A reflection about recruitment models –
It’s all about Total Cost/ Value of Hire
By Grégoire Depeursinge, AIMS International, July 2014
“The external cost is only the tip of the iceberg”
Retained executive search firms face strong competition from other candidate sourcing models. In addition to contingent search firms on the market of external search providers, in-house recruitment teams are lately being built with increasing force.
What are the reasons for this development?
We believe that the retained model has come under attack as new players of questionable quality and business ethics have used the opportunity of low entry barriers to start their business. But does this mean that there are no trustworthy partners existing? No!
Recruitment capabilities, strengths and weaknesses of classic HR-teams are well known. But what are the strengths, weaknesses and differences of contingency and retained search firms? Many HR Managers know the differences of the fee/invoicing model, but what about the service level? For detailed information about this you can refer to the AESC’s comparison chart.
And what is the goal of the in-house recruitment team? Basically to in-source the capabilities of external recruiters (but which: contingent or retained?) in order to reduce costs.
The objective drivers to reach a decision about the execution of a recruitment should be:
1. (Available) in-house resources
2. Importance of confidentiality
4. Quality/fit of hire
One obvious reason for using external recruiters is the lack of in-house resources. Even large companies which are able to build-up a team of internal recruiters in terms of time, money and knowledge transfer investment will still have variations in their recruitment needs, which will lead them to complement their limited resources with external partners. So, even if your company chooses to in-source most of its recruitment activities, you will still need external partners. Solid partnerships need to be built. This counts even more in an international context.
2. Importance of confidentiality:
Confidential searches should be done by external recruiters. Otherwise there will always be a leak within the organization, or some misinterpretation of replacement searches.
(For more details see topic 4.)
Few companies use a TCH (Total Cost of Hire) or value-based approach when choosing a recruitment model, even though this would be appropriate. Here are some of the transaction costs that need to be considered:
- ROI of hiring the best candidate in the market vs. a qualified candidate
- Cost of “mis-hires” (including the cost of having to search again)
- Cost of leaving a role vacant for longer than absolutely necessary
- Hidden costs (workplace, training and recruitment of in-house recruiters, process costs/red tape)
- Higher cost of external resources (no volume discount, less experienced consultants…)
- Quantity of resources needed to handle the different types of suppliers (contingency, in-house, retained)
While this sounds obvious, it is sometimes not easy to bend budgetary constraints, as the only planned expenses are the cost for external suppliers and the salaries of in-house recruiters. HR leaders and top managers should aim at quantifying hidden costs so that they will at least be taken into account for the decision whether and how fast to use external providers.
If one makes an objective analysis of all these criteria, it will become evident rather quickly that there are no major differences in terms of TCH between the different models. Once we accept this, the quality/fit of hire and, to a lesser degree, the availability of in-house resources should become our only criteria.
4. Quality/fit of hire
This is the most difficult of all: recruitment is specialist work, so it is quite clear that the use of a professional recruitment organization, external or internal, will tap into a greater candidate pool and increase the chances of finding the best fit. But which model is the best?
Contingency based search:
It is well known that recruiters working on a contingency basis tend to minimize efforts, have a lesser degree of involvement with the client and will give up quickly if they cannot present suitable candidates fast. They will also try to work on several similar assignments at once to try and maximize their chances of placing a good candidate (which also means the candidate is not presented to one client only). In short, they are candidate-centric. So while using several of them at once is probably the fastest way to fill a vacancy and will guarantee a wider reach than classic recruitment on advertisement basis, they are not likely to present the best candidate in the market and candidate evaluation work will be only slightly reduced. Using contingent search firms is indicated for relatively easy to source profiles when you’re in a hurry or have a great number of vacancies to fill.
In-house recruiters have a number of strengths: they normally know the company well since they work there (even though this may be relative in large organizations and they might have less of a general picture of the market than an external person), they normally use a direct search approach, meaning they will tap into a wide pool of candidates and they are under internal pressure to deliver quality. They have however also a number of weaknesses: not all prospective candidates will talk to an internal recruiter and there might be trouble when approaching employees of the competition or clients. Sharing confidential information with them might also be problematic and they are definitely hampered by having to respect the company’s processes and compliance rules. Contrarily to contingency recruiters, they are client-centric, meaning they act in the best interest of the company, but not always of the candidate, which could result in a higher percentage of mis-hires.
Retained search organizations are committed to both the client and the candidate. They have minimal administrative limitations and can tap into the whole market to identify not only suitable, but the best potential candidates for a role. The good retained search firms will provide you with the right candidates. As those companies normally provide a warranty and are dependent on repeat orders to increase their EBIT, they will aim at quality and allocate a lot of resources to any single assignment. With a retained recruiter, administrative work on the client side is minimal.
When thinking about which recruitment model to choose, take into account Total Cost of Hire/Total Value of Hire:
- Think of how many resources are available and how much time saving there will be with the chosen model
- Ask yourself how much confidentiality you need
- Think about the real cost of recruitment, taking into account also hidden costs
- Think about the missed opportunity cost of hiring a good candidate vs. hiring the best in the market
My thanks to Christian Schulte, AIMS International, for his contribution to this article.