The Last Word
The Harvard Business School identified the cost of inferior selection of sales representatives, at 3X the rep’s annual compensation,including expenses, training, benefits, wages and commissions/bonus.Thus a $60,000 per year salaried/commissioned sales rep hiring mistake actually costs the company more than $300,000.
In hiring a sales representative, What is the cost of a poor hiring process?
There are hard and soft costs to consider. The hard costs include, but are not limited to, time from dispatching the job order to hire. For instance, a sales territory is open an extra week, or month, or quarter, the reduced revenue and profits can be calculated according to the following formula: annual quota, divided by the time period, divided by gross profit-less salary, recruiting fees, travel and administration expenses. All numbers are annualized to the week or month or quarter.
- Annual quota $2,000,000.00
- Gross Profit 35%, = $700,000.00
- Salary+ commissions = $175,000.00
- Recruiting fees= $25,000,
- Administration, Benefits, Travel and Entertainment=$25,000
- Gross Profit: $700,000
- Total Costs:$225,000
- Net Profit:$475,000
- Net Profit loss per week:$9,500,
- Net Profit loss per month:$39,583.
Presented here is a simple and true case study highlighting additional hard costs not easily evident in the equation above.
“During FY2000, Lisa, a recruiter, presents a sales engineer to a International software company. The company, in business since 1985 has annual revenues in excess of $50 million. The company hires this candidate, 2 years later the same person is still employed (the definition of a good hire). The Software Company requires another sales engineer (in the same territory)to compliment the employee placed 2 years ago. Does the hiring manager call Lisa? NO! The position is still open 2 weeks later, the employee calls Lisa and suggests she call his boss. The boss acknowledges the opening but insists they have it handled using internal recruiting efforts. Meanwhile, Lisa presents an on-target candidate. One month later, the boss/hiring manager calls Lisa and asks about the candidate. The manager agrees to pay the fee. Discussing the hiring process, Lisa learns the hiring manager is interviewing eight additional people. Five managers from around the country fly into the territory to interview these 8 candidates. Lisa’s candidate makes 9. However, her candidate is the only one that the hiring manager is excited to meet. Five upper level managers fly into a city, stay in hotels and spend a complete day meeting 8 candidates when they only need one. At what cost? Six weeks have gone by. The hiring manager knew Lisa was competent. Has he saved any money? Based upon the example above he has already lost close to $60,000. If we attempt to equate the cost of one day of management hours of a Software company, the equation looks like this: $150,000 times 5(managers)= $750,000 divided by 200(days)= $3,750. Plus, what revenue generating activities could be accomplished instead of a complete day in front of 7 or 8 people they will never see again? How frustrated will these managers be (by the end of the day)? How many will quit if the company continues this wasted effort? How much revenue is lost annually because of this type of behavior?
Additional, definable soft costs: The hiring manager has spent 10 hours minimum, reading resumes and speaking to candidates over the phone. An additional 5 hours coordinating with the other managers. What activities could the manager have done instead? If I gave you back 2 full working days, every 6 weeks what would the time be worth to you?
Superior human capital practices are not only correlated with financial returns they are, in fact, a leading indicator of increased shareholder value. …superior HR practices are a key to attraction, retention and more and more, business outcomes, message: If a company’s goal is to improve shareholder value, a key priority must be its approach to human capital.
The business case has been building, and Watson Wyatt’s Human Capital Index research makes it airtight. The linkage between superior human capital management and superior shareholder returns has been proven. Moreover, proof that superior HR practices drive financial results, more than superior financial results drive HR practices, supports our theory: By hiring the right people, create an environment that supports creative thinking and increased productivity, leveraged by technology, you’ll reap the rewards. Dr. Bruce Pfau, Watson Wyatt During the last ten years I have carefully studied the recruiting and human resources management practices of technology companies. The organizations I included in my observations span the gamut. 5 person companies, 50 person companies, 500, 5,000, 50,000 plus person companies. 10 year old firms, startups, etc.
My research included tracking their share-holder value. The share-holder value was usually tied closely to the career movements of the candidates. Early on, I noticed that many of these firms did not value their employees. In the early 1990’s I witnessed (publicly traded companies) ‘the 90 day mentality’. Hiring people in an attempt to build sales and firing them in an attempt to reduce costs every quarter. When the issue of fees was introduced many of the firms stood fast! They negotiated low fees. I wondered, If they don’t value their employees they certainly won’t pay to hire the best! Then I read the resumes. Very few people were employed at the same firm for more than 3 years. Most less than 2. An an alarming rate less than 1 year. What was the problem? The hiring process? The on-boarding process? The products? The management? The marketing? The business model? The individuals who ran or still run these companies are smart! So why do they act so dumb?
Another simple and true case study: One of my close recruiter friends works closely IBM. She placed over 25 sales reps in a short period. The interview to placement ratio, less than 3 to 1. Usually 2 to 1. Another friend worked closely with Sun Microsystems. His interview to placement ratio: 22.5 to 1. He placed over 100 sales people with Sun Microsystems over a 3 year period. In the last 2 years IBM stock is down from $130 to $50 in a terrible tech market. Sun Microsystems’s stock down from $60 to $3. IBM needs a 260% increase in stock price to recover, Sun, 2000%.There is a reason for everything!