When Cheaper and Better isn't enough: Opportunity Costs and Recruiting

In the past 20 years, many companies have outsourced myriad functions to vendors, partners, and professional services companies. Some of the most popular functional areas for this have included accounting and payroll functions, helpdesk, marketing, low-level software development, among many others. When these moves were made, they were often justified by the fact that these were not the main areas of focus of the company, the chosen partner(s) demonstrated a clear focus, capability, and success in this area, and also that there were often cost savings involved - after all, who can argue with cheaper AND better? While this may be the case, there are some areas that have very stubbornly resisted making a change. Chief among these, in quite a few cases, is recruiting.

Let’s take a deeper look at the two reasons that combine to make outsourcing any functions a preferred choice: “cheaper” and “better.” The latter is easier to consider. For example, as a broad generalization, it is likely that a software development company with a proven track record is probably better at writing software than a restaurant chain. It should also  be true most often that a company which employs hundreds of helpdesk professionals at all levels, has a variety clients of various sizes using their services, utilizes a broad diversity of specialized technologies, and participates in helpdesk professional organizations, probably knows a bit more about running a successful help desk than a typical medical device company. Often, to get the best “bang for the buck,” it is a good idea to partner with a company that specializes in solving the specific functional-area problems at hand.

What about cost savings? This is a bit tougher for the following reason: companies typically do a pretty good job of determining the (obvious) sunk costs, but they often don’t do a good job of properly taking into consideration the opportunity costs. For example, let’s say that a company spends 72 hours of various internal employees’ time recruiting a professional candidate all the way to hire. This may cost around $3700, when all of the different people involved have their hourly compensation averaged. Throw in one candidate’s share of advertising, job boards, job fairs, travel, applicant tracking system technology, etc., and you are often looking at between $4000 and $4500. (While I made some reasonable assumptions about salaries and levels the numbers can be customized a bit will yield a somewhat similar tale.) At first blush, this number of between $4000 and $4500 seems like quite a bit less than the fee  an external recruitment agency would charge. For example, a professional at a $100k salary with a somewhat-in-demand skill-set often generates a retail fee of between $20k and $25k depending on the position. (Retail pricing assumes that this is not part of a volume or exclusive program.) A no brainer, right? Not so fast! There are two things that are not yet  taken into account by this calculation: opportunity cost and quality.

The first thing to consider is the opportunity cost of the internal resources in the hiring process. If a company reduces the internal time expenditure from 72 total hours to 18 total hours, they may have reduced the sunk labor cost by only $3000 (the differential cost) but they have also given their employees an average of (around) 54 additional production hours on which they can focus upon their “day job,” which is (hopefully!) to make the company money in some way. In other words, for a $40MM company with 100 employees, they have just improved their top line revenue by an average of an additional  $24k. (Calculated by dividing company revenue by the average salary of professionals involved and multiplying by the number of hours taken out of production.)  This $27k total savings results in an increase net of 10-35% AFTER the recruiting fee is taken out!

The second thing is even more ephemeral, and can have more of a profound effect on a company’s success. That said, it isn't even addressed in the savings calculation above, namely the quality of hire. By designing a robust program, and by engaging an excellent outsource recruitment partner, the quality of a new hire can be raised significantly. In other words, engaging a professional helps! While quantifying the value of an excellent hire is a bit beyond the scope of this article, and does require some very customized information, I think we can all agree in general that, assuming the same successful business model, higher quality employees are positively correlated with higher top-line numbers - and sometimes even transformational business advancements.

It is ironic to me that most companies actually already recognize the benefit of engaging an effective outsourced recruitment program, but they take it only so far and then they stop! Here I speak of executive level retained recruiting, where companies  hire retained search firms to find CEO’s, CFO’s, and other similar executives. It is interesting to me that this is deemed to be the best way to go for the very top-level positions, yet the same companies fail to generalize that they can both save on opportunity costs and reap the benefit of higher quality candidates at a level which may be one or two steps further down the ladder. I believe that quite a few companies are leaving money on the table AND settling for second best. I also know, however, that when companies have found a successful partnership they are very pleased with the results. In the words of one of my recent fortune 500 clients, “I don’t know why we weren’t doing this a long time ago!”


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