Wednesday, June 28, 2006

The Hidden Costs of Hiring The Wrong Person - A Conversation With Lori Dernavich

My friend, Bob Allard, is CEO of a company called Extension Engine ( Bob is a serial entrepreneur, a world-class networker, and one of the most insightful and intuitive individuals I know in terms of sensing which of his friends and acquaintances should meet each other. Bob has been responsible for introducing me to some of my favorite people. He did it again last week when he told me I should meet Lori Dernavich, an executive coach and consultant specializing in staffing issues.

I was fascinated with Lori’s knowledge about the hidden costs of hiring the wrong person, and as our conversation progressed, I asked her if she would be willing to allow me to share with readers of The White Rhino Report some of her insights. If you are in a position to influence the way that hiring is done in your company, reading Lori’s words could save your firm a significant amount of money.

Here are some excerpts from our recent conversation:


Lori, when we met earlier this week, I was astonished and impressed by the hidden costs to a company of hiring the wrong person, or delaying hiring the right person. If my memory serves me correctly, you mentioned a figure of $600,000 that some of your clients had figured it cost them by not having a proper strategy and processes for hiring top-level leaders. Can you give me (and the readers of The White Rhino Report) a sense of how your clients arrived at such an astronomical figure?


Most managers will admit that they've made poor hiring decisions. It's not uncommon. But, how many managers or companies actually track the cost of a bad hire? I often take my clients and audiences through this exercise. I invite your readers to try it with me now. Think of a job title within your organization that makes about $100,000 salary. This is pretty common nowadays.

Let's start by calculating the hard costs associated with hiring the wrong person:

1. Recruiting: typically, a fee of 25-30% of the employee’s annual salary if using an outside recruiter.
2. Travel and Relocation Expenses
3. Advertising:, for example, charges $395 per job posted, or $1000 to search resumes. Factor in newspaper ads as well.
4. Training: off-site training for new hires can be anywhere from $2,000 – $20,000.
5. Separation pay: If you honor the severance package of the bad hire, it will cost the company 3 to18 months of salary with benefits.
6. Lawyer fees: this may include reviewing the job offer, creating and reviewing the severance package, and litigation if the situation gets messy
7. Contract and temporary help, to fill the void left when you terminate the bad hire
8. Missed deadlines
9. Client loss

We’re not done yet. Now try to calculate the soft costs associated with hiring the wrong person:

1. The time current employees use to recruit, train, and mentor new hires
2. Lower or lost productivity
3. Lower employee morale
4. Damage done to client relationships
5. Loss of Intellectual Property – what it costs your company when the bad hire leaves with all of your best practices and trade secrets.

And don’t forget that when you are calculating the cost of a bad hire, you must double most of the costs listed above because you often go through the process twice: once when you make the bad hire, and a second time when you hire the bad hire’s replacement!

All told, I would be surprised if you came out with a cost of less than $400,000. A CFO who attended one of my seminars made the following comment: “I would never dream of spending $600,000 of my company’s money without having numerous meetings with stakeholders to outline the reason for the expenditure, the process of how the money will be spent, and the metrics associated with measuring the outcome. But with recruiting, we don’t give it any thought. We just say we have a job opening – go fill it. I won’t do this ever again.”


You also mentioned that you help your client companies to think strategically about issues of hiring the right people for the right jobs. What are the most common errors that you have seen companies make when it comes to looking at hiring senior level people (Director Level up to C-Level)?


I see several common mistakes:

1. Lack of commitment from the top. Hiring managers often push the recruiting responsibilities down to HR because they “don’t have enough time to deal with it.” If you went through the previous exercise, you’ll see that hiring is a capital investment. As a senior manager, you should be involved in the process from beginning to end. You shouldn’t assume that HR will thoroughly understand the job. And if they don’t understand the job, why should you assume that they will recruit the best candidates for the job? This can result in a big waste of time and money.

2. Not having a hiring process. I’ve heard plenty of examples of this and perhaps some of your readers have encountered it as well, as a job candidate. Have you ever gone through several rounds of interviews when, suddenly, the job requisition gets pulled or the company decides to “go in another direction?” This is often a clear indication that the company doesn’t have a process. They don’t even have a real job description. A company must have a clear and consistent hiring process.

3. Trusting your gut. Intuition isn’t inherently bad, but it shouldn’t be the main factor in choosing a candidate. Keep in mind that a job candidate is acting on his or her best behavior in that interview. A common mistake many interviewers make is in telling the candidate up front all about the job, the company, the culture, etc. What will an astute job candidate do? They will tell you everything you want to hear! So…beware. Who are you really interviewing? Don’t trust your gut. Dig deeper.

4. Rushing. Does this sound familiar? You’ve interviewed a great candidate and he says that he has another offer on the table so you’ll have to make your decision soon. He comes highly recommended, is a friend of your COO, and you like him, so you cut corners and only check one reference. Once you hire him, you find out that this “great guy” has a questionable past. This can turn into a big headache fast.


Conversely, what are some of the best practices you recommend that ensure hiring the right people to produce satisfying results for the company and the candidate?


The best practice is to have a solid hiring process in place that has been communicated to the whole organization. This includes determining who participates in the process, creating the job profile and interviewing questions, conducting phone screens, using screening assessments, and checking references.

The most critical thing you can do, though, is to create a job profile with your team. This job profile is the foundation of the entire hiring process, but it seldom gets the attention it needs. When I ask a company president to explain a job to me, and then ask the team (the people who would work with the new employee) to explain the same job to me, the job descriptions hardly ever match up! Therefore, when you hire the new employee, someone is inevitably going to be disappointed.

I always advise executives to take 30 to 60 minutes to sit the manager and team down to create a Job Profile – a description of the requirements needed for an individual to be “successful” in the role. This should consist of more than just skills and experience. Be sure to consider talents, those things that you cannot teach someone: Are they visionary? Persuasive? Customer service oriented? Also important is cultural fit: Do they want flexible hours? Do they like working alone, or do they thrive in a busy, crisis-oriented environment? These intangible factors, after all, are often the reason that a new hire with a perfect resume will under-perform in your company.


Is there a typical profile of companies that use your services?


If you will be hiring people in the future, then you may find that training your existing workforce on how to interview will be beneficial. One shouldn’t assume that someone who grew up in finance or engineering will be great at interviewing. However, it’s something that can, and should, be learned.


How do you work in partnership with a company's HR team, senior leadership and external executive search consultants?


My clients see me as a true partner to their organizations. I am primarily an executive coach. I work with executives who are struggling with issues around job performance, communication skills, behavioral issues or time management problems, among others. I have a background in the recruiting field, but I don’t recruit anymore. I developed the interviewing training because I continued to observe that my clients hired people who didn’t fit well into their organizations. This resulted in them building ineffective teams. The interviewing training helps my clients to hire the right people the first time around and this ultimately saves them time, money, and headaches.


Is there a final word of advice you would life to pass on to the readers of The White Rhino Report?


I like Jim Collins’ (author of the book, Good to Great) mantra, “Get the right people on the bus, the wrong people off of the bus, and the right people into the right seats.” A great hiring process will help you to do this.

* * * * *

If you feel that your company could benefit from Lori’s wisdom and knowledge, please let me know and I will be happy to put you in contact with her and her Boston-based consulting and coaching practice.

If your company needs help in recruiting top-quality leaders, I know a pretty good executive recruiter who is also based in Boston!



Anonymous said...

Great article--Thanks, Al and Lori. I have to say I don't understand the double-cost argument. How much does it cost to hire the right person? You're going to spend that in any case. I don't see how you can blame the dud hire for that amount. Robert Olivier,

Web2earn said...

Thanks, these are some nice tips on advertising. I tried to put together a similar list, probably a little more detailed, at Advertising index

Let me know if you found anything of interest in it - thanks!


Anonymous said...

Very good article. It is important to bring this to the attention of third party and corporate recruiters as they have the power to effect and impact the hiring processes and the quality of hire.