Just imagine you interview several candidates to fill your software developer positions, and you involve internal specialists such as PMs, BAs, or senior engineers to check and verify their skills and experience. Because all those specialists are costly, you decide to charge each failed interviewee for the time and resources spent on talking to them. It sounds like a joke, doesn’t it? Why the hell should a candidate that failed your interview pay for your experts’ time? However, if you calculate the real total cost of each new hire, you’ll realize each newly hired DevOps can cost you an arm and a leg, and maybe a kidney.
A new look at the old formula
Surprisingly enough, but many businesses fail to calculate the cost per hire or don’t even want to bother with it. The typical formula used by the vast majority of companies is the total amount of all direct and indirect expenses divided by the number of employees hired within a particular timeframe. Let’s say you’ve hired a freelance recruitment consultant that supplied the right candidate who was finally hired. You pay the consultant $5,000 for the service, so your cost per hire (CpH) would (ostensibly) be: $5,000/1=$5,000.
Will this figure help you better budget and estimate the cost of closing a tech vacancy? Not at all. This figure only confirms that you’ve spent $5,000 to find the right employee for your software development team. And there is no guarantee that next month the hiring of another candidate will cost you the same $5,000. If you’re challenged with a hard-to-find position like, for instance, an AI software developer or a data scientist, involving an external recruiter may not suffice so you’ll have to expand your search bandwidth and probably outsource the job to several freelance recruiters or an agency to reduce the time to find a candidate. It’ll add significantly to your total cost of “employee acquisition”.
And don’t forget that the majority of staffing agencies charge 15%-25% off each new hire’s annual remuneration as their commission fee. This should also be added to the indirect costs of your tech hiring.
Unfortunately, that simplified calculation doesn’t ensure predictability and precise planning.
Moreover, this calculation seldom takes into account the “internal” costs of hiring such as the time of each top specialist involved in the interview, the time your internal recruiters spent on screening each candidate, checking previous job references, and so on. Of course, it is difficult to calculate these costs precisely–it is much easier to attribute them to the “functional duties” of your hiring manager.
In any case, even 20 hours a month spent on interviews with the wrong candidates swallows 12% of each involved specialist’s working time. Let’s say your senior business analyst costs you $8,500 per month (according to Indeed.com, the average annual salary of a senior BA in NYC is $105,000) and the time he/she spends on interviewing people is worth $1,000 of his monthly wage. And what if you have three senior employees involved in the interviews? Your CpH turns out to be $8,000, not $5,000 as calculated in a simplified way.
In-house tech hiring: factors to consider
The first figure you need to pay attention to is the “net” value of your hiring. Practice shows that the effective coefficient is x3. It means that one in-house recruiter that costs you $6,000 per month will actually cost you $18,000 in total! To do their job well, they need a workstation, paid profiles on hiring-friendly platforms like LinkedIn, specialized recruitment tools and software, insurance and social benefits package and perks (to better sell them the job), some on-job training, paid vacations, etc.
The second figure to consider is the average monthly cost of searching and interviewing candidates and the lost profit – from 0.2x to 2x of the basic rate of the senior-level candidate being sought.
This coefficient is calculated quite simply if you make a linear relationship between the margin for each employee and the “hidden loss” in the absence of it. By “hidden loss,” I mean the lost profit that the company could earn if it had a specialist in this position on the team.
Also note that the minimum cost of closing a vacancy within the first month of working on it is equal to 2% of candidate’s total salary (depending on the marginality of projects, the level of wages, etc.) plus the cost of internal recruitment. This amount will increase with each new month of search.
For example, a recruiter cannot fill three tech vacancies for two months: two middle-sized developers each costing $7,000 per month and one senior developer costing $9,000 per month. At the same time, your internal recruiter’s monthly cost is $6,000. In total, the minimal “hidden loss” incurred by the company as a result of missing three specialists on the project team for two months is equal to 3*6,000*2+(7,000+7,000+9,000)*0.2*2 = $53,600, which corresponds to approximately 19% of the annual salary of all three candidates to be hired.
If you understand that the average time to hire a candidate within your home country will be about 1.5-2 months and the costs are skyrocketing, there’s no better alternative than to hire external recruiters or outsource your entire tech hiring to a specialist staff augmentation provider offshore.
Benefits of working with a staff augmentation agency
Here I’d like to highlight some of the most apparent benefits of engaging an offshore outstaffing provider versus hiring internally.
1. Niche expertise and tribal knowledge
The trend towards a narrow specialization of recruitment is gaining momentum now. As a rule, offshore outstaffing providers have well-crafted recruitment and headhunting methodologies as well as access to untapped and closed developer communities which allows you to save tremendous costs thanks to the reduced time to hire and non-involvement of your internal staff to the interview process and candidate selection. Of course, you should appoint an outsourcing manager to control your engagement and communication with the vendor, but in the case of offshore staff augmentation, you can hire one locally for a small fraction of what it would cost you in your home country (you can hire a professional one with relevant experience and perfect English for $3,000-4,000 per month in countries like Ukraine, feel free to compare the total cost of your tech resources in Ukraine versus Israel, UK, and the USA).
Tribal knowledge helps offshore staff augmentation providers to build effective tech hiring roadmaps and find ways to source candidates from non-trivial sources (e.g., source blockchain developer talent from local blockchain startups or local blockchain events). Professional staff augmentation companies employ well-rounded and well-connected recruiters who can find the right candidates based on the insights from peers or competitors, etc.).
2. Speed of hiring
Dedicated recruiters who are involved in your software development project for 40 hours a week and know the ins and outs of your project team will have a 70% higher chance to close your tech vacancy faster than those who work on several projects at the same time.
At 8allocate, each new client gets a dedicated recruitment consultant acting as their account manager and helping develop and implement a client-tailored hiring strategy based on the project and team specifics, work ethic, and overall culture, etc. Therefore, it’s recommended that you partner with a staff augmentation rather than just a staffing agency to avoid having remote recruiters shuffle from project to project and to ensure the maximum commitment of external recruiters.
Also, to give our clients a competitive advantage such as fast hiring, we use a shared pool of talent along with our trusted resource partners (whom we analyze carefully for internal delivery capabilities). It allows us to build a dedicated development team in Ukraine within 30 days or faster. In general, you can have a completely on-boarded and up-and-running team working on your custom solution development in less than two months!
3. Cost-efficiency and transparency
In the case of offshore staff augmentation, all of the hiring expenses (both direct and indirect) are already included in the total cost of the specialist, which allows for more effective and precise budget planning. Each outstaffing provider also adds its service fee to the total monthly cost of talent so as a client, you get a monthly invoice that consists of each team member’s salary and a service fee. In some cases, the service fee is included in each developer’s salary. In any case, the total cost to hire tech talent offshore (e.g., in Ukraine) is 2-3x lower than in North America or Israel.
4.Positive impact on your employer brand
Staff augmentation companies do care about each client’s reputation in the local market. Employer’s track record and a positive image are some of the most decisive factors for many offshore developers in countries like Ukraine to join a project team. As such, you can save money from your brand’s PR budget and rest assured that your provider’s recruiters will pitch your project the right way to local software engineers and will do all the hard PR job for you.
To conclude, it’s crucial for any business to calculate cost per hire correctly and add all indirect costs of hiring to the formula and estimate the weighted average cost factor for the duration of the search (from 0.2 per month).
This data will allow you to evaluate the effectiveness of your tech hiring and scale your team faster and cost-effectively each time you need to strengthen your hiring function.
At the end of the day, it’s up to you to choose which way to go – long and bumpy that will allow you to learn lessons from own mistakes and build a powerful yet expensive recruitment team in-house in the long-term perspective or short and inexpensive that will give you an immediate competitive advantage and allow focusing on your core business while having a reliable partner augment your tech staff and take care of your team scaling efforts. This will help you better maintain your cash flow and do more software dev job for less money without compromising on quality.
And which option is more preferable for you?