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The Expense You Can’t Afford

Dwight Harris's Profile

I just came from a summit of executives, where the hottest topic under discussion was talent acquisition. There was enthusiasm because talent is available. However, I was surprised to find that no one had a tangible plan for bringing in the right people. Given that we are emerging from an unprecedented period of sharp job loss, perhaps hiring and retaining talent would require a smarter approach than ones used in the past. A recent statistic suggested that 40% of new leaders going into new organizational roles fail in their first 18 months; 64% of new executives hired from outside the company fail; the average cost of a failed executive is $2.7 million! (Source: Executive Search Summit, 2008). Those statistics are rather sobering. Then I began to wonder what those costs might look like for a moderately large to large organization (revenues over $200 million). According to 2008 “Businessweek,” worldwide recruitment expenses approach $10 billion. For Forbes, that number approaches $11.6 billion. That suggests that approximately $4 billion are wasted in recruitment fees alone each year. But what does that mean for your firm? Let’s do the math. To hire a position might take one to two months of HR labor. At $60,000 a year, and at 20% of his or her time during that period, the cost will be approximately $2,000. If that hire is mid to senior level, that executive will command a salary of approximately, $90,000 a year. Benefits would be roughly $22,500, at approximately 25% of base salary. So, 40% of the time, your company loses $114,500 per mid to senior level executive that is hired. This does NOT include any recruiting fees, or costs to train or acclimate to the new role. And, you get to do this again next year or two. Multiply this number by 5 or 10 a year and you can see why this is a problem you can’t afford. Unless we learn from our history, we are doomed to repeat it.

Answers

Joseph Gwozdz
Title: CFO
Company:
(CFO, ) |

This is an interesting and valid topic. In a recent Forbes article, they refer to a study that shows that an outsider is more likely to succeed or at least limit tendencies to throw good money after bad. See - http://www.forbes.com/2009/10/22/insider-succession-planning-leadership-ceonetwork-governance.html

Either way the point to focus on is as Dwight highlights there is a huge cost for making the wrong hire whether from internal or external.

Romy Zeid
Title: Vice President
Company:
(Vice President, ) |

Great article, and very true!

Topic Expert
Mark Richards
Title: VP of Finance & Operations
Company: RBA Consulting
(VP of Finance & Operations, RBA Consulting) |

In response to a question about why it took companies so long to make a hiring decision - I found that there are questions that companies need to address during the hiring process before extending an offer.

I developed a document (see url below) for people in transition, but it applies here. As I look at my experience where our hires went sideways, in many cases it was not asking these questions that contributed to the problem - as we had not defined what we needed or wanted.

Good discussion.

Regards,

Mark

Patricia Axelrod
Title: Business Manager
Company:
(Business Manager, ) |

I hate to see something like this encouraging not to hire externally. I agree recruiting and replacement costs are real and are high. I also have seen too many times that good execs are looking for positions way too long because of this potential "risk" while companies promote internally and wait out getting a less qualified person up to speed because it was the best of the bunch, not because it was the right hire. This isn't to say that promoting from within isn't great. It is. Internal people have knowledge of the company and it is the right message to send. Lets just please be careful about closing the door on new people as they bring a fresh set of new ideas and help move culture to the next level because it does change the dynamic when there is new blood.

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