Determining the Hidden Cost of an Unfilled Position to an Organization
Let’s create a comprehensive example considering various potential costs associated with an unfilled engineering job position for one month. Please note that this example is for illustrative purposes and the actual costs may vary depending on the organization and specific circumstances.
Assumptions
- Four people participating in the hiring process with different levels of involvement as percentage of their time (Top Boss, HR, Hiring Manager and one influencer).
- An Engineering position that generates about 3 times their salary as Revenue (minimum business requirement).
- Number of working days in one month is 22.
Calculation
Calculate the Direct Cost Per Day:
Cost Per Day = $284
Total direct Cost for One Month = Cost Per Day x Number of Working Days in One Month
Total direct Cost for One Month = $284 x 22 = $5,673
Additional Intangible Costs
Productivity Loss: Considering the productivity loss as the revenue not realized by this position due to its vacancy, estimate the cost of lost productivity. In this case, suppose the position contributes 3 times the Cost of Engineering.
Position Productivity Rate = Average Engineering Rate x 3 = $83 x 3 = $250 per hour (rounded).
Productivity Loss per Day = $1,538
Total Productivity Loss for One Month = Productivity Loss x Number of Working Days in One Month = $1,538 x 22 = $30,769
Overtime or Temporary Replacement Costs: If overtime or temporary replacements are necessary to cover the workload during the vacancy, estimate the additional costs. Suppose the estimated cost of overtime or temporary replacement is $500 per week, totaling $1,000 for one month.
Total Overtime or Temporary Replacement Costs for One Month = $1,000
Total Costs
Summing up the costs calculated above, we have:
Total Costs = Total Direct Cost for One Month + Total Productivity Loss for One Month + Total Overtime or Temporary Replacement Costs for One Month
Total Costs = $5,673 + $30,769 + $1,000 = $37,442
In this example, the estimated total costs of having an unfilled job position for one month, considering salary, benefits, productivity loss, and overtime or temporary replacement costs, amount to $37,442.
This conservative analysis helps provide a comprehensive understanding of the potential financial impact of a vacant position on an organization using the most obvious factors that affect costs. However, there are other risk factors that can influence the cost of an unfilled vacancy in more significant ways. For example; the loss of contracts can result in losses in the thousands or millions of dollars in revenues or penalties.
Furthermore, the emotional wear and tear, frustration, loss of motivation and productivity by the stretching of the existing workforce can also have a major detrimental effect to company profitability. Not to mention hiring the wrong talent. On that note, mistakes in the hiring process typically result in three predictable and quantifiable outcomes: Mis-Hires.
There are basically three types of mis-hires: Turn-Downs, Fall-Offs and Low-Quality talent. The US Department of Labor provides statistics on Turn-Downs and Fall-Offs in companies’ hiring processes.
They occur because the hiring process fails to identify the candidate’s motivators.
- Turn-Downs happen when a candidate seeks a job offer to leverage his position at his current job, gets a counteroffer at the last minute, and turns down yours. This happens 20% of the time.
- Fall-Offs happen when a candidate is always seeking greener pastures. They may accept your offer temporarily, then leave after a few days because of a better offer. This happens 25% of the time.
Using the cost of hiring from the example above, we can determine the cost of mis-hiring given those probability risk factors:
These costs are real and they do happen, but most organizations don’t take them into consideration for many reasons, mostly because of being unaware of them.
The third component of the Mis-Hires group is Low-Quality Talent.
- This happens because the hiring process failed to identify and validate the skills’ strengths and weaknesses in the candidate. Couldn’t tell doers from academics or spectators. Or simply because the hiring process ran out of time and had to compromise on expectations.
Again, using the cost of lost opportunity from the example above, we can determine the cost of hiring low quality talent. Say the new hire starts at 50% productivity and it takes one year to catch up to the same level as the rest of the team. Assuming a linear learning curve for one year, we can adopt a productivity index of 75% as an average, or a 25% productivity loss for the year due to performance learning curve.
Performance Learning Curve for a year = Number of hours in a year x Productivity Loss x Position Productivity Rate
This walkthrough example gives a sobering illustration of the cost of hiring that is often ignored by the immediate hiring team because it’s hard to assess from their vantage point. Savvy bosses can identify them as a drain to their business, and as they justify their P&L’s, try to keep their workforce focused on productivity, and present ways to quantify and reduce the impact of distractions.
Note: In this example, we did not attempt to quantify the cost of hiring the wrong fit. Their high maintenance costs, damage control requirements, distractions, exponential poisoning and detriment to culture, affects every corner of the organization – making it impractical to quantify its impact.
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