Costs of recruitment

How do we work out how much recruitment costs? Well, it gets a bit complicated, because costs can be organised in different ways; in New Zealand we tend to consider direct and indirect costs; in the USA the costs tend to be grouped into external and internal (Phillips & Gully, 2015). Direct costs arise where we can point to that and say this was directly related to hiring a new staff member (such as advertising the position), and indirect costs are costs which are are part of someone's job or overhead (such as HR staff time, travel and expenses for selection and interviews, testing, reference-checking and verification of qualifications). This latter category is remarkably hard to track, even though it has been tried (Tsarenko & Krishnamurthy, 2021).

External hiring costs arise where we pay someone outside our organisation (advertising placement, recruiter fees, referral bonuses, travel costs, relocation costs), and internal hiring costs are self-evident (advertising content or co-ordination, travel/interview/referee costs, and staff time). Apparently 90% of hiring costs - "including testing, reference checking, hiring manager time, and administrative support" - are likely to be external costs (Phillips & Gully, 2015, p. 156).

Recruitment costs, or costs per hire/CPH, used to be guesstimated at something like $13k per person, which I would guesstimate to be more like $20k today. In the USA in 2016 this was considered to a little over $4100 (SHRM, 2016). This is a simplistic model, largely only including direct costs (advertising, testing, verifying, contracts), not indirect costs (screening, interviewing, reviews) or the six or so months it takes for a new staff member to become acculturated to organisational processes, procedures, and to build networks.

Those more complex recruitment costs - including training investment - for trainee accountants were calculated out to a staggering 241% of an accounting graduand's annual salary (Twiname et al., 2011). However, those accounting students require two expensive professional exams to become Chartered Accountants once they have clocked up the appropriate number of hours, which significantly inflates costs in this profession (Twiname et al., 2011). It would be interesting to know whether the percentage has shifted since the original study, and what costs doctors and lawyers rack up!

It is interesting just how pricey it is. I began making a rough list of what needs to be factored in, and came up with quite a substantial list (see the image accompanying this post). And I forgot job sizing.

It is a complex bucket of stuff!

Sam

References:

Phillips, J. M., & Gully, S. M. (2015). Strategic Staffing (3rd global ed.). Pearson Education (UK) Ltd.

SHRM. (2016, August 8). SHRM Benchmarking Report: $4,129 Average Cost-per-Hire. Society of Human Resource Management. https://www.shrm.org/topics-tools/news/shrm-benchmarking-report-4129-average-cost-per-hire

Tsarenko, A., & Krishnamurthy, D. (2021). Understanding and Improving Quality in Firm Recruitment Processes: A case study [report 2021:035]. University of Gothenburg.  https://d1wqtxts1xzle7.cloudfront.net/97248696/483817839-libre.pdf

Twiname, L. J., Samujh, H., & Rae, S. (2011). Accounting for the costs of recruiting and training [paper]. Cambridge Business and Economics Conference (CBEC), Cambridge UK, 27-29 June 2011. https://researchcommons.waikato.ac.nz/server/api/core/bitstreams/1fc33677-9d09-4f9c-a9de-8a69368f7ab2/content

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Under-estimating project times

There is a book which explores mega-projects, by two professors of management, Bent Flyvbjerg and Dan Gardner, on how we underestimate costs, and are overly ambitious in working out how long projects will take to complete (2023). 

The book takes us on a fascinating tour of how we budget large projects, using an international database containing projected public works budgets mapped to final costs. Gathering data from other researchers and consultants such as McKinsey, the authors have now gathered "16,000 projects from 20-plus different fields in 136 countries on all continents except Antarctica, and it continues to grow" (Flybjerg & Gardner, 2023, 4%).

The book clearly shows the average global underestimated project time and cost is 62% (Flybjerg & Gardner, 2023). The average. If we are not that flash at budgeting or costing, our projects will come in much higher than that. All too often we seem to have our time optimism glasses on, in addition to being amazingly bad at costing (read more here). This has resulted in what Flyvbjerg calls the "Iron Law of Megaprojects", a probabilistic rule that planned projects will come in "over budget, over time, under benefits, over and over again" (Flybjerg & Gardner, 2023, 4%), because they are too optimistically planned, where the budgets are trimmed so they will be approved, where the job goes to the lowest tender, and where the payoff or benefits are inflated so that the infrastructure gets the go-ahead. So "a miniscule [number of projects] 0.5 percent nail cost, time, and benefits. Or to put that another way, 91.5 percent of projects go over budget, over schedule, or both" (Flybjerg & Gardner, 2023, 4%). And - as a result - projects end up being 62% under-costed. 62% later than expected.

However, some nations seem to do this stuff better than others; generally Scandinavian nations. Of course, they too get thing wrong, but they seem - to me - to start from a more honest base.  

It is important to collect such data. Interestingly I found from my own business experience that - when quoting for consultancy work - I know I will underestimate the hours by 66%. I have my quote records, and can compare quote to actual, so I know I will be out by a factor of three. The results of this book do not surprise me in the slightest; and I know that I am slightly worse than the average Flyvbjerg and Gardner found in their data (2023). As a result of my own data, when I quote for a job, I still carefully work out how many hours I think it will take, but then I treble my first estimate of hours, before passing the quote to the client. My final clean-up invoice will then be within cooee of the quote. 

Do try the book: it is a highly entertaining read.

Sam

References:

Flyvbjerg, B., & Gardner, D. (2023). How Big Things Get Done: The Surprising Factors that Determine the Fate of Every Project, from Home Renovations to Space Exploration and Everything in Between. Signal.

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Total labour cost revenue percent

Earlier this year I watched the documentary, Persona. There is a point in the movie where Ben Dattner, an organisational psychologist and executive coach, is interviewed. He justifies the recruitment testing industry with the rationale that "approximately 70 percent of an organisation's expenditures is on human capital" (Hawkins, 2021, 14:18), apparently implying that any strategy to reduce the organisation's exposure to such a significant cost as labour is a no-brainer. My immediate thought was: bollocks.

There was no way that the total cost of labour could be anywhere near 70%. Perhaps if you had a service industry it could be, but only if it was low tech (i.e. required no capital investment that the business would need to fund from earnings). So I went looking online. There is indeed a white paper stating that organisations tended to have "total human capital costs, or total cost of workforce, [at] nearly 70% of operating expenses" (HCMI, 2022). I found the 'technical' term for this, which is "total labour cost revenue percent".

Hmm. To calculate our cost of labour, we need to add all remuneration per staff member (car, insurance, retirement, housing etc), and to include all staff who are overhead (i.e. not directly responsible for production) such as managers, administrators and directors. Costs of hiring can also go into this bucket. But the cost of clothing, health and safety planning, scheduling etc should be part of infrastructure costs, not part of the cost of labour (Stone, 2019). Most of the firms I have had experience with would have had the cost of labour well down the expenses list. For example, a local manufacturing firm's main monthly cost is raw materials, followed by $1m in electricity. Total labour (including fringe benefits) is 11th down the list of costs at about 10% of the monthly total.

My 'instinctive' reaction to the 70% comment - also based on my initial accounting degree - was to have placed labour at around 20% of operational costs. However, I may be underestimating, as "[t]ypically, labor cost percentages average 20 to 35 percent of gross sales. Appropriate percentages vary by industry, A service business might have an employee percentage of 50 percent or more, but a manufacturer will usually need to keep the figure under 30 percent" (Johnson, 2011).

Organisations are keen to automate as much as possible to drive down the cost of labour. It is unlikely that labour costs will ever increase. And - while it will vary across sectors - it will not be 70% of costs.

However, aside from the extremely dubious claim made by interviewee Ben Drattner, the movie Persona (Hawkins, 2021) is a very interesting watch.

I firmly recommend it!

Sam

References:

Hawkins, T. T. (Director). (2021). Persona: The Dark Truth Behind Personality Tests [movie]. HBOMax.

HCMI. (2022). Total Cost of Workforce (TCOW) [whitepaper]. Human Capital Management Institute. https://www.hcmi.co/Resources/White-Papers/Total-Cost-of-Workforce#:~:text=Including%20the%20Fortune%20500%E2%84%A2,nearly%2070%25%20of%20operating%20expenses.

Johnson, K. (31 July 2011).>Employee Sales vs. Cost Ratio. Chron. https://smallbusiness.chron.com/employee-sales-vs-cost-ratio-38936.html

Stone, D. (2019). Estimating, Labor Burden, and Cost of Goods Sold. Construction Program & Results. https://www.markupandprofit.com/articles/estimating-labor-burden-and-cost-of-goods-sold/

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Escalation of Commitment

There is a fascinating theory in management called the Escalation of Commitment (Staw, 1976). This is "the voluntary continuation of investing resources into what appears to be a failing course of action whose outcome is uncertain" (Tine, 2013, p. 0), or where "decision makers can become over committed to a course of action" (Staw, 1981, p. 579) without evidence that the investment will pay off. While this theory is related to the management idea of sunk costs, escalation of commitment is a separate theory.

Think "we have started, so we will finish".

Imagine that we are building the Sydney Opera House. It is 1957. We have held a competition. We have been presented a superb design by Danish architect, Jørn Utzon. We have the concept drawings from the architect, and they are iconic. The building will be a monument to creativity: it will 'make' our city. We think it will cost AUD$7m (back of the envelope calculations), and perhaps take ten years. But we have no detailed drawings yet about how it should go together. Instead of asking how it will all work and costing the project, we push the go button on the project, and will work it out as we go (Murray, 2003).

The costs start accumulating alarmingly. By 1961, we are estimating AUD$18.6m. The detailed working drawings are costing a fortune. By 1963 costs are at AUD$29.6m. The costs continue to spiral. Moving the concept to reality is proving a nightmare. Things do not work as anticipated. There is political scandal. Controversy is international. By 1965 the cost is out to AUD$49.4m. We 'accept' the architect's resignation because some local architects and builders have told us they can put it together for less. By 1967 the costs are at AUD$85m (Murray, 2003; Pitt, 2018).

Then at last it is complete - only 16 years from concept to reality! The grand opening by Queen Elizabeth II takes place in October of 1973. And the final bill comes in at AUD$102m (Murray, 2003). Ouch.

The Sydney Opera House is one of the most iconic buildings of the 20th Century. Almost anyone on the planet who sees an image will recognise what it is, and where it is. The architect won the Pritzker prize - the Nobel-equivalent for architecture - with the commendation "There is no doubt that the Sydney Opera House is [Utzon's] masterpiece. It is one of the great iconic buildings of the twentieth century, an image of great beauty which has become known throughout the world—a symbol for not only a city, but a whole country and continent" (Murray, 2003, p. xii).

But the cost was a perfect example of an escalation of commitment: we have started, so we will finish. While costs, after nearly 50 years, appear negligible - especially for something so unique - from a management point of view, the project was a disaster. The costs were uncontrolled/uncontrollable. The project was poorly planned, poorly conceived, over-ran on time, over materials, over budget, over reputations, and over personnel.

Why? Well, planning should have been key, but it was not. The project was too 'out there' to cost accurately. The design was too difficult to translate into reality: it was a concept. Working drawings were much harder to translate than was anticipated, and everything stemmed from there.

However, in my mind, the Sydney Opera House is a piece of art, and I for one am grateful to the artist, Jørn Utzon. He created a thing of beauty that is not so much a building as an expression of voyage, saga, and an inspirational human story of creation.

Sam

References:

• Murray, P. (2003). The saga of the Sydney Opera House: The Dramatic Story of the Design and Construction of the Icon of Modern Australia. Spon Press.
• Pitt, H. (2018). The House: the dramatic story of the Sydney Opera House and the people who made it. Allen & Unwin.
• Staw, B. M. (1976). Knee-deep in the big muddy: a study of escalating commitment to a chosen course of action. Organizational Behavior and Human Performance, 16(1), 27–44. https://doi.org/10.1016/0030-5073(76)90005-2
• Staw, B. M. (1981). The escalation of commitment to a course of action. Academy of Management Review, 6(4), 577-587. https://doi.org/10.5465/amr.1981.4285694
• Sydney Opera House (2021). The Opera House History. https://www.sydneyoperahouse.com/our-story/sydney-opera-house-history/tubowgule.html
• Tine, D. C. (2013). Attribution Bias and Overconfidence in Escalation of Commitment: The Role of Desire to Rectify Past Outcomes. [Doctoral Thesis: Robinson College of Business]. https://scholarworks.gsu.edu/cgi/viewcontent.cgi?article=1023&context=bus_admin_diss

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No, No, I won't believe it!

I read a really interesting article on the Guardian recently by Sian Townson about why we humans can be so gullible about the claims of pseudoscience.

This is where, despite what scientists have actually discovered within their fields, that the bulk of us would rather believe that our 'instincts' than the careful and methodical research of experts.

Pseudoscience encompasses myths such as vitamins, naturopathy, cancer being cured by diet alone, the Atkins diet working because carbs are bad for you, and that a face cream can reverse the effects of gravity and ageing.

Sian lists four key factors.

The first one interestingly is about sunk costs (which is related to cognitive assonance). Sian goes on to explain that, when we've purchased something we want to justify our expenditure to ourselves and others. It's a good point to remember that we are more likely to justify items that we have purchased based largely on wishful thinking, even more when that purchase is an expensive one.

Secondly, when we have purchased an item, we have what is known as a "confirmation and selection bias". We seek out only evidence that supports us being 'right', and - sadly - we ignore contrary evidence and be wilfully blind. It's like the family legend that Great-grannie being psychic; we remember only the few times she was right and forget about all the times that her "feelings" didn't pan out.

Thirdly, there is a great thing called a "clustering illusion". Humans are pattern seeking animals, and we will assume correlation or causal factors and a group of random happenings where there may not be a relationship. We create our own closure: put our own construction on what is 'actually' happening. Conspiracy theorists dine out on this stuff, and again, this is like our psychic Great-grannie. We should be cautious of clustering factors unnecessarily.

Lastly, there is the Dunning-Kruger effect, where the less we know about something the more likely we are to see the 'logical' solution. Oops, I think we will all have been there! This is "illusory superiority", where our lack of understanding of the complexities of an issue only allows us to see a simple answer; when in actual fact we know very little. I think "illusory superiority" is a gorgeous phrase.

I can put my hand up to all of these at one time or another, as I am sure can we all.  The trick is to remain open-minded enough to guard against getting sucked into these self-deluding behaviours.


Sam

References: 

• Townson, Sian (30 January 2016). Why people fall for pseudoscience (and how academics can fight back). Retrieved 30 January 2016 from http://www.theguardian.com/higher-education-network/2016/jan/26/why-people-fall-for-pseudoscience-and-how-academics-can-fight-back?CMP=new_1194&CMP=

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