Appreciating the True Cost of Your Vacancy
Many of the costs of recruitment are easy to quantify, e.g. advertising or agency / consultancy fees, although the focus on these tends to blind many people to the very significant internal, often unaccounted for, costs.
We’ll address these in a separate article because the other, almost certainly far more expensive, effect of the focus on the cost of recruitment is ignoring or failing to understand the true cost of not recruiting, that is having a vacancy open for a significant period. They can run into tens if not hundreds of thousands of pounds but are usually overlooked.
The costs and impacts of an open vacancy are significant, start almost immediately and usually continue after the new incumbent starts until they are fully productive.
How do we assess and attempt to quantify the damage an open vacancy does to a business?
An open vacancy may directly lead to a loss of revenue, may lead to obvious additional costs and will have many other indirect effects which will impact the business.
First let’s consider the most obvious financial impacts and how to assess them. In simple terms if you have a machine operator vacancy your direct cost is either the value of the output lost whilst the machine is idle / unattended.
In reality it is likely that a business would want to avoid an idle machine so would utilise overtime or a temporary operator. In this case the obvious direct cost becomes the additional cost for the overtime or the temporary operator. Hidden costs may include reduced output and or an increase in rejects or quality issues resulting from inexperienced or fatigued operators.
Of course operators are direct labour and the cost is relatively easy to quantify, what about indirect staff, sales people etc.
The cost of a sales vacancy also has a ready formula for assessing business impact. If a sales person is targeted at £500,000 per year that’s potential lost revenue of £40,000 per month. Against numbers like that the cost of recruitment doesn’t look high anymore. Of course it can be argued that for many products new business comes in in chunks and it is not simply the annual figure divided by 12.
However in reality this is potentially even worse. Winning new business is a process with a cycle which needs managing. People buy from people and opportunities in progress may fall out of the sales funnel when the sales person driving them leaves.
Any new incumbent will take several months to bring new opportunities to fruition. In the meantime whilst the sales position is vacant the starting point of the sales cycles for opportunities will be missed and the opportunity may not come again for years.
It is safe to say that a 12th of the annual target is a reasonable measure of the monthly cost of a sales vacancy. The cost will accumulate from the opening of the vacancy (sometimes before if the individual is disillusioned) until several months after the new incumbent starts.
For indirect / admin staff the task of quantifying the cost of a vacancy is harder and more open to debate. There are a number of methods of calculating the cost with each having its merits. All can be argued for and against so typically I would suggest businesses use one which is simple to use.
Of course if the open vacancy is covered by a contractor or temp the additional direct cost may be measurable but should also consider the cost any reduced output or increased errors.
Simplistic measures of the cost of a vacancy can include:
Average revenue per employee. This is simply taking the company revenue and dividing by the number of employees to give an average revenue per employee. Divide this by the period the vacancy is open to give the cost as an indicator of lost revenue
Salary multiplier. Studies have indicated the value of an employee is up to 3 x their salary. Whilst it can be argued that the company is saving the salary cost of the employee they are incurring the loss of the value the employee would have added.
In any of the above examples if the role is covered by a colleague, as often happens, a range of indirect impacts kick in. Many employers believe that in having a colleague cover the vacancy they have avoided both lost revenue and additional cost. Whilst in theory this could be true it suggests that a) the business was very inefficient and under productive prior to the vacancy and b) in reality there is no vacancy.
The soft, indirect impacts of a long open vacancy fall into the following categories:
- Individual / team performance
- Individual / team morale
- Management performance
- External image
- Recruitment and retention
Individual / team performance
Assuming colleagues were reasonably fully utilised prior to the vacancy it is impossible for them to continue to cover their own work and the additional work in normal hours. Either work must be prioritised and some omitted or longer hours will be required. Longer hours may lead to fatigue and an increase in errors, rejects and or waste all of which have a cost.
Individual / team morale
The additional pressure of “all hands to the pumps” can have a positive effect on morale in the short terms although this is by no means guaranteed. In the medium term however the pressure, fatigue and feelings of loss of control caused by having to omit part of your normal work to provide cover can cause stress and will impact on morale.
Poor morale typically leads to reduced productivity, increased errors and absenteeism all of which compound the effect of the vacancy. It may also lead to staff turnover creating additional vacancies multiplying the problems.
In these situations typically management becomes less effective. Managers will often be directly covering part of the vacant role and will spend more time addressing the productivity, quality and morale issues. Consequently the managers themselves have less time for management and are less productive, more fatigued and themselves may contribute to the problems with poor decisions and errors.
Long term vacancies have an impact on the company’s external image. Firstly it is clear that customers suffering as a result of productivity or quality issues as a result of an unfilled vacancy will loose sympathy quickly. Customers may view a company’s inability to recruit as a weakness and will naturally take measure to protect themselves should the vacancy and the problems caused be prolonged. Ultimately this could result in lost business.
Similarly competitors will view long term unfilled vacancies as weakness. On the assumption that performance, quality or service may be affected they will attack the company’s customers. If the customer has had less frequent contact or is suffering problems the business may be vulnerable.
Recruitment and retention
Another impact of external image is potential candidates may perceive there must be a reason a vacancy has not been filled. “What do others know that I don’t? What’s wrong with that company? There must be some reason they cant recruit.”
Of course this becomes a vicious circle making ever harder to fill a long term vacancy. It may deter the better quality candidates and result in the company only being able to access a lesser talent pool.
Internally the pressures of additional workload, falling morale and the company’s perceived inability to fill the role may cause further staff turnover. Again staff may wonder what is wrong with their company. Why don’t people want to work here? For a company struggling to recruit staff turnover compounds the issue.
These indirect costs are much harder to quantify ahead of time but perhaps address the scepticism some may have about the arbitrary nature of the simplistic methods of estimating the cost of a vacancy.
Many of the indirect costs are difficult to quantify before hand, but companies should consider where are their weaknesses? What is the potential for quality problems? Which customers are vulnerable to attack from a competitor? What is the likelihood and impact of these?
- The costs of a vacancy start almost immediately, continue after recruitment and WILL be significant.
- The longer a vacancy is open the greater the indirect impacts will be and the harder it is to fill.
- Sales vacancy cost
= (Annual Target / 52) x (weeks vacant + 4 weeks) assuming 4 weeks to get up to speed
- Direct labour vacancy cost
= cost of overtime or temp + cost of increased waste + value of production shortfall
- Indirect labour / admin vacancy cost
= (3 x salary / 52) x (weeks vacant + 4 weeks) assuming 4 weeks to get up to speed