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Estimating the Cost of Employee Turnover

July 30th, 2018

Have you ever stopped to figure out exactly how much time you have to invest in hiring an employee? Activities, like screening phone calls, reviewing resumes and arranging interviews, can really be time-consuming. This exercise will help you develop an accurate estimate of how much time you spend locating a suitable individual.

For the following recruiting and hiring activities, estimate how long each would take to complete. Once you’ve done that, total the number of hours. You may be surprised at what you find.

Recruiting and Hiring ActivitiesEstimated Time Required
Developing position specifications (job description, compensation package, etc.)
Writing, laying out and placing ad
Screening phone calls (how many phone calls might you receive to an ad?)
Receiving and scanning resumes (how many resumes would you wade through to find a few good ones?)
Reviewing resumes
Developing a short list of possible candidates
Arranging interviews (how many first interviews would you need to schedule?)
Conducting first interviews
Developing a second shortlist based on interviews
Arranging second interviews
Conducting reference checks
Extending an offer
Sending rejection letters
Other recruiting and hiring activities:
Grand Total:

This analysis makes several assumptions:

  • You get a great response to your first advertisement
  • The first person offered the job accepts and starts
  • The first person hired works out for the long-term

If any of these assumptions turns out not to be true, the figure you just calculated could easily skyrocket.

How can permanent placement services help?

Reclaim Time – A staffing service will handle the majority of the administrative burden associated with hiring a new employee. For any job opening, you’ll only hire one person out of all those you see. Most of the time you spend is completely wasted. What more productive activities could you engage in, if you didn’t have to spend time advertising, recruiting, screening and reference checking?

Better Quality Applicants – Often, the best people are already working. The perfect person for a position with your company may not have time to look for another job or may be concerned about confidentiality issues. People in this situation often turn to staffing services to help search for new employment. As a result, staffing services have access to candidates who may not otherwise be available to your company.

Guarantees – If a candidate proves to be unsuitable within a specified frame of time, most staffing services will replace that candidate free of charge (each service’s guarantees vary). This saves you all the time and hassle of replacing a bad hire on your own.

Shorten the Placement Cycle – Placement services leverage their recruiting and advertising expense across multiple clients, and are constantly searching for skilled individuals. They employ multiple recruiting tactics like advertising, direct recruiting, networking and computerized databases to maintain a large pool of applicants. Access to vast applicant resources may enable a staffing service to locate a candidate for you more quickly.

Confidentiality – Recruiters provide strict confidentiality, which can keep competitors from being tipped off to company changes, new product releases, and can protect against employee and supplier apprehension. Recruiters value the sensitive information they are trusted with during the search process and respect their client’s vulnerability.

Estimating the cost of a bad hire:

In many cases, staffing services offer less expensive alternatives to getting your work done. For example, do you know what it really costs you to employ your staff? The “hidden” expenses associated with being an employer are often underestimated. Things like recruiting, interviewing, training, benefits administration, management, and turnover really add up. Consider the following expenses for an administrative employee at $20,000 who terminates after one month:

Cost AreaExampleYour Estimated Cost
HR Time
Specification of position
Prepare classified ad
Review resumes from 100 ad responses
Telephone screen 10 candidates
Schedule, prepare for, and conduct 5 interviews
Assessment testing for 3 candidates
Reference checking for 3 candidates
Total HR time ($ per hour x hours)$40 x 30 = $1,200
Other Recruitment / Interviewing Costs
Management interview time ($ per hour x hours)$50 x 6 = $300
Other interviewers’ time ($ per hour x hours)$50 x 9 = $450
Cost of advertising (15 line ad run for 3 Sundays)$450
Salary and Related Costs
Salary (for one month)$1,666
Benefits (based on national average of 31%*)$516
Overhead, administrative expense, etc. (20%*)$333
Training / Orientation / Answering Questions
Trainer’s time ($ per hour x hours)$15 x 16 = $240
Manager’s time ($ per hour x hours)$50 x 8 = $400
Productivity Losses
Compensating for sub-standard performance (co-workers doing or re-doing bad hire’s work: assumes bad hire is working at 5% capacity)$10 x 40 = $400
Grand total:$5,955

 

Additional Expenses to Consider:

 This estimate of the real cost of a bad hire doesn’t even take into account costs which are extremely difficult to calculate, such as:

  • the negative effect on co-workers’ productivity and morale
  • lost business and opportunities due to mishandling by the employee
  • unemployment compensation, severance pay or legal fees
  • recruitment and training costs which you must incur again to replace the employee.

Imagine what the cost would be for a mid-level manager who terminated after three months.

The Bottom Line:

Although the examples provided in this exercise are quite conservative, they effectively demonstrate the real value staffing services provide: lowering costs, improving focus, reducing the risk of not finding qualified candidates through traditional resources. If you are interested in increasing your organization’s profitability, staffing services can play a major role.

To learn how Murray Resources can help you with your recruiting/staffing needs, contact us today at 713) 935-0009

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