What is the True Cost of a Failed Hire?

It is always a big disappointment when a new hire fails to meet the expectations of their role. It is also incredibly expensive.

We look at both the direct and indirect costs of a bad hire and suggest ways to get to the root of the issue and switch strategy to ensure it doesn’t happen again.

The direct financial costs of a failed hire

In 2016, the SHRM Human Capital Benchmarking Report put the average cost of the hiring process as just over $4,000  but in some cases, hiring costs could be triple that. Add to that the additional costs of ‘wasted’ salary and severance pay and it is easy to see how the real cost of a bad hire could reach the $240,000 figure quoted by experienced recruiter Jorgen Sundberg.

But it gets worse: above and beyond the tangible financials above is another layer of loss. These indirect costs are likely to be even higher since they affect other people in the company.

Counting the indirect costs

It is notoriously difficult to put a value on the indirect costs of a poor hire. Some involve complex calculations while others are impossible to quantify.

Some of the negative effects that lead to indirect costs include:

  • the time spent recruiting the poor hire (you won’t get that time back)
  • the loss of business opportunity due to the poor performance of the hire
  • the cost of business resources used to support the failed hire
  • the loss of the opportunity of onboarding a good quality candidate
  • the effect on morale in the company. Low morale reduces performance
  • knock on resignations
  • the effect of burnout on colleagues forced to compensate for the bad hire

Worst of all, some of these costs can be incurred over a long period of time if the source of the problem isn’t recognized early.

To get a better understanding of the true cost of a bad hire, head over to our interactive tool at:

How to identify what went wrong

Every CEO will experience the fallout from at least one bad hire during their tenure. If it happens to you, it is important to carefully analyze exactly what went wrong.

Critique every stage of the recruitment funnel. Did you fail to attract enough good quality candidates? 23% of recruiters interviewed as part of MRI Network’s Recruiter Sentiment Survey (2017) said that they received too many junk resumes from job boards. 34% said they had trouble finding passive candidates, those people already in work who might be tempted away by the right offer.

Was the job description inaccurate leading to a poor fit? That was a common issue discovered by Glassdoor in 2013 when 61% of employees admitted that the realities of their job did not meet the expectations set in the interview.

Did the interview process fail to test important aspects of the workplace? Did executives simply make bed judgement calls?

Could it even be that your hiring process is too long? MRI Network’s Recruiter & Employer Sentiment Survey (2016) revealed that 56% of recruiters blamed the length of the hiring process for bad hires. While no company should rush to fill a position, waiting too long is also damaging because it can mean that the best candidates have already found positions elsewhere.

Do you need to change strategy?

Depending on the results of your analysis, you might decide a change of strategy is in order.

For example, putting more resources towards sourcing passive candidates could unlock a new source of better quality applicants. Spending more time on creating authentic job descriptions and assessments is likely to reduce the number of unsuitable people applying.

If your recruitment process is too lengthy, speeding it up will ensure good candidates are not left to drift away to competitors, leaving only the dregs behind. If you’re not sure how the length of your recruitment process compares, the average in 2016 was 39 days according to the Jobvite Recruiting Funnel Benchmark Report.

If your recruitment is in-house and you are finding it difficult to implement a change in strategy, it is worth seriously considering an external recruitment company. A decent quality recruitment partner will have the personnel, tools and processes to maximize the chances of securing an excellent hire every time.

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