How Smartrecruiters Made a Case to Grow Their Budget - HROS
It’s an exciting time for our industry. In the three years since the SmartRecruiters Talent Acquisition System (TAS) came out of R&D, the recruiting industry has witnessed the kind of technological upheaval that’s transformed just about every business model around us, from marketing to manufacturing, real estate to retail, It’s been a long time coming for HR, which is strange, considering the degree to which the most influential business leaders give importance to the process.
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”. Like many corporate recruiting teams, we struggled with finding the right formula for investing and measuring our recruiting resources to ensure maximum impact.
What We Did
Our mission at SmartRecruiters, in the broadest terms, is to match as many candidates with the right employers as possible. We had to prove to recruiters and HR departments that implementing our TAS would save enough time to make it worth their while, but there would need to be an investment in recruiting. We had to start by proving it to ourselves on our own team.
What we discovered surprised us. We found we weren’t spending enough on recruiting. We knew we needed to make a business case to support this, so set about making a ROI model that would validate our assumption. To show that increasing cost per hire was more than a worthwhile investment, we mapped a clear methodology, and made the necessary case for disrupting legacy approaches, as well upping hiring budgets.
Why We Did It
Part of the problem recruiters face 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.
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.
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.
Ensuring recruiting resources and focus are maximized to drive the necessary output for success.
Our recruiting team 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.
How We Did It
We’re based in the Bay Area, which is notorious for talent shortage, putting increased pressure on our recruiting engine. And while technology innovates at ten times the speed it once did, our methodology for achieve hiring success has to keep up. Which means we must quantify our methodology to the point where any unsure hiring manager can see the immediate benefits of this process.
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.
An organization’s Hiring Budget includes all recruiting costs such as all Talent Acquisition (TA) employees, program spend, outsider recruiters, travel cost of candidate and technology infrastructure, but does not include time spent by interviewers and the hiring team as they engage in the process.
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 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:
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.
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.
The chart below breaks down this process, and finds we are already at 32.5% of positions filled on time.
There are gaps to be filled, streamlining on both sides of our process, but we’re happy to have reached a candidate satisfaction score of 8.3, and from the hiring-manager side, a satisfaction score of 7.1.
We hired two recruiters to improve the process, and we invested in direct sourcing for entrance-level positions with LinkedIn, but that proved time-consuming and expensive. Instead, we optimized our ROI on job advertising with better conversions, referrals and smarter budget allocations, using a collaborative process with job-specific scorecards (see example in next section), so we had better evaluations with no bias. Finding the right sourcing mix for each type of job is critical, and taking this into account improved our overall candidate experience from the first visit to hire, but the most important thing we did, was to follow our own rules and processes religiously.
All this led to a) better candidate flow b) improved hiring decision making c) streamlined processes so both speed and quality went up dramatically.
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 with cost (Hiring Budget), speed (Hiring Velocity) and quality (Net Hiring Score).
Once you have your own +/- Net Hiring Score, you can combine this with your Hiring Budget and Hiring Velocity for the three main metrics for a Hiring Scorecard, which represents the health and impact of the hiring function. This will quickly tell you which components might need some work:
In this example, the organization invests 7% of New Hire Payroll in recruiting. With that budget, it is able to maintain an acceptable velocity of 75% while hiring great talent - evidenced by an NHS of +52. (It’s important to note, however, that even if you have a positive NHS, low Hiring Velocity can still have an adverse financial impact by taking too long to fill jobs.)
To define Return on Hiring for any given period of time:
Calculate two numbers: Net Hiring Score (as %) and New Hire Payroll (NHP) - which is the total annualized payroll of new hires for any given period
If NHS is positive: Net Return on Hiring = 2*NHP x NHS (as %)
If NHS is negative: Net Return on Hiring = NHP * NHS (as %)
Organizations should then compare net returns in relation to the amount spent to recruit - i.e. Hiring Budget.
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:
As we see, Sad Sad World LLC 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. Compromises are made around quality which results in numerous bad hires. The direct financial impact of all of this is a loss of -$500k.
Rockstars Only, Inc. took a different approach. By resourcing their hiring efforts with almost three times the amount Sad Sad World LLC, 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 Inc. managed to generate an incremental $1MM return.
Team Not Bad has a mediocre Hiring Velocity, but average Hiring Budget. While these metrics are certainly better than Sad Sad World LLC, Team Not Bad makes the same number of good hires as bad (NHS of 0) which means the financial return on hiring is $0. Again, this is better than a negative financial impact, but certainly not a number you’d want to share in a board meeting.
What We Missed
In an effort to raise the bar, we started to use direct sourcing methods for most roles, but we realized quickly we were wasting time and energy going outbound for entry-level sales positions. We ended up turning our sourcing mix towards inbound (advertising,...) for junior roles and mostly outbound (referrals, direct sourcing,..) for more senior positions.
Hiring success is now 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 laters 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.
We use LinkedIn and Entelo for sourcing, LinkedIn, Indeed, and niche boards for job advertising; Criteria Corp for assessment; and Outmatch for reference check. All of which are natively integrated in our SmartRecruiters Talent Acquisition System.