Hiring from the outside may seem like the natural step when a position opens up. It’s pretty common, after all. If you’re looking for new retention strategies for employees, you may want to consider your recruitment and hiring practice. The costs of hiring outside talent may outweigh the alternative: internal hiring. It goes beyond monetary compensation or the number of ads or sponsorship needed to seek outside hires. There are other considerations for fast-moving organizations.
First, let’s define the cost of hiring: what is cost per hire?
If you’re a seasoned talent management professional, you may want to skim further down the page as you may be familiar with the costs involved. Cost per hire is a common recruitment metric that dives the total amount of money invested in the talent search divided by the number of hires. If you’re looking to hire 100 people within a 12 monthly period and the amount spent per job opening is $4000, expect to spend $400,000.
The costs associated with talent acquisition include advertising on job boards, social media, traditional media, various kinds of software, relocation expenses, etc.
To dive deeper into the cost per hire, you’ll want to start with the three biggest items in your budget: team salaries, recruitment outsourcing costs, and digital recruitment tools
Recruitment team salary
This may be a bit misleading, as it’s not necessarily the salary per say. It’s the idea that, as a business leader, the recruitment has only X number of hours on the time table; their time is limited. They have other tasks. Talent management professionals may need to involve other team members for creating hiring strategies. For their hiring and recruitment process, they often need to recruit new employees, particularly those that are in high demand with bigger budgets. Those take more time to hunt down and may prolong the job application and interview process The average cost of a new hire costs between $3500 to $5000.
Outsourcing recruitment to outside the company
In an ideal work environment, an in-house hiring expert already manages their talent acquisition strategies. However this may not be applicable to all organizations. Some are too small or may be burdened with finding rare talent, like executives or a highly sought technical lead. They often outsource for outside help, like recruitment agencies or headhunters. This additional support adds to the cost list of cost per hire. Organizations leverage the capabilities of second-party headhunters due to their hyper focus on truly finding a great skill and experience fit. They possess advantages such as being industry insiders, perhaps specializing in one particular industry like manufacturing or technology. Coupled with their own databases of applicants, this makes this system of hiring and recruiting a compelling case.
Using digital recruitment tools
Digital recruitment tools are the key in today’s competitive talent market. Every organization improves their ability to capture quality talent by investing in the right tools. The most common tool is the applicant tracking system (ATS) that makes it easy to store applicant information in an easy-to-use and GDPR-approved database. Other talent management tools touch on every other aspect of the talent management lifecycle, from improving candidate experience by sending out a candidate experience survey or gauging team fit with a digital pre-employment assessment. The cost of using these tools may average between $1500-5000, depending on budget and company size.
Given the costs, here’s why consider internal hiring in your employee retention strategies
In one of the most comprehensive studies on the performance of those hired from within a company versus sourcing outside talent, author Matthew Bidwell shares insights in Paying More to Get Less: The Effects of External Hiring Versus Internal Mobility. Bidwell shows throughout the different indicators of performance impact made by internal and external hires. His findings include that organizations look for outside talent according to a job description. So they hire according to a job’s rote requirements. But Bidwell found that internal hires possess direct knowledge of the company, the role, and the requirements needed to successfully executed. Simply because they were much more profoundly acquainted with the needs and direction of the organization and role, they received higher performance evaluations.
Additionally, internal candidates were more aligned with the values and direction of the organization, already emphasizing their alignment. This points to the absence of employee turnover, as these employees would have left already due to poor fit.
For the first two years, “external hires” get significantly lower scores for their first two years in their position. Their counterpart, internal hires, receive promotions. In terms of costs, “external hires” also usually exit the company and cost the company more not only when they leave the company, but their salaries are often higher, usually about 15-20%.
Bias towards “external hires”
What recruiters and hiring managers may not realize is their bias towards outside hires. As a consequence of not knowing candidates, they can only examine the variables available to them: their education and their experience. Bidwell terms this phenomenon as “externally observable attributes.” However his and other research shows that are not impactful indicators of how actually the person’s performance may be. He cites that external hires often need two full years to full integrate and understand their role. It takes time to build trust with colleagues, with company partners, and feel self-confident in their role.
Not only do external hires take more time to come up to speed with their coworkers’ know-how, they are overall riskier to place in a job. They may become frustrated by not feeling competent or comfortable and thereafter may leave voluntarily or be let go.
Here are the ideal situations to consider internal hiring:
You have a small budget to find, hire, and onboard new employees
The roles requires significant industry or company know-how
There are number of willing and growing employees who want to learn and take on more responsibilities
Skill already exist in-house
Though external hiring is a popular recruitment mechanism---just as popular as pre-employment testing or remote hiring---organizations should consider their size. Bidwell found that smaller companies preferred leveraging outside talent; larger companies leaned heavily on grooming high potentials for moving into positions.
External hiring costs significant time and investment; companies may need to reexamine their motivations.
Retention strategies that work are those that make sure bias is kept out. Hiring managers may get excited about a certain skill set or experience aligning with a rote job description. However it’s difficult to understand and spot which weaknesses a candidate really has. Internal hires are already aware of their weaknesses, in addition to HR.
Finally consider how you advertise job opening within your company
One consideration is how you circulate a new vacancy. Often organizations circulate an opening via an internal posting, meaning anyone can apply or via an internal sponsorship, referring to a manager refers candidates. The more democratic opportunity found that those hired were ranked as high performers in their positions. They were also less likely to leave after the first two years in the position.
Retorio is a video-based behavioral assessment powered by AI. It uses facial expression, language, gesture, and voice to create a Big 5 Personality profile.
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