HR Professionals have the same problem as Residential Realtors. How do they demonstrate their value proposition for their clients?
In the case of Residential Realtors, they face growing competition from FSBOs (For Sale by Owners) who may feel that they can do the job of selling their homes almost as well (or better than) a Realtor and not have to pay a commision on the sale of 4, 5 or even 6%. I believe that Realtors must do a much better job of explaining their value proposition or they will continue to lose market share. To read more on this CLICK HERE.
Last night I had dinner with a high powered tech recruiter from San Francisco and I must say she faces a very similar challenge: How does she convey her value proposition to her clients, some of whom may feel that their internal management and staff can do the job just as well and for less out of pocket cost?
Let’s look at some of the underlying variables:
1. She charges her clients, on average, about $30,000 to place a techie in the $100,000 per annum salary range.
2. However, she is drawing from a large pool of known candidates; her firm has a lot of information about these people, not just how they perform in interviews or what their referees say about them. She knows how they actually perfom on the job.
3. She is saving considerable management and staff time– not having to wade through 300 resumés from an online job shop or having to interview perhaps a dozen candidates instead of just two or three.
4. Also, checking references these days and credentials too is not as simple and direct as it used to be. Privacy legislation can certainly restrict the amount of information you can glean and what happens if someone is not totally forthcoming about their credentials? You might only figure out that someone didn’t actually get an engineering degree from Stanford after they prove that they are bumbling fools in the job.
5. On average, the techies she recruits stay at their jobs for four years as opposed to two when internally recruited. This is a big difference. Employees tend to get more productive over time. Cisco gets up to $750,000 in annual revenues per employee. For the purposes of this analysis, I assumed that each tech employee can generate $150,000 in revenues in his or her first year, increasing by $100,000 per year for four years before reaching a maximum of $450,000 in their foruth year. If someone only stays, two years, you not only have the cost of replacing him or her twice as often, you are also losing the additional productivity from longer tenured employees.
6. I ignored the cost of a bad hire. Most HR Professionals give a guarantee of sorts; if the employee does not work out within a certain period of time, they will replace him or her free or for a reduced cost. But if you hire your own employee and he or she steals from you (it might be cash but it could also be code or whatever) or abuses his or her colleagues, the cost of getting rid of that employee (more management time, wrongful dismisal action, legal fees, severance pay, etc.) is considerable.
7. HR professionals usually have a lot more experience recruiting staff than the typical manager or even internal HR specialist. A decent residential realtor might do 5 or even 10 transactions a month. The typical FSBO might do 1 or 2 or at most 3 in a lifetime. The Realtor sure as heck better be better at doing these transactions and getting more value for their clients than they can get for themselves. HR professionals should also be better at their jobs than someone who does it intermittently and may have a lot of other responsibilities. Typically, internal HR people do a lot more than recruiting; they are involved in HR policy development, internal problems that crop up with individual employees, establishing payscales, doing employee reviews, becoming part of the negotiating team re. union contracts, morale boosting initiatives, continuing education programs for staff, staff training, etc. So outside professionals should be considerably better at the recruiting end of things… They should be like Terminators, “That is what they do, that’s all they do.” So they should be pretty good at it.
I put all this together on a spreadsheet and uploaded it to my server in .xls format so you can dowload it to your PC and fool around with the assumptions yourself. GO GET THE SPREADSHEET.
What the anlysis shows is that for an upfront investment in an HR Recrutier of $30,000, the company is saving just over $10,000 in management time– the additional time it would take to recruit internally. They are saving this amount twice during the four year period (because the HR Recruiter’s placement stays an average of twice as long as the internally selected candidate). In addition, the company is seeing $200,000 in increased revenue in each of Years 3 and 4 because the longer tenured employee is more productive than the new hire (hired after the first employee leaves at the two year mark).
The $30,000 investment in the HR Recruiter’s fee has an IRR (Internal Rate of Return) of 163% p.a. under these assumptions (and, as mentioned above, we have ignored the costs of a bad hire which would increase this rate of return further).
Even if we decrease the additional productivity of a longer tenure employee by half (to $50,000 per year and a maximum output of $300,000 per employee per year), the IRR only drops to 119%. A further decrease to $25,000 per year and a maximum output of $225,000 decreases the IRR to 84% p.a.
There are very few investments that a company makes that provide returns like this. A typical large company project will have a return of 20 to 30% p.a. Returns that are in the 40% range are rare even for VCs or Vulture money so the HR Professional does have a clear value proposition to present. It is likely that the value of a HR Recruiter to a company increases further as they get to know the company better; they become the HR arm of the company and their track record together is likely to increase further as their relationship becomes even more symbiotic. Companies live in complex business eco systems and NOTHING is more important to a company’s performance than the people they hire.
You can have the greatest assets in the world in any asset class but if your employees suck, your company’s financial performance will too.
Awesome stuff, Kevin. I completely missed Point 3– very strong. Sure, most managers productivity will suck while they are distracted from their ‘day jobs’.
From: Kevin Dee, EagleOnline.com
To: Bruce Firestone
Sent: Sunday, October 22, 2006 9:56 AM
Subject: Re: HR in Silicon Valley
So I finally had a few minutes to sit and digest the cost/benefit analysis. Here are some (disjointed) top of mind thoughts:
1. I love the concept of providing a dollars and cents value proposition.
2. I would question some of the assumptions as they apply in Canadian markets … but I assume your friend knows her market.
(i) Tenure of tech employees is very dependant upon the economy (and demand), I think that 2 years tenure is probably normal and possible standard when the economy is not red hot. I think that people are moving more often, and with the demographic changes that are coming that will only be exacerbated.
(ii) The “productivity” number that you place on the employees seems high … I do understand that Cisco may generate $750K per employee in revenue but is even a Cisco manager going to assume that a tech resource is going to contribute at that level (and most other companies will be nowhere close to even the $300K you use)? Conversely if the position is filled with a less capable candidate, or one that stays for a shorter time will they look at their contribution as that much different than the other guy? My experience is that most line managers are pretty myopic … if they can get a decent body in the job that is good, if not that is not good.
If the client accepts that a search firm candidate will stay twice as long as an internally sourced candidate (good luck selling that one) then you can still show a decent ROI, but most companies will have a problem with that assumption. The biggest reasons that people come and go are way beyond the control of a search company, except that it is search companies that may pull them out.
3. Your calculations are really a comparison between an in-house solution versus a use of a search firm. That would have to assume that there are dedicated search people in the client organization. If the client is using line managers for their hiring process ( which often happens) then the cost to the client is far greater, because the line managers are distracted from their “day job” impacting deliverables, project deadlines etc.
4. I still believe that if the client can get at the same candidate pool as the search company, and with the tools available today that is very likely, then the search company is slipping towards a commodity pricing model. The real value is being able to provide candidates that the client can’t find, or “headhunt” specific people in a “anonymous” manner that the actual client could never do without causing problems for themselves.
5. The type of search that your friend appears to be in is what we would call mid-tier here in Canada. It is not “executive search”, and it is not low end “placement”. They fee structure that she commands is very healthy for that kind of work compared to Canada.
I forwarded your email to a colleague of mine who specialises in search in Canada and am interested in his take on this. Eagle is also in the”placement” and “mid-tier” search business and it is our ability to find the candidates that our client cannot find that is gaining us business. Even then, clients are balking at paying fees and we only charge 20% of salary, which appears to be the standard in Canada for this type of search work.
I do like the concept and I think there are other variables here that could add to the model … 1. Access to passive candidates; 2. The fact that search is the “core business” of a search company and NOT of the client; 3. The ability of the search company to ramp up or down with the needs of the client; 4. Time to hire … which directly affects productivity … and which search firms can definitely show numbers that will impress; 5. Finding, retention, training and productivity of in-house recruiters … my experience is that they are (in general) definitely NOT as motivated as recruiters in the staffing industry.
Hope this is useful feedback, it seems to come across a little negatively but that was not my intention. I will let you know if I get anything from my colleague, in fact I will copy him on this response.
Kevin Dee, CEO
Eagle Professional Resources Inc. (Eagle)
902-170 Laurier Ave. West, Ottawa, ON. K1P 5V5
(613) 234-1810 ext. 3223
“High Altitude Staffing”
VISIT THE EAGLE BLOG @ http://eagleceonews.blogspot.com