When Outside Recruiting Makes Economic Sense

[Jackie Teal]

Internal recruiting works. Outsourced recruiting works. So which one
works better? There is no universal answer, but there is a specific
answer for you, your company, your need. That answer depends on
variables like job classification, number of positions to fill, in how
many different markets, at how many different compensation levels,
time of year, date of new product roll out, prevailing and projected
economic climate.

To rephrase the question: Which one, internal or external recruiting,
makes the best economic sense? Or, since outsourcing is the option
that inherently requires justification, When does outsourcing make
economic sense? Again, you won’t find a standing answer, but you will
find a means of arriving at one from situation to situation. It is
RCR, or Recruiting Cost Ratio, the most reliable method at your
disposal. Let’s break RCR down.

The RCR calculation is superior to a traditional cost-per-hire
calculation because it divides costs by compensation recruited instead
of by number of people. Doing so allows apples-to-apples comparisons
between different job levels – say, bank tellers compared to Executive
VPs – and it also corrects for variables like geographic salary
differentials. Thus, one avoids the trap of equating cost efficiency
with number of hires. Definition:

RCR = Total Recruiting Costs divided by Total Compensation Recruited
times 100

The resulting index indicates how many recruiting dollars your
organization spends per dollar it pays in new hire compensation.

So, to oversimplify, here are your steps:

Add the costs of all recruiting activities, from advertising to
relocation to signing bonus, for X positions
Add the total compensations of those X positions
Divide the costs by the compensations
Multiply by 100
Compare your internal RCR to the RCR provided by the outside
recruiting firm you are considering.
Now you have a dollar figure, an efficiency benchmark which guides you
in apportioning your recruiting dollars whether in normal or unusual
circumstances. You may very well find that, as a rule, recruiting
belongs inside, but that there are exceptions for certain positions,
or at certain compensation levels, or on a tight timeline where an
outside specialty recruiter is equipped to perform more efficiently
than you. Other exceptions might involve the number of people needed,
their specialties, or your internal staffing levels. Then again, you
may find that you cannot match a vendor’s RCR.

Also, even with your benchmark in hand, do not overlook the quality
issue, a separate measurement which plays out over time. You can
recruit 50 programmers. The last time you did, however, 22 of them
were no longer on board six months later. Clearly, this area is not
your forte. Factor in lost productivity and replacement cost, and your
efficiency is well below that of an outside supplier with greater
proficiency, resource depth and risk aversion built into its
methodology. There may be no causal relationship between RCR and
quality, but knowing your RCR means you can focus on quality.

Last thought. To the extent that efficiency so often results from
uniformity, repetition and volume, staffing is no different from a
great many other activities. Thus, there are situations where more
outsourcing can mean greater efficiency at certain thresholds, as data
from the following chart in our 2008 Benchmark Report suggests. There
may be a general relationship between percent outsourced and
efficiency. It may be economy of scale. Certainly, this plays out
differently from one company or job description or compensation level
to another