Outsourcing and the hidden costs of recruitment

We’ve written before on how many organisations are choosing to outsource their recruitment functions for more strategic reasons than short-term financial gains (read our previous contribution at http://www.sourcingfocus.com/index.php/site/opinionscomments/2519/) , but for the moment, there’s no getting away from the fact that a desire to save costs is still a significant factor.

However, at the risk of stating the staggeringly obvious, you can only save money if you know what you are spending already. And when it comes down to recruitment, our research suggests that very few organisations have an accurate understanding of their cost per hire.

The superficial reasons for this are legion – the daunting prospect of marshalling and analysing agency invoices and the hidden hire squirreled away under some other budget area are just two of the most common ones. But what about all the other factors that arguably ought to come into the calculation? Some organisations will include elements such as advertising, travel costs and even the employment cost of the recruitment team itself, but few will go beyond this which may be somewhat short-sighted.

Our research shows that more than 50% of recruitment costs are indirect and perhaps one of the most obvious aspects of this is the time cost of line managers. With managers conducting an average of 10 interviews for each hire, it’s easy to see how costs can stack up (we calculated that hiring managers’ time accounts for around £2500 per hire). And while business leaders may accept that interviewing is an integral element of a manager’s job, they quickly become conscious of lost earning opportunities where revenue generators are involved. But this particular indirect cost may be just the tip of the iceberg with the ‘nine tenths under the water’ coming from the employment of temporary and contract workers.

Many organisations rely on contractors and contingent workers to support their operations, but a growing number also use them as an alternative to permanent recruitment and this is where costs can really mount up. So why do so many line managers choose the contractor route over permanent?

Our research uncovered two key reasons:

- Headcount approval – hard to achieve for permanent hires, but surprisingly easy for contractors

- Talent availability – managers frequently state that it’s easier to secure a good quality contractor than a good quality permanent employee

Sound reasons perhaps but not particularly cost effective. Let’s assume most contractors charge a 30% premium on their equivalent permanent salary and an agency margin adds another 20%. On average therefore the extra cost of recruiting a contractor over a permanent employee can easily be 50%. And that cost continues throughout the life of the contract. To make matters worse many organisations don’t even have a clear idea of how many temporary workers they are using at any given time. In a recent client project we found the company was employing three times more contractors than it thought it was at a cost of over £60 million. And £20 million of that was accounted for by contractor premium and agency margin – money that could have been saved by better overall control of the hiring process.

Which of course begs the question – can an organisation really afford not to know what its true cost of recruitment is?

Paul Daley is a director at recruitment outsourcing and talent management specialist, Ochre House – www.ochrehouse.com