Quality of Hire (Part 1 of 3)
Part 1 of 3: An Interview with Yves Lermusi, CEO, Checkster
Reprinted with the permission from APQC
Yves Lermusi, CEO, Checkster
Quality of hire is a topic of keen interest to recruiters and talent acquisition professionals and in June of 2010, APQC interviewed Yves Lermusi, CEO of Checkster, to ask him how he, and some of the organizations he works with, define and measure quality of hire. These days Yves spends most of his time consulting and analyzing the cost and effect of quality of hire.
This will be a three part series on the effect and challenges of measuring Quality of Hire.
Part I
APQC: First, let’s begin with a definition of quality of hire. Measuring quality of hire is something that many of our member organizations struggle with. How do you define quality of hire?
YL: There are two distinctions that are important to note when you think about the hiring process: One is the efficiency of the process. The other is the effectiveness of the process. Efficiency involves how fast you can do the process, and how inexpensively you can do the process. Effectiveness relates to how good the outcome is, and is essentially the quality of hire. This is the distinction from a high-level point of view.
Often, the focus of talent acquisition experts and vice presidents of talent acquisition has been mainly on efficiencies, and not enough on effectiveness or quality. So, to come back to the definition of quality of hire, it is ultimately defined as the output of the new hires coming onboard. Obviously, this is a general definition.
A basic CFO-level metric for quality of workforce is revenue per employee but from a corporate standpoint it is a short-sighted measurement. The more comprehensive measurement is revenue divided by total labor spend (the overall spending on labor, taking into account not only your full-time equivalents but also the contingent labor spend). That is one way to see how good or efficient your workforce is.
From the standpoint of recruiters and the talent acquisition department, there are different ways to measure quality of hire. From their perspective, at a high level, you evaluate the output created by each new hire according to different measurements.
APQC: A follow-up question to this idea of the ratio of total organizational revenue divided by the spending on labor is: Would people consider that measure a form of human capital return on investment overall?
YL: That’s correct. Our approach has been that so many people are speaking about the overall revenue per employee. There is recent research that has shown that this definition is not accurate. It ignores the contingent labor force. It is a good step in the right direction, but not quite there. To give you one specific example, we conducted an analysis and one organization had revenue per employee at $145,000. Another organization had about $150,000 in revenue per employee. In this example, it would appear that organization number two is more efficient than the first organization, so organization number two must have better people, better processes, etc. Then, we looked at the ratio of revenue on total labor spend for the two organizations, and it brought us to the opposite conclusion.
In a “return on workforce” approach, organizations look not at revenue, but at operating income [essentially profits], divided by total labor cost. This provides a “micro-measurement” that is directly impacted by not only organizational strategy, and the quality of organizational processes, but also by the company’s people.
APQC: Let’s move from talking about strategic measurements to talking about the operational measurements for quality of hire. Many of our members and customers participate in APQC’s Open Standards Benchmarking survey on “Recruiting, Sourcing and Selecting Employees,” and it includes many measures at the tactical level in terms of efficiency, productivity, and cost of the process for the organization. But when it comes to measuring quality, that’s something that I think organizations still tend to struggle with.
YL: Let me first say that a third of the organizations we work with today don’t do anything about quality of hire-they don’t measure anything.
For those that do, let me give you a couple of specific, tactical, examples for measuring quality of hire– not at the corporate level, but rather at the recruiter or departmental level. Quality of hire is the most strategic measurement of talent acquisition. The example I often give is to just imagine that you have to start a restaurant and you need to hire a chef. If you want to be extremely efficient, you go out in the street and hire the first guy that’s looking for a job, because he can probably cook a couple of dishes. It costs you five minutes to find the person and fill the job–very quick, very inexpensive. But, what’s the likelihood that the individual will be up to par in terms of helping you compete in the restaurant business? It is probably very slim.
However, when you look at talent acquisition departments, most of their operational metrics have been time to fill and cost per hire. How quickly can you do it, and how inexpensively can you do it? However, good companies would rather hire new employees that are a good fit and stay for the long-term, rather than someone who has to be fired six months after being hired. So, quality of hire is a strategic measure.
Once we agree that quality of hire is a strategic measure for recruiting and talent acquisition departments—how do we go about measuring it? For many of our customers, what they do is if they have some jobs that are easy to measure-typically sales jobs and call center types of jobs-then they use those standard measurements of performance for those jobs as benchmarks for quality of hire. For example, call centers monitor call resolution and the speed of success. They also conduct post-call surveys. For sales jobs, typically you see the volume of sales, customer satisfaction, and customer retention as standard measures of performance. The other way that we’ve seen organizations measuring quality of hire is through proxy measurements, such as new-hire retention.
APQC: When you talk about retention to gauge quality of hire as a proxy, are organizations looking at different points like retention at 30 days, 90 days, six months, a year, or more than five years?
YL: That depends from one organization to another and depends of the jobs. But more fundamentally, new hire retention is only an approximation of quality of hire because a new hire may join an organization and six months down the road his or her spouse is relocated and they have to follow. In that case, the employee’s leaving the organization has nothing to do with quality. There are a number of similar types of examples, so new hire retention is a proxy for quality of hire. It is one measurement that organizations are using today because it’s a measurement that they have at their fingertips.
Another way that they measure quality of hire is to look at the performance reviews after the first year to see how those people are doing. But a big debate comes into play: Is the performance of an individual the responsibility of the direct manager? Or, is it the responsibility of the recruiter? There is no straight answer.
It will obviously depend as well on the type of job. In a job with high turnover like retail, typically people don’t even last a year. The performance review after a year is not as useful. At some organizations where turnover is in the single-digit percentage, they would say maybe it’s the first year or first two years that recruiting is responsible or has a huge impact. So, the performance review is not a straight answer either, because the quality of hire is not directly linked to what the recruiters have been doing in the long term (after a year).
What we see as the third most-used metric by organizations is a simple survey of the manager.
To be continued.
Part II to be published by Recruiting Trends on Thursday, September 9th, 2010
About CHEKSTER
Checkster (www.checkster.com) offers reference-checking and 360-feedback technologies to client companies to help them automate reference checking, build a passive candidate database, and increase and measure their quality of hire.
ABOUT APQC
For over 30 years, APQC has been on the leading edge of improving performance and fostering innovation around the world. APQC works with organizations across all industries to find practical, cost-effective solutions to drive productivity and quality improvement. We are a member-based nonprofit currently serving more than 500 organizations in all sectors of business, education, and government.
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phone: +1-713-681-4020 or 800-776-9676
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e-mail: apqcinfo@apqc.org www.apqc.org
Posted by Yves Lermusi
on September 1, 2010. Filed under Human Resources, Thought Leadership.
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I want to applaud you for even posting this! My firm has been researching and consulting around human capital productivity for years. Yves Lermusi is correct about what sales per employee (SE) misses in terms of measuring human capital productivity (not really quality of hire, but a workforce productivity or HCROI metric). We have found that doing apples to apples comparisons with total workforce costs (including contingent labor) is nearly impossible to do accurately without proprietary knowledge. We did a study in chemical manufacturing that showed just this, one company had a huge SE but the worst operating income per employee of the bunch. After some research we discovered that this organization had outsourced a lot of business functions the past five years and believe this was a major contributing factor. SE looked great because headcount was low comparatively speaking, but all the outsourcing costs were captured in operating costs! This is not to imply that outsourcing was a bad move for this particular company, because operating income per employee may have improved after outsourcing. It simply shows that other companies in this industry are generating much better returns on human capital.
We use SE along with operating income per employee (OIE) or operating margin (OM) because they capture contingent labor spend, and cash flow per employee (CFE) for the same reason, along with total number of employees (TNE) to compare organizations against direct product or service competitors to find out who generates the greatest HCROI. You can read some of the publicly published studies on my companies blog at http://executivesguide-humancapital.com or request the research papers at http://www.cordellandcompany.com. We believe the real measure of Quality of Hire, at a global workforce level, is new hire productivity vs. existing hire productivity. Note, we also believe the best metrics of learning and development are based on the same measures and should work similar to retail store measures of same store sales.
The trick with these measure is that you have to dig a lot deeper to identify where the greatest improvements in productivity come from and where improvements need to be made. Until organizations correctly define output/productivity measures at the organizational, group, department, team, and individual level (and track them objectively) it is hard to make fact based decisions at these levels. This certainly is a contributing factor to the emphasis on cascading goals…and why employee performance management software/business execution software has become such a big deal.
What we find is that companies with the greatest HCROI generate anywhere from 30-150% more in CFE than the industry average, and anywhere from 30-100% more in OIE (and many times they do it while increasing TNE more, or reducing TNE less, than their competitors). The high level take away is that these companies acquire and/or develop and keep more high performing talent than their competitors. Over time you see this reflected in their operating performance and their stock prices!
There is even some research published on this topic by McKinsey & Company, using net profit per employee, that shows companies that produced the highest profit per employee over a ten year period generated the greatest return to shareholders across a broad set of industries. You can find a paper on at https://www.mckinseyquarterly.com/Strategy/Strategic_Thinking/The_new_metrics_of_corporate_performance_Profit_per_employee_1924 or read about it in their book Mobilizing Minds.
At a basic level, this is quite logical when you think about it. The factors that affect productivity include materials (inputs), technology, process, and people. Once you have optimized your technology, processes, and purchasing (something most large organizations have done the past decade) you have only one place left to go…people.
CorDell Larkin
http://www.twitter.com/cordellco
http://www.linkedin.com/in/cordelllarkin