How to Measure Hiring and Staffing

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Part 3

• How to Measure Hiring and Staffing

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Why Recruitment Mission Critical

• If we think of the people in the organization as
  assets, lets look at our work as being that of
  human asset managers
• Just like capital, equipment, supplies and
  energy, human talent has to be acquired - we call
  it hiring, recruitment, staffing - but it is the
  acquisition of talent - the first step in asset
  management.
• The value-adding potential of all functions
  within organi-zations depends, how effective is
  the talent we help them acquire.
• All other assets are nothing more than inert
  commodities, that can be purchased at market
  prices. Once purchased and delivered, these
  resources become depreciating assets. Only the
  human asset has the potential to learn, grow and
  contribute.

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Make or Buy Decision

• Organizations have two choices in acquiring human
  assets
• train internal people for greater responsibility
  (make), or
• go to the market and hire someone (buy).
• One of the fundamental variables in the make or
  buy decision is cost.
• NOTE The acquisition process has a wider range
  of effects on the organization than is generally
  realized. The cost-effectiveness of any given
  hire does not stop when the offer is accepted, it
  can be traced all the way through the new
  employees career until the day the person
  becomes a turnover statistic.
• The issue of turnover cost starts with selection!

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The First Measure

• To make intelligent decision regarding the
  trade-offs between promoting from within and
  hiring from without, it is necessary to know the
  relative cost of each choice.
• We start with what is often thought of as the
  first measure cost per hire (CPH).
• This applies for internal and external sources as
  well. Of course internal placements do not
  require all the types of expenses that external
  sourcing does, but there are still costs, and
  they need to be calculated.
• CPH includes not only the direct costs of
  advertising and agency fees, but a multitude of
  expenses generated by the replacement process
  (see table).

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Expenses Related to Hiring Process
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Measuring CPH

• In its simplest but most complete form, CPH can
  be expressed as shown in the equation below

• where
• AC advertising costs
• AR agency fees
• RB referral bonus
• TC travel cost
• RE relocation cost
• RC recruiter cost
• NC unsolicited no-cost resumes
• H number of hires

Get the best data with a minimum of
effort! Based on Saratoga Institute, this formula
proved to be accurate - in 8 years period the sum
of all other cost was between 9 to 10.5 percent.

• CPH can be calculated for both external and
  internal hires.

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Advertising Costs

• When we run one advertisement for one position,
  it is easy to ascribe the cost of the ad to that
  hire.
• However often combination ads are used to call
  applicants for two or more jobs. Sometimes we use
  a blanket ad calling for an unstated number of
  jobs.
• Question how should we apportion the cost of the
  ad between the positions we want to fill?
• divide it simply by the number of positions?
• weight the charges by the salary level of each
  hire?
• etc.
• There is no prescribed rule to follow. We need to
• establish the ground rules ahead of time
• be consistent in our methodology to gain
  comparable results

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Agency Fees

• Agency fees cover all types of outside agency
  sourcing
• executive searches
• employment agencies
• temporary workers who are converted to permanent
  workers
• In the case of executive searches, the fee can
  run to hundreds of thousands of Hungarian forints
  (tens of thousands of US dollars). This, along
  with relocation (in the US), is usually one of
  the highest costs.
• This is the reason, why so many companies have
  strict controls regarding the use of executive
  search firms.

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Referral Bonuses

• Because of the tight labor market situation, some
  companies in the US have employee referral bonus
  programs.
• These companies pay current employees a bounty
  (fee) if they bring in qualified applicants who
  are subsequently hired.
• When the labor market became very tight in the
  second half of the 1990s, many organizations
  started offering sign-on bonuses for people who
  came in directly without going through an agency.
• We do not have neither of these programs in
  Hungary.

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Travel Relocation Costs

• According to international data, expenses
  associated with travel and relocation are
  significant (between 1984 and 1995 these costs
  quintupled in the US).
• This is also the situation for multinational
  companies in Hungary in respect with Hungarian
  and/or foreign expatriots (especially in higher
  value-added positions, like RD or in management
  positions), but does not hold water in general
  terms.
• Under these circumstances for not having a
  misleading CPH rate it is appropriate to report
  two sets of figures
• one for hires that does not require travel
  relocation and
• an other for hires for which there are travel
  relocation costs

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Staff Time

• International studies have shown that the
  recruiters salary and benefits cost multiplied
  by the number of hours spent per job is the sixth
  important cost variable.
• All other staff time - clerks, hiring department
  staff, and management - is part of the 10 percent
  miscellaneous cost variable. We do not recommend
  spending valuable time working this cost variable
  out in-depth.
• If you feel you must, you may introduce standard
  labor costing for each of the staff members
  involved in the hiring process. Standard rates
  are often computed as a sum of the following
  three factors
• salary of staff member involved
• benefits of staff member involved (generally as a
  percentage of the amount of salary)
• overhead costs.

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Breaking Down CPH

• The true value of the measurement system becomes
  apparent only when we examine a dependent
  variable such as cost per hire.
• The bottom-line number, CPH HUF X for a given
  time period is just the starting point what can
  be a very enlightening tour of the staffing
  function.
• Whether we have an automated or a manual data
  entry system, we can divide CPH by any of the
  types of expenses discussed.
• It is also easy to measure CPH by source, by
  level of job, even combining level with job
  groups.
• NOTE To be able to make those cuts, we have to
  remember to collect the data at the time of hire.

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Source Analysis

• For the following analysis, standard costs for
  staff and management time, travel, relocation and
  other costs are taken as givens. The outcomes are
  only the sourcing costs.
• The basic equation is as follows

• Once we have the basic formula, we can change the
  denominator to any group of hires and recompute
  cost per source for that group (e.g. technical,
  marketing, sales, administrative).

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Source Analysis

• For reporting purposes it is enlightening to show
  the comparative cost of each source of hire. To
  do that, we simply separate the variables in the
  numerator and do separate computations

• A sample report based on this cost analysis

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Interviewing Costs

• We already know how to calculate standard labor
  costs for the staff and for hiring management.
  Observations disclose how long on average each
  interview takes place. Computing the cost of
  interviewing (CTI) as a component of the total
  cost is a simple two-step process

step 1 CTI ST MT

• where
• ST staff time, total staff time spent
  interviewing (e.g. HUF 2.000 per hour standard
  cost x half hour per interview x number of
  interviews - 237)
• MT management time, total management time spent
  interviewing (e.g. HUF 5.000 per hour standard
  cost x one hour per interview x number of
  interviews - 237)

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Interviewing Costs
step 2

• In step 2 we simply include the interviewing cost
  in the known source cost per hire ratio.
• The new ratio reflects the cost of the fact, that
  although there were only a certain H amount of
  hires (e.g. 74), it was necessary to interview
  237applicants and conduct 237 interviews.

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Summary (costs)

• Evaluating the cost-effectiveness of the
  employment process is one of the easier
  judgements to make.
• Costs are mostly visible in the form of invoices
  for advertisements, fees and travel. Moreover the
  less apparent expenses, such as the cost of
  someones times, can be determined quickly.
• No HR department can claim to operate efficiently
  if it does not know how much it is spending to
  hire people. Acquisition costs are important,
  whether we are talking about machines or
  employees.
• Fortunately, these costs are easy to obtain, and
  are powerful tools for proving that HR is trying
  to maximize the organizations recruiting ROI.

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Keeping Management Satisfied with the Hiring
Process

• Cost are important, BUT there are obviously other
  staffing considerations besides cost.
• Issues of timeliness, completeness and quality
  may be more important in the eyes of the hiring
  managers (our customers).
• Our customers are focused on achieving their
  operational objects. The decision point may shift
  among time, cost and quality as outside pressure
  change (e.g. in a fast-growing company, having a
  candidate in place may be the key requirement)
• Knowing where the customers priorities are or
  are likely to be will enhance our service.

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Time Factors

• Basically there are three time issues in the
  recruitment process.
• The first issue has to do with how long it takes
  to develop qualified candidates and refer them to
  the management for an interview. This is called
  response time.
• Response time is defined as the cycle time from
  the day we have a signed, approved job
  requisition in hand to the day on which we call
  or forward to the requesting manager at least one
  qualified candidate ready to be interviewed.
• Although it does not mean that we have completed
  the assignment, it shows how quickly the system
  works.

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Response Time

• The computation of response time is a simple
  subtraction

RT RD - RR

• where
• RT response time
• RD date first qualified candidate was referred
  for an interview
• RR date of receipt of job requisition

• Adding total days to respond and dividing it by
  total hires for a period of time gives an average
  response time

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Internet Effects on Response Time

• Job boards and internal databases are both
• a blessing (rapid access to applicant databases)
• and a burden (quality of applicants has to be
  further screened!)
• when it comes to rapid response time.

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Time to Fill

• The second time issue is how long it takes to
  fill a job requisition (have the offer accepted).
  This is called time to fill.
• Time to fill measures the total number of days
  between the delivery of an approved requisition
  to staffing (RR) and the date on which an
  applicant accepts the job offer (OD).
• NOTE Once we refer an applicant, our degree of
  control begins to lessen.

TTF OD - RR
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Time to Start

• The third time measure is time to start. It is
  calculated exactly as is time to fill except that
  is shows the additional number of days between
  acceptance and start. The start date is the day
  the new hire reports for work.
• The formula for time to start is start date (SD)
  minus requisition receipt date (RR)

TTS SD - RR
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Administrating - Selecting Key Checkpoints

• A staffing manager who is looking for
  opportunities to improve the time to fill or time
  to start record, needs a complete log of the key
  checkpoints of the process (computerized HR
  systems often generate this automatically, but a
  spreadsheet program may also be used instead).

1 - requisition received, 2 - sourcing started,
3 - first applicant responds, 4 - first
screening, 5 - follow-up contact, 6 - first
management interview, 7 - hiring decision made, 8
- offer made, 9 - offer accepted/rejected, 10 -
new employee starts work
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Referral Factor

• After measuring cost and time of hiring, the
  third issue is the quantity of candidates.
• Quantity is measured by the referral factor, as
  the equation shows
• where
• RF referral factor, a relationship of candidates
  to openings
• R number of candidates referred to an interview
• O number of job openings
• A variation on this formula is to substitute
  openings for hires. NOTE for a given period of
  time not all openings result in hires.
• A realistic referral factor is always a
  combination of management demand and market
  conditions.

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Job-Posting

• Later we will talk about the job-posting system
  as a part of the career development effort. Here
  we look at it solely from an administrative
  standpoint.
• From this point of view three perspectives of
  job-posting are important to us
• the employees use of the system
• the rate of hire generated by the system, and
• the role of the system in the total hiring
  scheme.
• Each perspective provides opportunities for
  measurement.
• Job-posting systems and the use of these systems
  vary considerably among industries and different
  countries of the world. Also management
  philosophy, union status, internal communication
  capabilities and other factors affect the usage.

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Job-Posting Response Rate

• No matter what the system like, the first
  questions to ask are
• How are people responding to it?
• When we post a job, what happens?
• Are we flooded with employees eager to transfer?
• Or does anyone at all show up?
• The basic measurement is the job-posting response
  rate (JPR), which indicates how many responses
  are received per job posting.
• where
• A number of applications received
• O number of posted jobs

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Job-Posting Response Rate Analyzing Results

• Job-posting, if monitored, can yield much more
  than a list of applicants for open positions.
• Assume that there is a flood of applicants for a
  job or for all jobs posted. What could that mean?
  A few reasons people apply for a transfer are
• desire for advancement
• escape from bad supervision
• lack of interest in the current job (boredom)
• escape from bad interpersonal situation
  (co-workers)
• better pay
• movement to a new geographical location
• change in job responsibilities
• family or health problems.

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Job-Posting Response Rate Analyzing Results

• An analysis of the source of applications and the
  reasons given by the applicants often helps
  pinpoint an organizational problem.
• Let us assume now that there only a very few
  employees respond to posting. Some of the
  possible implications are
• there is a consistent history of internal
  rejection in favour of outside applicants
• there is no visible support from management
• there are threats from supervisors about applying
  for other positions in the company
• the HR department has done a substandard job of
  dealing with applicants
• only low level jobs are posted.

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Other Job-Posting Measures

• There are variations on the basic JPR formula,
  one of which is to calculate how many posted jobs
  are responded to.
• JPRF gives a picture of the spread of responses.
• The second test of the job-posting system takes
  the process a step further by dealing with the
  number of placements that result from the system.
• NOTE If a high rate of response is coupled with
  an equally high rate of hire, the system would
  appear to be fulfilling its mission.

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Internal Hire Rate

• Some companies set targets for internal
  replacement rates.
• This is probably a healthy thing to do. It lets
  everyone know what the expectation is. If it is
  communicated well, employees will understand and
  support it. A formula for measuring these targets
  is called the internal hire rate (IHR)
• Job-posting measures are a good example of the
  inherent value of measurement. These seemingly
  secondary issues yield information well beyond
  what appears on the surface. In the process of
  obtaining data on one subject, the procedure and
  results cause another set of questions to be
  asked.

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Career Path Ratio

• A second perspective on the organizations
  internal hiring process emerges from calculating
  the percentage of internal hires that are
  promotions versus those which are transfers.
• By understanding these results, one can uncover
  other career development issues as well.

• where
• CPR/P career path ratio / promotions
• CPR/P career path ratio / transfers
• P total promotions
• T total transfers

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Recruiting Efficiency

• After examining cost, time and quantity issues,
  we focus on the efficiency of the recruiting
  process and that of the recruiters.
• Lets start by looking at recruiters efficiency.
  Our basic questions are
• How productive are their interviewing techniques?
• What is the average length of interview for a
  given type of job?
• How many interviews does it take to develop a
  list of qualified applicants?
• How many interviews does it take to achieve a
  quality hire?
• Ratios for all this issues can be created if that
  will be useful.

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Basic Measures

• The most basic measure is average length of
  interview (AIL)
• There is another efficiency measure that yields
  information about both the recruiters and the
  sources of applicants, the hire rate formula
  (HR)

• where
• HO total hours spent interviewing
• I total number interviewed

• where
• A applications received (e.g. 120)
• I interviews (e.g. 30)
• R referrals (e.g. 10)
• H hires (e.g. 4)

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Basic Measures

• Hire rate traces the process from the point of
  application to the point of hiring. The ratios
  show how the original pool of applicants is cut
  at each step.
• Example
• Questions
• If we obtain only 4 hires, was the advertisement
  effective with 120 applicants? - consider time
  and cost of processing
• When the process was finished with four hires,
  probably 60 to 80 labor hours had gone into it.
  Is that satisfactory?

HR 25 x 33 x 40 3
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Offer Acceptance Rate

• Another measure that says valuable information
  about how productive recruiters are is called the
  offer acceptance rate (OAR). Simply stated this
  is the hit ratio of job offers made to job offers
  accepted.
• It is helpful to have an acceptable standard for
  this ratio. OAR can not be fully controlled, it
  reflects the supply and demand positions of the
  labor market as well. Today the accepted US rate
  of OAR is about 80.
• There is probably nothing more irritating,
  frustrating and wasteful than an employment offer
  is rejected.

• where
• OA offers accepted by applicant
• OE offers extended (made)

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The Quality of Recruiting

• The basic problems with measuring quality of
  recruiting are
• How do we judge the quality of a new hire at the
  time of hiring?
• How do we describe a good employee (our product)?
  
• Our answers to these questions are
• When observing the quality of recruiting, we must
  acknowledge that quality is time bound.
• NOTE patience is a prerequisite to measure
  quality of hiring.
• For describing a good employee we use three
  criteria
• performance
• promotability
• stability

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Quality of Hire

• Based on our answers we believe that quality
  issues cannot be measured for a minimum of 6-12
  month.
• With these assumptions we can create a quality of
  hire (QH) measure

• where
• PR average job performance ratings of new hires
  (as a percentage of possible maximum performance)
• HP percentage of new hires promoted within one
  year
• HS percentage of new hires retained after 1 year
• N number of indicators used (in this example 3)

• The resulting percentage (e.g. 62) is a relative
  value.
• It is up to us to decide if the number represents
  high, med. or low quality.

• The decision can be based on historical
  comparison or preset performance standards, etc..

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Recruiter Effectiveness

• To answer the question of recruiter effectiveness
  (RE) we will follow the same procedure, but
  employ different indexes.

where RT response time TTF time to fill
CPH cost per hire OAR offer acceptance rate
QH quality of hire N number of indexes used
(here 5)
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Summary

• We have looked at the staffing function and
  measured it with the five basic indexes cost,
  time, quality, quantity and customer service.
• NOTE the most important is customer
  satisfaction. Without it, we are out of work.
• The examples given were not meant to be
  all-encompassing. Rather they were samples of
  what we consider the most important tasks to
  measure.
• There may be special needs within the company.
• Consider the environment, the staff, line
  management, business conditions, organizational
  objectives, etc.
• Then design a set of measures and reports that
  will help meet the twin goals of effective
  management and persuasive reporting.

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C o f f e e b r e a k