By Robert Richardson
Every great company stands on the passion, talent, and grit of the employees who drive its business outcomes and revenue. Recruiting delivers the lifeblood of these organizations – you can’t run an effective company without effective people. Why then, do companies so often describe recruiting departments as cost centers? Recruiting drives profit when it is done well. But many companies fail to realize how much recruiting impacts revenue. This article illustrates one way to show the financial impact of recruiting using data collected through my work helping SAP SuccessFactors customers.
The primary reason companies hire people is that the profit or savings generated by their role exceeds the cost of employing them. In other words, money spent on employees generates a positive return on investment (ROI). By the same logic, the longer a position goes unfilled, the longer a company loses the benefits associated with this ROI.
The following case study illustrates how one organization used time to fill (TTF) to position recruiting as a profit center. The numbers in this case study are based on actual data, but rounded for easy math. The logic goes like this. Sales people can’t sell if they aren’t hired. A surefire way to lose revenue is to leave sales seats unfilled. By shortening sales time to fill (TTF), we impact revenue.
To illustrate we just need to work through some simple numbers and formulas.
- Assume TTF to be measured in days
- Assume Turnover to be Number of Vacancies in a given year
- Loss of Revenue = The Role’s Average Annual Revenue Production / 365 x TTF x Turnover
- Revenue Production = The Role’s Average First Year Revenue Production / 365 x Reduction in TTF x Turnover
Loss of Revenue due to Sales Vacancies: This client’s salespeople produced about $2,600,000 per year. Their TTF was approximately 50 days. So, every sales vacancy resulted in a loss of more than $7,000 per day or about $360,000 across all 50 days it was left vacant! This organization turned over 20 salespeople per year. That’s a loss of more than $7,000,000 per year due to unfilled sales positions (this is also an argument for investing in recruiting methods that reduce turnover by predicting employee fit and retention).
Revenue Production through shortening Time to Fill: Given the numbers above, it’s tempting to say Talent Acquisition will return $7,000 per day that gets shaved off average TTF. And, that’s the first argument this organization went to bat with. However, money was tight and they received pushback rightly claiming new salespeople are rarely as productive in their first year as their second or third year. Back to the drawing board. Talent Acquisition then partnered with finance to understand actual first year revenue production.
Their finance team looked at the last 3 years and found new salespeople produced an average of about $2,000,000. So, using the Revenue Production formula above, average revenue production per day proved to be just shy of $5,500 per day!
Organizations that use methods such as this to position recruiting as a mission critical driver of profit find it easier to invest methods to improve their recruiting performance. These organizations appreciate the financial benefits that come from hiring better talent faster. Need extra funds to post a job? Does it cost less than $5,500 per day? Go for it! Need to sponsor an ad? Is it less than $5,500 per day? Have all the money you need! …Ok, it’s not that simple. But, you get the idea.
Now let’s assume you need something more substantial like a new career site, candidate relationship management system or assessment tools. Are you confident it will reduce TTF? Because, doing so by 3 days results in $16,500 in profit for each individual or $330,000 across all 20 vacancies. Reducing TTF by 5 days results in $550,000 across all 20 vacancies. Reducing TTF by… well again, you get the idea. Not too bad for a cost center. And, we’ve only touched sales jobs!
Formulas like these are most easily calculate with with sales jobs because of their visible impact upon revenue. But any role considered “revenue generating” applies. Nurses in hospitals are often considered revenue generating since you can’t fill beds without the proper nurse to patient ratio. Software Engineers in technology companies may be considered revenue generating because without a product there’s not much to sell. The key is to get outside of the Talent Acquisition group and work with other departments to understand what drives revenue. And, if all else fails, simply divide total company Revenue by employee count for a very rough average across all employees.
There are plenty of other ways to prove recruiting drives profit. But, in the end, profit is determined by the numbers. So, do the math, present the argument, refuse to be painted as a cost center! Prove how critical hiring the right people quickly is to company profitability. You may find your organization better funded by recruiting to the bottom line.