The $80,000 mistake

Understanding the true cost of a mis-hire

It’s a common view held by businesses, when it comes to their recruitment, that if they get it wrong, it’s just the direct costs of hiring another person they’ll lose – so they move them on and start again.

In the early stages of our Real Recruitment workshop, we work through the true cost of a mis-hire. Participants are commonly shocked at how rapidly costs accumulate. Moving someone on as quickly as possible, if they are not a culture fit, is appropriate. However, it’s the hidden costs that really add up. Those costs create a compelling case for reducing as much risk as possible in the recruitment process to ensure you get the right fit before you hire.

To start, let’s consider the main issues of:

  • Direct costs including recruitment fees, external testing, and time and administration costs of staff directly involved in the recruiting
  • Induction, orientation and training
  • Remuneration while the person is in the role
  • Management costs of managing a poor performer
  • Termination costs

Beyond these, there are additional considerations such as the opportunity costs of having the role vacant prior to recruitment, or the impact someone with the wrong behaviours might have on the rest of the team. If action is taken because the person is unsuccessful, again, there is a lag in having someone in the role. Those factors aren’t included here.

A case study

If we look at a branch manager with a $100,000 + super + vehicle package, who is in the role for six months, here’s how the costs can add up:

Direct recruitment costs
Recruitment fees (assuming no agency fees – $15,000 to $25,000) $0
External psychometric testing $750
Time and administration – advertising, candidate engagement, interviewing, reference checking (a recruitment campaign typically takes approximately 40 hours x $70/hour average – $30/hour administrator and $110/hr hiring manager) $2,800
Induction, orientation and training
4-8 hours per week in the first two weeks (approx. 6 x $100) $600
3-4 hours per week in the second two weeks (approx. 3 x $100) $300
2 days of specialised technical or systems training ($950 per day) $1,900
10 hours per week for the first two weeks with direct reports understanding strengths, role dynamics and key drivers in the branch (approx. $60 per hour) $1,200
4 hours per week, usually conducted in the first four weeks, of introduction, understanding and engagement with internal and external stakeholders $1,600
Six months of time in the role (half remuneration) $54,750
Six months of motor vehicle use $5,000
Maintenance costs
Six months of management time for reporting (1 hour per week) $2,600
Three months of managing a poor performing person (1 hour per week) $1,300
Termination costs
4 weeks’ notice $8,423
Total $81,223

There are potentially greater ramifications such as mistakes, poor performance and lost opportunity (eg underperforming in relation to budget targets). These may be offset by some positive contributions, such as deals or projects completed that added value to the business. These should counterbalance to gain a fair picture of true costs.

In this scenario, if the branch, under the new branch manager, only achieves 50 per cent of their $3 million half year budget, with the remaining 50 per cent ($1,500,000) as the lost opportunity cost, the cost of the mis-hire increases from $81,223 to $1,581,223. This still does not include the period of time the role was vacant, the impact on other staff because of poor behaviour, or the direct cost of the manager travelling to the branch during the six months (or bringing the person to head office).

There are the direct and indirect costs of making an incorrect appointment. Investing in the right preparation upfront and reducing the risk as much as possible are certainly advantageous and will vastly add value to your business.

Key tips for avoiding a mis-hire

  • Ensure the role is clearly defined before you begin recruiting. There are generally four to six factors that are uniquely attributed to any position. These are primary responsibilities that are not undertaken by anyone else in the organisation. As a standard rule, if you cannot identify these unique factors, the role does not exist.
  • Identify the role’s competencies. The best approach is to convert them into behaviours. This enables you to quantify exactly what you are looking for. For example, ‘innovative’ is a competency, but what behaviour does your organisation, or a given role, require to be successful? Is it development of new products or processes? Is it looking at issues and dealing with people in a different way? Essentially, what does each competency mean in the unique context of your organisation.
  • Look for repeating patterns of behaviour within a candidate’s background. This requires a thorough analysis during an interview of the previous roles the candidate has held, what they achieved, what they could have done better, what they liked and didn’t like, what their direct manager thought they did and didn’t do well and so on. This reveals past behaviours and, in turn, a candidate’s repeating patterns of behaviour to then identify whether the candidate matches what you have defined as the behaviours necessary for success in the organisation and the role.
  • Define exactly what success in a role looks like in 12 months. This is a great way to ensure that, right from day one, a candidate knows what they’ve got to do to be successful. It removes ambiguity for candidates and line managers and is a good way to ensure you are focusing on the key issues.

For more information

If you’d like more information about our services and how they can add value to your business, please contact our team today.