What is the staggering cost of a bad hire in South Africa? - White Paper by Wamly.

What is the cost of a bad hire in South Africa?

A whitepaper by Wamly.

Summary:

Most companies have admitted to making a bad hire which cost companies in terms of time wasted making the hire, costs companies in terms of opportunity cost and also negatively impacted a company’s overall culture. Companies are therefore incentivised to improve their hiring process through software such as one-way video interview software to make better hires.

Introduction   

A bad hire not only impacts the overall productivity and culture of an organisation but also costs companies thousands to remove and replace.

And with studies finding that companies already spend over 3 months to make a single hire, organisations want to avoid wasting any additional time making a bad hire.

In one study, companies said they would spend as much as one-quarter of an employee’s annual salary to get rid of a bad hire and to replace them.

Furthermore, while companies would not like to admit it, bad hires occur quite often and are made by most human resources (HR) officials.

In a 2015 Brandon Hall Group research report, it was found that 95% of companies admitted to making a bad hire the past year, and 74% of HR officials confessed to making a bad hire.

Another study found that 46% of all hires are considered to be failures by the time they reach the 18-month mark, and one in five hires are considered to be a bad hire.

A bad hire does not only cost money in terms of job advertising, but it also costs money in terms of the time spent making a hire and the cost involved in upskilling a new employee.

Companies are therefore incentivised to improve their hiring process to ensure that they will hire the best possible people and to reduce the possibility of bad hires occurring.

Rebekah Cardenas wrote in her piece ‘What’s the Real Cost of a Bad Hire?’: “One would expect that organisations systematically gather data that allows them to calculate how costly a bad hire can be. In reality, this is seldom the case.”

We looked at the 6 costs associated with a bad hire, including the negative impact a bad hire has on a company’s culture, the time wasted and the potential reputational damage.  

• Culture cost 

Bad hires not only negatively affect the productivity of a company by neglecting their roles, but it is also certain that a bad hire will negatively impact a company’s culture and staff morale.

Forbes reported that it takes one employee who is disengaged or has a negative attitude to negatively start affecting the morale and attitude of all employees. 

Bad hires can also be disruptive, and intentionally seek to sabotage or create issues within a workplace, which might exacerbate the problem of a bad hire for employees.

This may affect other employees’ loyalty and dedication to the company.

More than one-third of managers report that their company’s productivity dropped due to a bad hire.

More than 90% of CEOs across the world recognise that a bad hire drags down morale in the company as a whole, and 20% of workers say that they’ve lost trust in a manager due to his bad hiring decision.

• Financial cost  

One of the main costs associated with a bad hire is the money spent on making the hire.

And the higher a position is within an organisation, and by implication, the higher the potential salary offered, the higher the cost of a bad placement.

This is because more senior panel members will have to spend their time in a panel interview, while interviews tend to take longer.

Financial costs include the upfront costs to get a candidate to an interview which includes making use of recruiters, advertisements and job boards such as LinkedIn.

Furthermore, the longer it takes to hire someone, the more it costs an organisation as more interviews have to be completed, and more CV’s need to be studied.

A quick calculation found that for an average senior manager in an organisation, who sits on an interview panel and earns a salary of R75 000, their cost to the company per hour is R447.

If that hour is multiplied by five shortlisted candidates who end up in an in-person interview and multiply it by five-panel members, then the cost is R11 175 to make just one hire.

Furthermore, during the hours when these senior managers are in panels and not completing their jobs, it costs additional productive hours for the company where sales could’ve been made, or value could have been added.

A company also spends money on a salary for a bad hire before that individual leaves the company – money that could’ve been spent elsewhere.

• Time costs 

One of the biggest costs associated with hiring is the time spent on making one hire. Companies not only lose valuable man-hours to the hiring process but also take up to three months to make one hire in South Africa.

During those three months, other members of a team are expected to complete the responsibilities of the position hired for, while key members of a team are involved in the hiring process.

Time includes having to advertise for candidates, sifting through CVs received, setting up meetings when all the members of a panel can attend, finding boardrooms for interviews to take place and the logistics of getting a candidate to an interview.

More often than not, there are also multiple rounds of interviews before a hire is made. One study in South Africa found that 40 man-hours of an employee are spent on making one hire – which takes on average 52 days to make.

Solutions such as one-way video interview software through platforms such as Wamly have been found to cut the interview process from three months to just two weeks.

This is because a panel does not have to look at an interview at the very same time, but can review it individually when it is most suitable to them.

• Upskilling cost 

Once a hire has been made, a considerable amount of time and money is also spent to onboard an employee to ensure that they operate optimally within a company.

If a bad hire is made, it means that the time and money spent to upskill an employee would have been done in vain.

HR officials agree that it takes on average three months to onboard one employee, but this process can take as long as six months for an employee to be fully effective.

Bamboo HR found that 31% of employees left a job within six months of starting. 68% of those left the position within the first three months of the role.

• The manager cost 

One of the biggest costs associated with the hiring process is the amount of time that senior managers have to spend to make one hire.

And after a hire is made, senior managers have to spend an additional number of hours to upskill and train new employees.

This represents a valuable time when a manager could’ve been innovating for the company, making sales or building key relationships.

And if the hire was a bad hire, it means that the company wasted hours of a manager’s time for no gain.

A Harvard Business Review survey among 1 300 managers found that only 47% of a manager’s time is spent on carrying out their role, while the rest is wasted on other administrative matters.

A manager is also often the best paid within an organisation, which means that their hourly cost to business would be the highest, compared to those of lower-level employees.

Companies should therefore make an effort to reduce the amount of time managers spend on tasks that are not directly associated with their responsibilities to maximise their return to the company.

• Reputational cost 

One of the costs not often considered when thinking of a bad hire is the possible reputation damage a company experiences from consumers and from other potential employees.

If a bad hire is client-facing, they risk ruining existing relationships with clients which took years to build.

Alternatively, the company can gain a reputation for having a poor working environment due to a bad hire’s influence on a team which deters other employees from working in the company.

Furthermore, in the digital age, future employees are accustomed to looking online to see the ratings employees give a company or to see anonymous feedback.  A bad hire can easily manipulate the feedback to reflect negatively on a company.

Rebuilding these relationships with clients is difficult, if not impossible, and time-consuming; once trust is broken, it’s hard to get back.

Research by Frederick Reichheld of Bain & Company found that increasing customer retention rates by 5% increases profits by 25% to 95%.

And it can cost five times more to attract a new customer than it does to retain an existing one

Conclusion 

While most companies only consider the amount of money spent on advertising when considering the cost of making a bad hire, the cost also includes the time spent on making the hire, the opportunity cost and the potential reputational damage.

It is estimated to cost as much as one-quarter of an employee’s annual salary to get rid of a bad hire and to replace them.

Furthermore, while companies would not like to admit it, bad hires occur quite often and are made by most human resources (HR) officials.

Therefore, with studies finding that companies already spend over 3 months to make a single hire, organisations want to avoid wasting any additional time making a bad hire.

One-way video interview software such as Wamly promises to help companies higher quicker and better by making use of structured interviews and allowing managers the flexibility to review interviews in their own time.

This ensures that managers can pay more attention to their core functions, helping the business operate more efficiently and ultimately helping companies to increase their efficiency.

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