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In-House Recruitment – Measure ‘value of hire’ correctly

Written by: on  January 29, 2013

Fraser HillIntroducing Fraser Hill to the EW family. Fraser brings 16 years of experience in executive search and recruitment, including an in-house executive search role at at J.P. Morgan.

Last month we explored 2012 recruitment trends and reader Jean-Paul Smalls rightly commented at the bottom that we didn’t include specific questions on direct sourcing and how it fit in with HR. So to address this, here is Fraser breaking down how in-house headhunters add value – and how to measure ‘value of hire’.


Enter Fraser:

Adopting the right value led approach to in-house recruiting

 Value of hire

 

“Cost of hire” is a metric familiar to those of us that work as in-house corporate recruiters or even hiring managers in the business itself.  Value of hire is something that’s measured more typically by and end of first year rating and it’s correlation to the masses within the organisation. “Are they still here after the first year and how has their performance compared to their peers”. If they rate equal to or above average it’s considered a high value (of hire) and if they’re no longer there or if they score less than their peers, the opposite is true.

There’s one huge issue I see with the value of hire model. Hypothetically speaking if your company is made up entirely of average performers, all an outstanding incoming employee needs to do in that first year is the bare minimum in order to be seen as a valuable hire. Basing the standard on the rest of the team or company is fine if you want to remain an average company.

Let’s take the example of the Olympics as it’s still reasonably topical as us British cling on the last remnants of success, glory and pride from 2012.  In the lead up to the Olympics, it wasn’t good enough for any of the teams (perhaps with the exception of the USA, China and the Jamaican runners) to assess themselves based on how good their teammates were. That approach wouldn’t lead to them being competitive enough. They had to look outside their own teams, to the broader “market”, identify who was really doing special things in the given sport and make them the ones to beat.  Jamaica was the benchmark for the male sprinters, and the USA for the swimming, for example.

If organisations seeking to attract talent into their organisation only assess their performance based on their peer group within the company, they’re in danger of falling short of the competitive mark.  Having said that, it’s difficult to measure your employees against your competitors. That would be impossible without companies sharing information which is never going to happen. So what’s the next best thing?

Well what we can do is make more accurate assessments of candidates coming into the company in the first place. There’s a big difference between candidates who are on the market and candidates who are in the market. Candidates who are on the market are those who are actively looking for work.  By active I mean job hunting every day with the intention of moving as soon as they find a suitable role; not the occasional check of the job boards with no intention of leaving anytime soon. Candidates who are in the market are the whole of the rest of the working population. Various figures have been quoted in the past but somewhere in the region of 20% of the working population are looking for work at any given time. That number may vary slightly from industry to industry or country to country even.

It’s scary to think that companies built their entire workforce based on candidates that have responded to job boards; those that are on the market. For some lower skilled roles this is an effective way to find high volumes of people. However the further up the food chain you go the more there is a need to identify the best candidate in the market.

In the next article I’ll go into some more detail about how to go about this but for now I wanted to share with you a graphical model that illustrates the true value of in-house headhunting (versus job board posting or using external vendors).

If it’s confusing try to take it all in at once, break it down and look first at the bottom bar chart, cost of hire, then the top bar chart and then follow it across to the conclusion on the right, the pie chart.

If you go to a high end search firm for a senior role, you expect them to have mapped out the market and made approaches to equivalent people in competitor organisations. You pay more for this service than for the contingency service which is often about a recruiter simply posting a job add and doing a key word search in their database.

The difference here between an in-house recruiter and an in-house headhunter is the same as the difference between contingency and search consultants – one does high volume “cheap and quick” recruiting whereas the other does low volume time intensive searching.  This accounts for the different costs in the “cost of hire” part of the chart.

Value of hire is our new assessment – “is this the best candidate in the market or just the best candidate on the market currently searching for work?” It can be argued that using job boards you’ll only ever find the best candidate on the market and as defined in the chart, doing search either externally or internally, there’s more chance that you’ll find the best candidate in the market.

Moving along to the pie chart, the small circle tells us what we already know – it’s cheaper to bring it in-house because we’re paying our own internal recruiter a salary rather than an external fee.  What most people don’t realise though is that bringing the headhunting piece in-house means a lot more. It means you build up relationships and market knowledge through the process of working on a search and gaining market intelligence you may not get by going to an external supplier.

Sure an external supplier will pass on some of the information.  Think about the scenario where the external supplier spends 4 to 6 weeks speaking to a long list of candidates to provide you a shortlist of 4 candidates. Think of all the conversations that happen during that time and the market intelligence that recruiter builds up. Good search firms will pass a lot of that data onto their client but you’ll never get as much as if you do it yourself. More than this, it’s the relationships you build with people in the market. People you can call up in future to ask for recommendations or commentary on a competitor. These insights are invaluable in building your long-term talent pipeline strategy.

So for those of you who are focussed on in-house recruiting, this model will help you to articulate the value and the need to have a real head hunter working on the inside.  If you’re working in the business, this should prompt you to champion the cause to get someone like this working in your firm to provide not only the best quality candidates from the whole working talent pool, but also the best market intelligence.

 

 

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  • http://twitter.com/AvidCareerist Donna Svei

    Hi Fraser,

    I’m so happy to see this topic getting more and more discussion. Cost per hire has always seemed to me to be the recruiting equivalent of knowing the cost of everything and the value of nothing. What you describe is an actionable step towards starting to explicitly measure the value of a recruiter’s performance.

    Donna Svei aka AvidCareerist.com

  • Bob Olivier

    nice pretty graph but nothing to prove the value provided by each of the approaches. As for the circles and the dollar sign its just a pretty image with absolutely nothing to substantiate it

  • Fraser Hill

    Bob,

    Thanks for commenting. Sorry if you feel the article didn’t articulate the values indicated in the chart. Please see below for a better description and there’s also a link below to an hour long webinar I did last week through ERE to around 500 people on this very topic which will hopefully make it a little clearer. If not, feel free to get in touch directly at fraser@headhuntin.com and I’d be happy to speak with you.

    http://www.ere.net/webinars/beyond-the-dollar-the-real-roi-of-in-house-headhunting/

    The chart illustrates, in theory, the potential value
    of internal headhunting in relation to other candidate sourcing methods. It
    also introduces the relationship between the actual cost of the hire, with the
    potential value of the hire. If it’s confusing try to take it all in at once, break it down and look first at the bottom bar chart, cost of hire, then the top bar chart and then follow it across to the conclusion on the right, the pie chart.

    Cost of hire

    This model assumes that a contingency hire fee (meaning full
    payment to agency only if a hire is made through them), is 20% compared to a
    search firm’s fee which may be 30% (where a retainer may be paid and a lot more
    work goes into market mapping). These
    percentages can be quite different but generally speaking there will also be a
    difference between search and contingent fees.

    You’ll note the cost of hire to headhunt internally is
    showing as greater than the in-house recruiter advertising option. This factors
    in the staff cost and the time it takes to carry out a full market map search.
    An internal headhunter can spend weeks working on a particular role whereas of
    course in-house recruiters, can fill many roles per week. The actual cost per
    hire of direct sourcing, despite using no advertising cost, can actually work
    out to be more although the potential return on investment is exponentially
    greater.

    Value of hire

    This model is not prescriptive as recruiting is in itself an
    inexact science. The actual value of an
    in-house recruiter or contingency agency hire, may well end up being optimal
    from time to time, but that would be more through luck, in comparison to a
    direct sourcing market map being carried out.
    Of course we can get lucky when great candidates are looking for work,
    but as an exclusive sourcing methodology, advertising and active candidate
    sourcing doesn’t stack up against headhunting in the true sense.

    The optimal value refers to the “best candidate in the market versus the best candidate on the market” theory. When we map out the market and headhunt, our
    candidate pool is at its largest and we can assess whether we genuinely have
    the best candidate in the market at that time (because in theory we’ve spoken
    to all potential candidates in the market).
    The perceived value of the best candidate “on” the market cannot be
    credited with as much potential.

    You’ll note that the search firm approach and direct
    sourcing both have the potential to identify the best candidate in the market
    (because both methods use competitor mapping to identify all potential
    candidates, and then contact them). Once
    again, this doesn’t represent the optimal value.

    Hiring the best candidate in the market is our ultimate aim
    every time. However the difference between doing this through a search firm,
    and doing it internally through direct headhunting, is illustrated in the dark
    blue area at the top of the in-house direct hire bar.

    When a search firm spends 6 weeks creating a short list to
    present their client with 4 candidates, they’ve spent that time in contact with
    the market place finding out a vast amount of information which helps them
    build their credibility and market insight. Some of that information makes it
    to the search report, but lots of it doesn’t. What certainly doesn’t make it to
    the search report are the relationships that get formed with key players in the
    market and rising talent. Both the
    market intelligence and relationships gained are represented here in the chart
    as additional value to the in-house headhunting model.

    When headhunting directly, the in-house headhunter is
    building up rapport and relationships directly with the market place and
    getting direct market intelligence. This market intelligence may relate to the
    role you’re hiring for, or it may be useful information that the business can
    use to its advantage. It’s not just
    about the market intelligence on that particular search. It’s the contacts you
    make, and relationships you build that lead you to be able to pick up the phone
    next time on another search and ask an external candidate their opinion or for
    a referral. This is the real true value of internal headhunting. Over time, an
    internal headhunter builds on their market knowledge, gets close to the
    competition and ultimately increases the probability of finding the best candidate in the market for
    every role, not just the best of who’s out there looking at the moment.

  • Fraser Hill

    Hi Donna,

    Thanks for your comments. I like the way you put it! :) I actually did a webinar on this very topic last week that may be of interest to you – http://www.ere.net/webinars/beyond-the-dollar-the-real-roi-of-in-house-headhunting/.

    Best regards,

    Fraser