work better.

Recruitment Cost can never be planned completely

After understanding different types of cost and the possibilities of different strategies that any organization can adopt, it is also imperative for organizations to understand that cost for talent acquisition can never be estimated in the beginning of year with cent per cent accuracy. Reasons can be many but some of them can be

•  Recruitment targets may vary owing to changes in business objectives. Talent acquisition cannot stop their work due to budgetary constraint if business has legitimate demand for resources.
• Charges for external services can vary. Recruitment depends heavily on external services of placement consultants and job portals.
• Changes in government norms like minimum wages, ESIC or PF in turn affect other associated cost directly as well as indirectly. Some payments to external vendors may be  directly in proportion to such changes.
• Talent acquisition may have to adopt new strategies as counter-move to competitor’s new moves.
• Employer branding exercise cannot be predicted as it will also depend on company’s financials and business plans made available to the public. If company has great financials and future plans to boast, employer branding exercise can be limited to minimum.
• A company may prefer hiring talent from same city to reduce the cost of hiring but cannot restrict opportunity for out-station candidates.

Conclusion

To conclude, an organization may select all or only certain costs to track depending on severity assigned to the recruitment cost. Yet, a consistent and holistic approach only will help people in bringing realistic perspective in hiring. Sometimes in order to cut costs, organizations try to be over stringent. The idea shall not be to curtail all costs but to have justified costs and have cognizance of the expenditures made. Once people start realizing the expenses made, the ways to optimize cost will also come through.

However, recruitment cost can be controlled but to an extent. The stance any organization takes depends on the organization’s vision for next few years. However, it is always good to plan for eighty percent of the budget as some unforeseen factors will always dent the budget.