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The Invisible $200,000 Problem in Your Recruiting Efforts

Posted by Bob Corlett on September 9, 2009

Jim leads the recruiting effort for Habenae Muneris (HM) - a professional services firm with about 50 employees.  For the most part, things are working pretty well for him, meaning that business is good, the company is profitable and nobody really complains about recruiting.  Hiring delays are fairly common at HM, but there's usually a good reason for it, and the delays aren't any worse than at any other firm he's worked for.  The most common hiring delays are caused by the hiring managers, not Jim:

  • Some managers are too rigid in how they look at resumes, overlooking potentially good people and adding weeks of delay to the hiring process.
  • Some managers are unclear about their hiring specifications until they start interviewing - when they suddenly become incredibly picky about what they are looking for in an "ideal" candidate.  This recalibration essentially starts the recruiting cycle all over again.
  • Some managers are hard to schedule (adding weeks of delay) and then, when pressed for time, they make rash decisions out of desperation to speed things up.  This results in hiring candidates who are not a good cultural fit, or sometimes paying too much for someone.

You know, the usual stuff that happens at every firm.

Like most firms their size, HM does not track turnover specifically, nor are there any metrics in place to measure the speed and accuracy of the hiring effort (time-to-fill or quality-of-hire for example).   Turnover is not broken out by department, so managers with a bad track record are not identified or held accountable for their mistakes. Some managers have quite a bit of turnover, and some have very little, but in reality, the managers pay far more attention to their customer deliverables and billable hours than the cost of their turnover.   In fact, some of the managers with the worst turnover are the people most beloved by their customers.  The managers at HM are not trained in interviewing and are not accountable for hiring speed, so they do the best they can to squeeze in time for interviews around their billable work and client commitments.  Like I said, typical stuff you find everywhere.

From time to time, the senior leadership team at HM says they would like to be "more agile in meeting customer needs" but really, there is no compelling reason to change anything - after all, customers are not complaining, business is still coming in the door and Jim has been a careful steward of the resources he has been given - he stays within his budget.   Jim stays current with his profession, reading all the articles on ERE, but the cost and complexity of building a recruiting pipeline  for a company the size of HM just seems prohibitive, and besides, the managers cause most of the hiring delays anyway.

Except here's the problem.  In my research, most firms about the size of HM lose over a million dollars in revenue and lose between $100,000 and $200,000 dollars in profit because of common, preventable inefficiencies and delays in their hiring process.  Yup, the  owners of these professional services firms unknowingly cut their own paycheck by $100,000 - $200,000 every year.

How can this be happening?  It happens because an inefficient recruiting process loses money in ways that are often not counted, so the losses are literally invisible.  This lost profit can't be found by accountants because it does not show up on the financial statements.

But you can make invisible losses quite visible with a few simple metrics - literally a one page Excel spreadsheet.  (And yes, I can send it to you if you ask me nicely).

So here's where the money disappears:  In a professional services firm, when a position is vacant for a month, that's a month of billable time that did not get billed.  For most DC government contractors, working at normal 10-15% profit margins, that's a couple of thousand dollars worth of profit that did not get booked every single month a position is vacant.  So, when you leave a senior level position vacant for 4 - 6 months - POOF!  - you've disappeared ten or twenty thousand dollars of pure profit on just that one position ... and your accountant will never find it.

At HM, people will tell you that most open positions get filled in 45 - 60 days.  Except there is a lag from when it is filled until the new hire actually starts work and becomes billable - so the unbillable window is really more like 60 to 75 days.   And, well, OK, when you really look at the data closely, it's not all that uncommon to leave a job vacant for 90 days.  So when you take a staff of 50, with a 20% annual turnover, you need to fill 10 positions every year just to maintain your current staff levels.  (Rest assured, if you don't specifically track it, your turnover is higher than you think).  If normal vacancies are open an average of 60-75 days until someone becomes billable, you gave up $40,000 in profit every year just backfilling current positions.   But most firms are also trying to grow by 30% - which means hiring an additional 15 people.  If that goes as slowly as the replacement hiring, then it will potentially cost you another $75,000 in lost profit.

And these losses don't include your recruiting, advertising, training or onboarding costs, we're just talking about unbilled hours right now.

So, if we take 3 or 4 hard-to-fill positions that go unbillable for 4-6 months, that adds up to $60,000 lost.  Add another $40,000 for all the billable time lost due to normal employee turnover.  Next add $75,000 for revenue you could not bill on new positions because of staffing delays.  Finally, add in $25,000 in unbillable time for the 3 hours a week that each of your ten managers must spend with new employees on interviewing, training, orientation and performance management.   And, for HM,  it all adds up to $200,000 in preventable costs - all hidden in plain sight within a stable, profitable professional services firm of just 50 people.   Just imagine how much more profit HM will lose when they have 100 employees.

The key to reclaiming this lost profit is in making these invisible costs visible, simply by tracking and reporting on them.  The management team can then direct attention and resources to the most costly inefficiencies and delays in the recruiting process.

Once you have the data, solutions are not expensive and can take many forms: it might be management training to help reduce turnover for one manager, tighter interview scheduling for another, helping develop better job definitions for a third, interview training to make better hiring decisions for a fourth, or perhaps in making a strategic investment in building a recruiting pipeline for a certain hard-to-find type of candidate.  The good news is that all of the above can be accomplished for a tiny fraction of what was being lost.

Topics: For Profit Company Management, Hiring Process