By Peter Weddle -- A recent research paper from the analysts at Wachovia Capital Markets had this to say about job boards: “Our checks indicate marketing budgets continue shifting from online postings and resume database, to emerging strategies like keyword search and social networking, at an accelerating rate. ROI is the key driver, as employers seek the better measurability of CPC/CPA [cost per click/cost per action] and attempt to reduce unutilized services.” While I applaud any move toward more rationale spending of recruitment advertising budgets, I don’t think CPC/CPA is the answer. Such metrics may make us feel good, but they do not provide us with meaningful insight into the effectiveness of our investment.
The first problem with these metrics is that they are incomplete. They measure candidate behavior, not recruiting results. It’s nice to know how many people clicked on an ad and viewed it and how many people subsequently acted on what they saw (i.e., applied for the position). The former tells us something about the number of people an advertising venue or Web-site can attract, while the latter provides some insight into how well we are writing our job postings. The problem is that neither tells us anything about our results, whether our advertising investment actually led to a hire. A new employee. That’s the real bottom line, right? And neither CPC nor CPA tell us anything about that.
In fact, these metrics can even be misleading. They can cause us to invest our employer’s money in the wrong places. How? If a source generates a lot of ad views (as measured by CPC) or a lot of applications (as measured by CPA), but those ad views and/or applications come from unqualified candidates, then investing in the source with the best CPC or CPA is actually a waste of money. We’re actually improving the efficiency of our ineffectiveness.
Feel good metrics give us the illusion of managing our recruitment advertising budget wisely, but they don’t give us the information we need to do so. The make us feel as if we’re on top of the situation, even as they make it harder to perceive what’s actually going on. They give us data, but not insight. And HR/recruiting teams don’t need more data. They don’t need to feel good; they need to see the impact of their decisions more clearly so they can direct the best recruitment advertising to those locations where it will do the most good.
What metrics can do that? In my opinion, there are just two. Instead of Cost per Click and Cost per Action, I suggest you focus on Cost per Hiring Source (CPHS) and Quality of Hire per Source (QHPS). You see, the Wachovia analysts had it wrong. The goal for recruiters is not to maximize the enterprise’s ROI; it is to optimize it. Rather than simply minimizing costs (per click, per action or per anything else), we should focus on identifying the best sources of the best yield. And, the best sources of the best yield are those which produce the greatest number of high caliber new hires at the lowest cost. Let me explain what I mean.
Cost per Hiring Source (CPHS)
This metric measures the flow of new employees into an organization by source. In other words, it identifies where a recruitment advertising spend produces the most new hires in each of the specific career fields for which an organization recruits. Unlike such “strategic” metrics as the Recruiting Efficiency Index which measure overall effectiveness, CPHS is very tactical. We can use the metric to make accurate spending decisions. To determine where to invest our limited advertising dollars, we simply select the site or sites with the lowest cost per new employee delivered to our organization.
In effect, CPHS measures cost-per-hire, but it does so in a way that is very different from that used in the traditional cost per hire (CPH) metric. These differences occur in two important areas:
Traditional CPH measures what your costs are. CPHS measures what your cost are and where. The first metric enables you to maximize your ROI by minimizing your costs. The second enables you to optimize your ROI by minimizing your costs at the source. It not only tells you what to do, but where to do it.
Traditional CPH is a global metric that is determined by averaging the cost per hire across all of an organization’s career fields. It is a general measure that can hide critical cost variations in specific career fields. For that reason and because the best advertising is always targeted to a specific audience, CPHS is calculated by individual career field. It is not a global measure, but a community one. It tells you which source produces the best results (i.e., the lowest cost per hire) in a specific career field.
Quality of Hire per Source (QHPS)
Presumably, the decision to hire a candidate is a measure of their quality. Unless the organization’s strategy is to excel by hiring mediocre talent (in which case, it has bigger problems than how to spend its advertising dollars effectively), a new hire is, by definition, a quality hire. In other words, the measure of a source’s quality is an organization’s decision to select a person found there rather than a person found at some other source.
The downside to this measure, of course, is that it says nothing about performance on-the-job. While that outcome can be (and often is) significantly influenced (for better or worse) by the quality of supervision, it is important to identify those sources which yield the people who perform best after they are hired. That’s what Quality of Hire per Source is intended to do. It identifies which sources provide new hires who make the greatest contribution to their unit. It is the product of two factors:
The rank order value of each new hire’s contribution by reverse numerical quartile (i.e., if a person’s performance places them in the first quartile, they are assigned a value of four; if it places them in the fourth quartile, they are assigned a value of one). For example, if source A produced three-out-of-ten employees in a unit and they are rank ordered as being in the first, second and second quartile; and source B produced four new hires ranked ordered as being in the second, third, fourth and fourth quartiles, then this factor would be calculated as follows: A = 4 + 3 + 3 or 10, while B = 3 + 2 +1 + 1 or 7.
The company’s average gross profit or what is commonly referred to EBITDA (i.e., earnings before interest, taxes, depreciation and amortization) per employee. For example, if a company generated an EBITDA of $1,000,000 and had 10,000 employees, then its average gross profit per employee would be $100.
The company’s QHPS for source A is 10 x $100 or $1,000; the QHPS for source B is 7 x $100 or $700. To optimize the organization’s ROI, therefore, it should invest in advertising at source A.
Of the two metrics above, QHPS is undoubtedly the more controversial for at least two reasons.
The rank order value factor, by itself, differentiates the relative contribution of new hires from each source so why bother translating it into profitability per source?
There are other measures of employee quality (e.g., revenue per employee, individual performance appraisal scores) that could be used so why pick profitability?
Using profitability, expressed in hard dollar terms, recognizes a simple reality of life in today’s enterprise. It is the one parameter that will resonate best with an organization’s senior leadership. It is a measure they understand and respect—a key ingredient in building the business case for continued investment even in difficult economic times. And, while certain line units may generate more profit per employee than other units, our goal is to identify the relative bottom line impact of one source versus another. The only way to do that is by using the organization-wide average of profit per employee as our baseline.
It’s hard enough, in the best of times, to apply metrics effectively. In today’s challenging economic environment, recruiters are not well served by metrics that are incomplete, metrics that make them feel good but don’t help them make smart investment decisions. For my money, the only metrics they should use are those which tell them where they will get the best results. And, the best results can only be defined as new employees who contribute effectively on-the-job. That’s how you optimize your ROI.
Thanks for reading,