There are various factors that come into effective recruitment and budget management. This includes everything from using the right applicant tracking system to selecting the best accounting software. Digging a little deeper, you also must use the right metrics to support decision making.
One such metric is cost-per-hire.
Make no mistake, understanding the intricacies of cost-per-hire is vital. The following guide explains why that is the case, along with the calculation formula, strategies to minimise recruitment expenses, and more.
What Is Cost-Per-Hire?
Cost-per-hire is defined as a key metric utilised by HR professionals to determine the total cost involved in recruiting a new employee.
Due to covering the total cost, it encompasses all incurred expenses. By doing so, it provides insights into the efficiency and financial impact of the hiring process which is important for many reasons. Mainly, it helps companies to better manage their recruitment budgets. Additionally, resources can be utilised more effectively, and areas of improvement can be clearly highlighted.
The Cost-Per-Hire Formula
The cost-per-hire formula is simple. This is how it works:
(Internal recruiting costs + external recruiting costs)/total number of hires
Of course, the formula on the surface is more straightforward than it seems. After all, there are various internal and external recruiting costs that need to be factored into the equation. Here is a breakdown of the components:
- Internal recruiting costs: This includes the salaries of recruiting staff, recruitment software, overheads, and other relevant internal resources.
- External recruiting costs: This covers expenses such as job advertisements, job fair participation, background checks, and fees paid to recruitment agencies.
- Total number of hires: The number of employees hired during a defined timeframe.
As an example, say an organisation is working out their cost-per-hire for 2023. Their internal recruiting costs were £60,000, external recruiting costs were £20,000, and they hired 40 employees. This is how the numbers would be added into the formula:
£60,000 + £20,000 = £80,000
£80,000 / 40 = £2,000
This shows that the organisation’s cost-per-hire for 2023 was £2,000. Is that good? Bad? The following section will help to supply an answer.
Average Recruiting Cost-Per-Hire
Understanding the average cost-per-hire can be tricky. After all, different elements come into play. For instance, the average cost per hire by industry can vary significantly. Take the technology sector as an example. Due to the competitive nature of the field and the requirement for specialist skills, higher recruitment costs are the norm.
If you are using recruitment services, the UK average cost-per-hire currently sits at £3,000, according to British Business Bank. This figure is based on data such as the average UK salary.
Cost-Per-Hire Calculator
Although the way to work out cost-per-hire is simple, there are still lots of figures flying around that can cause a headache. These costs can also increase the chances of human error occurring. That’s why it can be wise to use a cost-per-hire calculator.
Cost-per-hire calculators are valuable tools that simplify the process of calculating recruitment costs. They consider all the different expenses and deliver an accurate cost-per-hire figure.
The good news: there are many online resources where you’ll find a cost-per-calculator. These resources range from industry websites to specialist recruitment software that calculates this metric and various others. Along with increased accuracy, the use of a calculator also speeds up the entire process.
Factors That Influence Cost-Per-Hire
As you would expect, different factors can play a big role in determining the cost-per-hire metric. These can be split into two distinct categories: internal factors and external factors.
Internal factors
One of the main internal factors is the efficiency of your recruitment team. Their skills and productivity directly influence cost-per-hire. Similarly, the use of specialist tools – such as advanced recruitment software – can streamline processes and reduce costs.
Another internal element that can affect cost-per-hire, one that can be easily overlooked, is your employer brand. When in possession of a strong employer brand, you can attract candidates more efficiently. This results in lowering advertising and recruiting expenses, which in turn reduces your cost-per-hire.
External factors
Different external factors can also play a part. Take current labour market conditions as an example. The availability of talent in the job market is going to impact recruitment costs. If you’re recruiting for a specialist position but suitable candidates are hard to find, this is going to bump up your cost-per-hire. This can also be negatively influenced by competition for talent.
Costs can also vary significantly based on the location of the job and candidates. London might be awash with talent in a specific industry for instance, but it could be the opposite in a small northern town. Yet salary expectations will typically be much higher in the capital in this scenario.
How to Reduce Cost-Per-Hire
You want to optimise your recruitment processes. Yet you don’t want to compromise the quality of new hires. This is why it’s imperative you effectively reduce your cost-per-hire. Here are five tactics that can help achieve this goal:
- Enhance internal processes: Automate repetitive tasks, utilise recruitment software, effective communication among the hiring team – there are various ways to enhance your recruitment workflows.
- Utilise data analytics: By analysing metrics such as time-to-hire and sources of hire, you can pinpoint inefficiencies in your recruitment process. You can then make data-driven decisions to cut unnecessary costs.
- Improve employer branding: A strong employer brand attracts top talent more effectively. If you invest in building a positive company reputation, this can reduce the need for expensive advertising and headhunting.
- Leverage social media: Alternative recruitment channels like social media platforms can be a cost-effective solution. They can lower advertising costs, along with bringing in higher quality candidates through trusted networks.
- Negotiate with vendors: Seek better rates with external recruitment agencies and job boards. Long-term partnerships can pay off with discounted rates and more favourable terms.
With strategies like these in place, you can achieve significant savings with your recruitment budget – all while still achieving high recruitment standards.
