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There has not yet (to my knowledge) been a definitive economic study looking at the economic impact of poor hiring decisions. It is a clear truth that most people would realise that a poor recruitment decision can be very costly. Many organisations, though, are too accepting of their poor hiring record and little is done to fix it. Often the wrong metrics are looked at, such as how they can reduce recruitment costs, which in turn inevitably results in poorer processes. Fact: The best way to reduce recruitment costs is to make better decisions resulting in less recruiting frequency!
A good illustration can be made around the hire of salespeople. Many companies take very risky approaches to hiring salespeople. Rather than have robust processes in place to focus on High Performance Talent (HPT), they too often work with low cost, low quality “contingency” recruiters who recycle similarly low quality salespeople who are great at saying the right thing at interview, but often fail to deliver average performance, let alone anything outstanding.
Genuinely talented sales people and sales leaders are a comparatively rare commodity compared to the mediocre types. The market for High Performance Talent is what recruiters call “candidate driven”. This means that the best candidates are in short supply versus market requirement. Why are they in short supply? This is for a variety of reasons, but mainly it is because it is probably a sad truth that many people who go into sales are simply not cut out for it, and secondly those that are good are often not in the market for a new position as they are doing very well in their current role, so why would they change? Contrary to what some people may believe, top sales people generally don’t change jobs frequently, thus resulting in them being in greater short supply.
There are two principle causes for uneconomic hiring for any role, but this is particularly the case for salespeople, and those two reasons are short tenures and/or underperformance following hire.
It is a reasonable assumption that in most organisations a salesperson that lasts less than 12 months is an uneconomic hire. In most cases this will lead to an underperforming territory for a considerable period. It is worth noting that the effect can be cumulative as any new salesperson is faced with a severe challenge to turn round the lack of management of the territory previously. If a territory has had more than one unsuccessful hire in succession it will take good management and a very talented and resourceful salesperson to fix it.
Imagine a territory that is targeted to do €1M. If someone leaves and is replaced by someone 3 months later who then is on the territory for a further 3 months and then leaves it will probably be another 3 to 4 months before that person is replaced, meaning that the territory will have been sub-optimally managed for the best part of a year. The cost of that poor hiring decision will be roughly equivalent to the amount below target, and will probably be the equivalent of hundreds of thousands of Euros lost revenue
And what of the economic effect of incumbent underperforming sales people? I recently asked a CEO of a mid-sized company with a sales force of around 120 what the difference between their top performing salespeople and their poorest. Essentially it was that low performers were hitting around 60% of target. The top 10% were hitting 150%.
Assume, then, that your sales people take an average of 12 months to really get up to speed after hire, and that they have a target in their second year of €1M per annum
Your bottom 10% are hitting only 60% of target, or €600 000
Your top 10% are hitting 150% of target, or €1 500 000
This kind of difference is not uncommon.
Therefore, in this example, the difference between a really good hire and a really bad one is a massive €900k in lost revenue in year 2 per territory alone!
Even when comparing core performers who hit their target and a High Performing Talent, we are looking at €500k.
A bad hiring decision instead of a good one can cost your company between €400k and €900k in their first or second year!!
A robust process for recruitment that genuinely focusses on High Performance Talent and has the capability to massively reduce the chance of hiring people that last less than 12 months or will be below average performers will have a truly outstanding impact on your business. While this is easy to see with salespeople it equally applies to all other professional areas. Leaders in all organisations need to make more time to ensure their processes are as good as they would like their new hires to be.
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