Cost per Hire: How to Calculate It and How to Reduce It

Cost per hire: What it is, how to calculate it and how to reduce it

In the competitive landscape of talent acquisition, understanding and optimising your recruitment KPIs is crucial. Among these, Cost per Hire stands out as a critical metric. But what exactly is it, and how can you effectively reduce it without compromising on the quality of hire? Let’s dive in and explore this essential recruitment metric.

What is Cost per Hire?

Cost per Hire is all about the average cost an organisation faces when filling a job opening. This includes everything from the money spent on advertising the position, to the salaries of recruiters, to the costs involved in conducting interviews and handling all the paperwork. It’s a useful number for hiring managers and recruitment teams to get a handle on how efficient and effective their hiring processes are.

But there’s more to Cost per Hire than just crunching numbers. It’s really about understanding how this figure affects your recruitment budget and your overall business strategy. This is particularly important for companies in the UK, especially in industries like retail, logistics, healthcare, and hospitality. In these sectors, where hiring needs can change rapidly and are often quite intense, getting to grips with Cost per Hire is crucial.

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How to Calculate Cost per Hire

Calculating Cost per Hire is fundamental to understanding and optimising your recruitment budget. This metric, which may seem complex at first, can be simplified with the right approach. Endorsed by the American National Standards Institute (ANSI) and the Society for Human Resource Management (SHRM), the formula for calculating Cost per Hire is:

Total Recruitment Costs (Internal and External) / Total Number of Hires = Cost per Hire

Let’s delve deeper into what comprises these costs:

Internal Costs:

These are expenses related to your in-house recruitment activities. It includes salaries of your hiring managers and recruitment team, the cost of internal recruitment tools (like an applicant tracking system), employee referral bonuses, and any overhead costs associated with the recruitment process. For example, if your recruitment team is using advanced software solutions like Teamdash, the subscription costs would fall under this category.

External Costs

These refer to expenses incurred outside your organisation during the recruitment process. They cover a broad spectrum, from job board fees and advertising costs to payments made to external recruitment agencies. Additional elements might include expenses for background checks, skill assessment tests, and travel expenses for candidates, if applicable.

To accurately calculate your Cost per Hire, consider all elements to understand your recruitment expenses. This calculation helps you see how well your hiring process is working. It shows if you are hiring efficiently and effectively.

Other considerations when calculating Cost per Hire

Moreover, this KPI shouldn’t be viewed in isolation. Calculating Cost per Hire by department or role can provide more granular insights. For instance, the Cost per Hire for a senior executive might be higher due to more extensive search and vetting processes, compared to entry-level positions. This differentiation helps in making more informed decisions and strategizing recruitment budgets effectively.

Additionally, benchmarking your Cost per Hire against industry standards can be enlightening. It provides a perspective on where your company stands in comparison to others in your sector, such as retail, logistics, healthcare, or hospitality.

How to Reduce Cost per Hire

Reducing the Cost per Hire is an essential goal for many organisations, particularly those keen on maximising their recruitment efficiency without compromising quality. Here are several strategic approaches:

Leverage Technology and Automation

One of the most effective ways to reduce recruitment costs is by embracing technology. Applicant Tracking Systems (ATS) like Teamdash play a pivotal role here. By automating many of the time-consuming elements of the recruitment process, such as candidate tracking, interview scheduling, and communication, ATS can significantly reduce the manual labor involved.

Features like recruitment dashboards, which provide a comprehensive overview of the recruitment process, and job ad landing builders, which facilitate the creation of appealing and effective job advertisements, are particularly beneficial. Additionally, automated compliance tools streamline the adherence to regulations like GDPR, which is especially pertinent for UK-based companies.

See Recruitment Automations in Action

Optimise Your Recruitment Marketing

A strong employer brand is invaluable. It not only attracts higher quality candidates but also reduces reliance on external agencies and job boards, which can be costly. Utilising targeted social media recruitment tools allows you to reach potential candidates directly, fostering a more engaging and authentic connection with them.

This approach not only lowers external recruitment costs but also helps in building a talent pool for future needs. Moreover, a well-crafted employer brand reflects positively on your company’s overall image, attracting more spontaneous applicants and thereby reducing the need for extensive external advertising.

How to reduce cost per hire

Improve Candidate Quality

Enhancing the quality of hire is crucial in reducing long-term recruitment costs. This strategy starts with creating clear and thorough job descriptions that accurately reflect the roles’ requirements. Utilising effective screening methods, such as custom application forms and candidate scorecards, helps in identifying the most suitable candidates early in the process.

Furthermore, data-driven recruitment methods can provide insights into which channels and strategies yield the best candidates, enabling more focused and cost-effective recruiting efforts.

Internal Talent Pool

Promoting internal mobility can significantly reduce the costs and time associated with external hiring. Internal candidates often require less training and are faster to onboard, as they are already familiar with the company’s culture and processes. Encouraging employees to apply for new roles within the organisation not only saves on external recruitment costs but also boosts employee morale and retention by offering career development opportunities (read more about the advantages and disadvantages of internal recruitment).

Learn how to get the most out of your Talent Pool

Evaluate and Adjust Regularly

Continuous evaluation and adjustment of your recruitment strategies are vital for maintaining cost efficiency. Regularly monitoring recruiting metrics allows you to identify the most cost-effective methods and areas where improvements can be made. This practice encourages a proactive approach to recruitment, ensuring that strategies remain aligned with evolving business needs and market conditions.

Partner with Educational Institutions

Building relationships with universities, colleges, and vocational schools can be a strategic move. These partnerships can provide a steady stream of qualified candidates, particularly for internships or entry-level positions. It helps in reducing advertising and agency costs and can be particularly effective in industries like healthcare and technology, where specific skills are in high demand.

Utilise Employee Referral Programs

Employee referral programs can be a cost-effective recruitment strategy. Employees typically refer candidates who are a good fit for the company culture, which can lead to quicker hires and better retention rates. Offering incentives for successful referrals can motivate employees to recommend quality candidates, thus reducing the need for external recruiting efforts.

Streamline the Interview Process

An efficient interview process can significantly reduce the time and resources spent on recruitment. This involves having a structured interview format, clear criteria for candidate evaluation, and a well-coordinated scheduling system. Reducing the number of interview rounds without compromising on assessment quality can also lower costs.

Outsource Where Necessary

While internal recruitment efforts are vital, there are scenarios where outsourcing certain recruitment functions can be more cost-effective. For roles that are particularly challenging to fill, specialised recruitment agencies can save time and resources, even if their services come at a premium (read more about the advantages and disadvantages of using recruitment agencies).

Focus on Retention

Reducing employee turnover is an indirect yet powerful way to lower Cost per Hire. By investing in employee engagement, career development opportunities, and a positive work environment, companies can improve employee retention. This reduces the frequency of hiring for the same positions repeatedly, thereby lowering overall recruitment costs.

Leverage Analytics for Data-Driven Decisions

Using data analytics to understand where your recruitment process is most efficient and where it is lacking can provide critical insights. This could involve analysing the cost-effectiveness of various recruitment channels or understanding the correlation between recruitment practices and employee retention rates.

Wrapping Up: Teamdash, your partner for reducing Cost per Hire

In conclusion, Cost per Hire is a multifaceted metric that, when optimised, can significantly enhance your recruitment process’s efficiency and effectiveness. By understanding, calculating, and implementing strategies to reduce this cost, organisations can gain a competitive edge in talent acquisition, particularly in dynamic industries. Remember, the goal is not just to reduce costs but to make strategic investments that yield long-term benefits in hiring quality and operational efficiency.

Reduce your Cost per Hire with Teamdash

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