While the exact cost of a bad hire varies from source to source, one thing that can’t be denied is this: it’s wasted money that doesn’t need to be spent.
And it’s a bigger issue than you might think. Ex-REC chief executive Kevin Green claims that bad hires are costing UK businesses billions each year.
But how exactly does a bad hire cost your company money? And what can be done to avoid it? Below we will give you all the information you need to greatly reduce your chances of making a bad hire ever again.
The Real Cost Of A Bad Hire
The costs of hiring the wrong person for a role can come in a variety of forms. Understanding these costs will give you better insight into why it’s essential to hire the right fit for the role first time. REC estimate that a bad hire at mid-manager level (earning £42,000) can end up costing up to £132,015. Yes, you read that correctly.
They suggest that costs would be broken down as follows:
Although quite a specific example, it shows how costs can spiral out of control. Within any bad hire, and the process of replacement that follows it, there will be two types of cost: logistical and indirect.
We will take a look at these in more depth.
The logistical costs will most likely be the first (if not only) costs that come to mind. They are the costs that are incurred as a direct result of hiring a new employee. It’s reported in a study conducted by Oxford Economics that the average cost to replace an employee in the IT sector is £6,455. This feels like a very low estimate, incidentally, especially if you need to hire contract resource as cover for anything longer than a couple of weeks – but it’s the number they have come up with.
So what qualifies as a logistical cost? An example would be the fee that a recruitment agency charges, should you choose to use one. This can be anywhere up to 20-30% of the employee’s annual salary. And the cost of agency fees can add up quickly if the recruitment process needs to be repeated multiple times.
There are also other costs to bear in mind, even if you don’t use an agency. For example, you may need to pay to advertise your position on certain job boards. As well as this, it might be necessary to hire a temporary worker to cover the position until a replacement is found. Both of which can be costly.
Some less-obvious logistical costs are the wages of employees whose time will be required to facilitate the hiring of a new recruit. You will need a number of senior members of staff to conduct interviews. As a result of their seniority, their time will come at great cost. In addition to this, the time used by HR staff to process a new recruit is predicted to cost around £200 on its own.
And once you’ve made your placement, you will also need to train them to do their job properly. The yearly average is around £300 per employee in training expenses. Although, it seems more training is better. Companies that spend more than the average are found to see a retention rate of a minimum of 6 months.
Other HUGE Costs That You May Not Have Considered
The logistical costs in themselves all add up, but in reality, they only make up a small portion of the cost of making a bad hire. There is something more valuable, but harder to quantify, that will cost you BIG.
This is the performance of the staff. There is no two ways about it: if a member of staff isn’t performing at an optimal level, they are costing your company money. Every time you replace a member of staff, there will be two periods of substandard-performance.
The first is when the original staff member hands in their notice. While we’d like to think that people give their all until their last day, the reality is that they probably don’t. The second is when the new employee starts.
It has been found by Oxford Economics that the time it takes for a new member of staff to reach optimal performance can take anywhere up to a year. Although, it should be noted that this is affected by a number of factors.
For example, employees going from one role to another in the same sector tend to take the least amount of time to reach OPL (Optimum Performance Level). Whereas employees who are returning to work after time out or unemployment typically take the longest.
The size of the business also plays a part. Employees at smaller businesses tend to settle into their role much quicker than those at larger firms. And the study shows that IT professionals take, on average, 29 weeks to reach optimal performance.
Why Sub-Optimal Performance Will Cost Your Company Money
Sub-optimal performance hugely contributes to the cost of a bad hire. The reason for this is simple. When an employee is not performing at the level they should be, they do not generate revenue for the company at the same rate – if at all – but they still receive a full wage.
Oxford Economics suggest that when an employee is at OPL, they not only generate enough revenue to cover their own wages, but also generate a surplus in the form of company capital.
When performing at a lower standard, an employee may not generate enough revenue to cover their own wages. Therefore, they subsequently won’t be generating surplus capital for the company.
A Knock To Morale
Aside from financial loss, bad hires can take their toll on your company’s morale. A high staff turnover, and the negative attitudes accompanying it, can be transferred to other employees; potentially long-standing employees who play an important role in your business.
So with this in mind, it’s important to promote a strong inclusive culture. Ensuring all members of your team feel like a firm part of the business, each with their own important role to play, is a good place to start.
Hiring people who aren’t a good fit and are ‘here today, gone tomorrow’, will create doubt in employee’s minds. If you want your staff to consider your business as somewhere they want to stay for years to come, minimising turnover is an essential step.
What Are The Causes Of Bad Hires?
It appears there are a variety of reasons behind the occurrence, and subsequent cost, of a bad hire. But, within the varying reasons, there is one consistent theme. And it’s as simple this: managers are filling roles with people who don’t suit them.
A report conducted on behalf of Robert Half found that the top causes reported by managers from 5,000 companies were as follows:
- Mismatch of skills (44%)
- Under-qualified candidates (42%)
- Applicants lying on CVs (37%)
So, what can be taken from this? Well, it demonstrates just how crucial it is to ensure you know as much about a candidate as possible before offering them a role. Clearly, CVs and even interviews, don’t always tell us everything required to make a final decision on whether they will be right for the role.
How To Avoid Hiring The Wrong Person
With all of this in mind, there are a wide variety of measures you can take. And it’s important to do so because, as you can see, the cost of a bad hire can manifest itself in a number of ways. So what can businesses do to avoid making this mistake?
- Research Your Recruitment Agency – If you’re going to go down the agency route, it’s important they can do the job. You need to ensure you are getting value for money. It’s no secret; not all agencies are built the same, but there are ways to tell the difference between the good and the bad. It’s also good to ensure they’re knowledgeable in your sector. As an IT recruitment agency, our clients know we have the technical knowledge to find specialists who are right for the role.
- Make Use Of Assessments – You can find out a great deal about how a candidate works before they ever step into the workplace. This is something that we are big believers in. It’s also something we don’t think people use enough. By utilising assessments such as an IKM test, you can get a true insight into a candidates technical abilities. And there are also a wide range of other assessment types out there that allow you to look at behaviours, personality and other critical characteristics.
- Check references – Don’t waste this excellent resource. If anybody will know how a candidate works, it will be their previous employers. Ensure that you request and follow up employee references.
And once you’ve placed your new employee, the process shouldn’t stop there. Once you have found the right candidate, you need to keep them. This is why on-boarding is also a hugely important area to focus on.
We will look at how you can avoid hiring the wrong person in more depth below.
What To Look For In A Recruitment Agency
A key area in which you can eliminate cost caused by bad hires is through careful consideration of your recruitment agency. But what do you need to look out for?
When researching potential agencies, look for a company that has a thorough process. If it seems like they will just send across CVs, don’t waste your money. You could do that for yourself. Find a recruitment agency that is committed to pairing the right candidates with the right roles.
So, how might they go about this? Firstly, by getting to know your company. If a recruitment agency is intending on getting it right, they will need to know about you. So it is always a good sign if they ask a lot of questions, or even better, visit you in person.
You also don’t want ‘yes men’ (or women!). Ideally, recruitment companies should be experts at what they do. And for this reason, will know more about the process than you. It is a good sign if they take a consultative approach as it shows they’re trying to ensure the very best results.
Finally, bear this well-known saying in mind: “Buy cheap – buy twice”. Expensive doesn’t always equate to better, however, often agencies are cheap for a reason. Find a recruitment company that doesn’t compete on price and offers their services at a fee that is reflective of the value it will deliver.
How Assessments Can Help
Behavioural and technical assessments are a hugely important tool when trying to minimise the cost of bad hires. They give you an insight into a candidate that CVs and interview questions cannot.
At Blues Point, we use Thomas PPA DISC assessments to profile candidates for our clients. This simple assessment gives candidates 28 groups of statements and asks them to select which is most like them and which is least like them. By doing this, it is able to get an accurate snapshot of their behaviour and can make suggestions on how to best manage them.
As well as this, we also offer clients Motivational Map assessments as part of our service, which look at the key motivators of the candidate. These motivational assessments are based on principles found in Abraham Maslow’s Hierarchy of Needs, Edgar Schein’s Career Anchors and The Enneagram. With this insight into what drives your team, you will be far better equipped to coach your employees and understand their needs.
The key difference between personality assessments and motivational assessments is this: personality assessments look at behaviours and motivational assessments look at motivators. Behaviours very rarely change but motivators constantly change. This is why it’s important to look at both.
The Right Skills For The Job
Ensuring someone is the right fit for your company’s culture is one thing, but ensuring they actually have the skills to do the job is another hugely important factor. And if they do have the skills, to what level?
There are a number of technical assessments available that can give you a strong idea of a candidate’s ability. A good example of this are IKM tests. IKM TeckChek are a global testing company. They have around 250 standard assessments which cover most areas of IT.
When a candidate has completed an IKM assessment, a report is created which showcases their results. It shows their overall score, along with an in-depth overview of their knowledge on specific subjects. You will also be able to see their speed/accuracy score and other key results.
References are something that candidates are constantly encouraged to include on their CV; and if not the full contact details, at least indicate that they are available upon request. However, employers don’t always use them to their full potential.
There are two types of reference: a box-ticking exercise and an in-depth review of an employee. Now, I put the question to you: which do you think you will get the most value from?
If you don’t specify the type of reference you would like, there is a good chance you may receive something back that just confirms that the person did, indeed, work for that company. Brilliant. And what can you take from that? Absolutely nothing.
However, if you include some specific questions in your reference request, you are far more likely to end up with something substantial. For example, you could ask: ‘what were the candidate’s main responsibilities?’ , ‘what was the candidates attitude towards feedback?’ or ‘what skills did the candidate excel at?’, and so on.
Unfortunately, it has to be said, it isn’t always possible to get this type of reference from previous employers. However, it’s always worth trying. By asking these definitive questions, you are far more likely to receive a higher-quality reference. And, as a result, you will have a much better idea of what the candidate will bring to your company.
Approach On Boarding With The Right Attitude
On boarding is a critical part of the recruitment process. It is the point in which a company can really solidify its relationship with a new employee. Although the candidate may have accepted their job offer, they could still pull out – at almost any point. But there are things you can do to avoid this.
We offer this advice to all of our clients, and use it ourselves, as can be seen in this blog post. So what steps can you take to ensure a smooth on boarding process? Firstly, make sure you keep in contact with the candidate throughout their notice period. A month (or in some cases three) is a long time. Staying in touch lets candidates know that they haven’t just been forgotten about. Don’t overwhelm them with communication, but every now and then, drop them an email to update them on something relevant to their role.
You could even invite them out to a team meal before they officially start. This is what the Blues Point team did for me during the run up to me starting my role with them. This builds relationships between the team and alleviates first day nerves about meeting new people. But most importantly, it makes the candidate feel part of the team.
On the day the new recruit starts, ensure that you have everything prepared for them. From putting stationary on their desk to having their email address set up, getting everything ready for their first day will show that you are ready for their arrival and eager to make a good impression.
There is clearly a great deal of cost attached to making bad hires – especially when you do it consistently. However, I hope you can see that there are ways to minimise the risk of it happening. By following the advice included in this article, you will have a much better chance of hiring somebody who truly suits your company’s culture and needs.
If you would like more information on how you can ensure your next IT recruit doesn’t leave, why not download our free report: ‘6 Reasons Your Next It Recruit Will Leave In 6 Months… And What To Do About It.‘
If you would like to discuss your own IT recruitment needs and want to find out how we can help your business, please contact us today.