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How Cost Per Hire Affects Your Recruiting Business

by | Apr 29, 2021 | Owner Issues, Top Echelon Blog

You know that looking at data and extracting trends can help you learn how to be a great recruiter. But, did you also know some of your clients’ metrics can help your recruiting business? One key measurement you should understand is cost per hire.

What is cost per hire?

Cost per hire measures how much it costs to fill a job opening. The ratio considers all the costs associated with candidate sourcing, recruiting, and staffing. You can use cost per hire with other metrics to manage recruitment goals.

Cost per hire compares recruiting costs to the number of positions filled in a period. The expenses relate to every aspect of filling a job, including internal and external costs.

Examples of internal costs are:

  • Salaries, benefits, and training
  • Recruiting software and hardware
  • Fixed costs like employee referrals and government fees

Examples of external costs are:

  • Recruiting and sourcing fees
  • Job marketing costs (e.g., industry specific job boards)
  • Career fair participation
  • Travel expenses for recruiting
  • Background and drug tests

With recruitment cost per hire, the number of positions includes all internal and external hires, as well as part-time and temporary hires.

Cost per hire formula

Calculating cost per hire is simple. Follow these two steps for the cost per hire formula:

  1. Add internal and external costs
  2. Divide the total cost by the total number of hires

(Total External Costs + Total Internal Costs) / Total Number of Hires = Cost Per Hire

For example, a company paid $1,000 in advertising, $600 on background tests, and $400 in internal recruiting costs. The company hired two new employees.

$1,000 + $600 + $400 =$2,000 Total External and Internal Costs

$2,000 / 2 Hires = $1,000 Cost Per Hire

Using the cost per hire formula, you can see that it cost $1000 to hire one employee.

The internal and external expenses will be unique to each business. The kinds of expenses measured should be the same each time cost per hire is found.

For example, don’t include advertising fees in one calculation and leave them out of the next. Using consistent units gives a clear picture of recruitment cost per hire from month-to-month.

Why recruiters should understand cost per hire metrics

As a third-party recruiter, you might be wondering how you fit into cost per hire. Your services, after all, are an expense involved in the hiring process.

By understanding cost per hire metrics, you can place accurate value on your services and justify your rates. Here are a few ways your recruiting services affect your clients’ hiring costs:

You have applicant tracking software: An applicant tracking system (ATS) is a software program that helps you manage candidates. With ATS, you can post job openings, import and parse resumes, and track candidate statuses. The software organizes hiring documents in a consistent format, which acts as a recruitment management system and streamlines the recruitment process.

As a recruiter, you handle ATS recruiting software. Your clients don’t need to buy ATS and pour time into learning and using the software. By using your recruiting services, they can reduce the internal costs of their cost per hire. This could be a selling point when negotiating your recruiting fee with clients.

You manage job advertisements: As a recruiter, you can also absorb the job posting cost. You advertise the opening on hiring boards and other sourcing outlets. Show clients that you reduce their cost per hire by promoting the open position.

You run background and drug tests: As a part of the screening process, you arrange (and pay for) background and drug tests. Your client does not cover these external expenses, cutting down the cost per hire. Your services also offer convenience, saving clients time from setting up the tests themselves.

Your expertise draws in valuable candidates: The cost per hire metric isn’t always something you want to reduce. A low recruitment cost per hire could mean you’re missing out on high-performing candidates.

A top-notch candidate is (and should be) more expensive to recruit. In fact, recent trends in the recruiting industry reflect this fact. Making placements within industries or niche-businesses that require highly specialized workers can be difficult. These hard-to-find skilled workers need to be successfully recruited and convinced to work for your clients. A higher cost per hire could mean you’re recruiting more high-performing candidates that add value to your clients’ businesses.

Our State of the Industry Report revealed that Information Technology (18.3%) and Engineering (11.4%) were the most difficult industries to make successful placements in 2016.

As a recruiter, you offer knowledge and experience that helps you find matches. You are often the best chance of finding high-quality candidates. Though you charge a recruiting fee, the value you provide justifies their cost per hire.

Cost per hire and ROI

There are many arguments about how valuable cost per hire is to recruiters and HR professionals. While some say it is one of the most important metrics to track, others claim it’s misleading about hiring performance.

By itself, cost per hire doesn’t offer a lot of insight. Cost per hire won’t show you:

  • The big picture of your recruiting efforts
  • How you compare to other businesses
  • The quality of your hires
  • If cheap recruiting processes are losing good candidates

If you pair cost per hire with other metrics, you can get a larger view of how you’re doing. Take cost per hire a step farther by looking at ROI (return on investment).

ROI reflects the result of the expenses made to fill job orders. If you track cost per hire and the quality of hires, you’re looking at ROI. The better the ROI, the more valuable your services are.

To find ROI, figure out how much it cost to hire the candidate and how much value the candidate brought to your client. Once you have that information, you can calculate ROI with this formula:

(Gain – Cost) / Cost = ROI

The ROI shows if the client’s investment was worth the cost. Use ROI data to give clients solid evidence that you offer a valuable service. Combining ROI and other recruiting metrics, like cost per hire, helps you track your progress as a recruiter and negotiate with clients.

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