3 causes of a bad hire and its impact on your startup

3 causes of a bad hire and its impact on your startup

A bad hire. A failure. Or at least that’s how it feels. You failed to hire the right person for the right job. So you’re a bad recruiter, just as simple as that, right?

If that’s what you’re thinking, you’re wrong. A bad hire happens to all of us. However, there are some tips and tricks that might be helpful to prevent yourself from getting into this situation.

After reading this article you will know:

  • The 3 most common causes for a bad hire;
  • The 3 categories of (financial) impact of a bad hire on your company;
  • How to prevent yourself from making a bad hire.

The 3 most common causes for a bad hire

The success of every company (and yes, every company) is determined by the impact of its team. It doesn’t matter if you’re a service- or product company or if your team is small or large. Every single team member has impact on your company and therefore influences its success. So, it’s extremely important to aim for the moon when it comes to your recruitment strategy and practices.

Over the last 5 years, we’ve seen 3 most common causes for a bad hire:

  1. Low hiring efficiency;
  2. Lack of data usage (and an open door for bias);
  3. Bad Candidate Experience.

(1) Low hiring efficiency

Hiring efficiency is all about (i) setting up the right processes and (ii) sticking to them. Step one is not that hard; step two, however, can be quite a pain in the ass.

One of the most important indicators of hiring efficiency is Time to Hire (TtH), the number of days between posting a new job opening and hiring your new colleague. This is also the biggest cause for a bad hire the category Efficiency.

We often experience that an increased Time to Hire is caused by:

  1. The time between two pipeline steps (applied – first interview / first interview – second interview), which is too long;
  2. The fact that too many applicants are invited for an interview (which makes the conversion between 1th and 2nd interview pretty bad).

How does this cause a bad hire

So a low hiring efficiency basically means your Time to Hire is increasing. This is how an increased TtH increases the chance on a bad hire:

(C) Equalture, 2019

(2) Lack of data usage

I know it’s not a popular thing to say, but data beats our human brain – especially when it comes to hiring your new colleague.

Why? Well, simply because data learns. A good algorithm learns from the data you feed it with and doesn’t have any bias. So a mistake is never made twice. Unfortunately, that’s not how it works in our brains. We base our decisions on so much more than objective data – we let our feelings grab a chair, we forgive ourselves for forgetting crucial information and we also have our frame of reference (i.e. our unconscious bias) standing in the corner of the room watching us. So yes, we also learn for sure, but we will always leave our door open for mistakes. Data doesn’t.

Equalture works with an AI matching algorithm to help recruiters evaluate applicants based on relevant, data-driven and unbiased information. Learn more.

How does this cause a bad hire

So a lack of data usage makes your applicant evaluation process more error prone. This is how that affects your chance of a bad hire:

(C) Equalture, 2019

(3) Bad Experience

I think this is quite a no-brainer, a bad Candidate Experience. Although many companies are working on creating a better experience for their applicants, it still seems like we’ve underestimated the impact of one single bad experience.

This blog explains how to calculate the cost of one single bad Candidate Experience.

A bad hire can hurt your revenue (mostly in B2C companies), but for many B2B companies the biggest pain is the impact on your Candidate Pool. A really bad Candidate Experience can cost you more than half your Candidate Pool on the long term. Ouch.

How does this cause a bad hire

So a bad Candidate Experience might even be the biggest bottleneck when it comes to hiring the right colleague. This is how Candidate Experience impacts the chance of a bad hire:

(C) Equalture, 2019

The 3 categories of (financial) impact of a bad hire

Now that we know which are the most common causes of a bad hire, let’s zoom in on the impact of one single bad hire. Just one.

Research has shown that a bad hire costs you at least 130% of this person’s salary. We can divide this percentage into three categories:

  1. Salary;
  2. Company reputation/clients;
  3. Effort of the hiring team.

(1) Salary

In 71% of all cases, a bad hire isn’t recognized during the trial period of the employment contract. This means that you will have to deal with someone who might be a bad hire for at least 7 months (in NL it’s common to offer a new employee a 7-months contract to start with). Take 70% of this person’s annual salary and you already have the first category of financial impact: short-term euros (or dollars).

Example: I hire a Junior Developer for €2.650 per month. His annual salary is €31.800. Take 70% of this amount and you will end up with a loss of €22.260.

(2) Company reputation/clients

This one is a bit harder to calculate, but let’s give it a try.

Every colleague within your organization has impact on your company – its reputation, its clients and its revenue. Some one them more than others, but everyone has as least some impact.

Imagine I hire the Junior Developer I mentioned above. This developer is hired to make sure we meet the deadlines on our roadmap while we’re improving our system for clients. Maybe this Junior Developer turns out to be a pretty bad developer, or maybe (s)he isn’t motivated at all. The result is that the deadlines are missed and that our clients are disappointed.

Example: Because of this postponement of the roadmap, 3 clients decide to leave. The average value per client is €4.500. This means we’re losing €13.500.

(3) Effort of the hiring team

Let’s say your team spends 30 hours on hiring a new colleague. This includes sourcing, evaluating applicants, creating a short-list, interviewing and actually hiring a this person.

We always work with the rule of thumb that we’re worth €100 p/hour now (if you would hire us for a freelance project). So let’s say your hiring team is worth €100 p/hour.

Example: Your hiring team spends 30 hours on hiring a new colleague (€100 p/hour), which means it costs your company €3.000. In case of a bad hire, you need to start the process all over again. Therefore the total costs will be €6.000.

Taking everything together, this Junior Developer would cost us €41.760 (131,3% of this person’s annual salary). Ouch.

How to prevent yourself from making a bad hire

So how to make sure this won’t happen to you (anymore)?

We’ve discussed the role of hiring efficiency, data usage and Candidate Experience. I’d like to tell you more about how we try to combine these three elements to turn Equalture into a technology that helps you hiring the best applicant for the job. This is how.

(1) Hiring Efficiency

  1. Our matching algorithm provides you with a matching score per applicant to make it easier and faster for you to evaluate applicants (which decreases the time for evaluation);
  2. By stimulating you to only invite applicant with a high score for a first interview, the increase the conversion between the 1th and 2nd interview (in other words: you won’t spend time on applicants who aren’t a fit to speed up the interview stage).

(2) Data usage

This is again where our matching algorithm becomes interesting. We are a huge fan of data to evaluate applicants. Self-learning and objective data. In other words: we feed our matching algorithm continuously with objective data to ensure it becomes smarter with every decision that’s made in the system. And to prevent ourselves from making the same mistake twice (because that’s where data beats human beings).

(3) Candidate Experience

So yes, we love data. And we want to gather as much data as possible. However, it should also be fun for applicants to provide us with this data. That’s why we use gamification to learn more about an applicant’s personality and cognitive traits. No (boring) traditional assessments, but fun and short games to make applicants forget they’re actually applying for a job.

Keen to learn more about how Equalture can ensure your days of bad hires are over? Just schedule a 30-min demo, no strings attached.

Cheers, Charlotte

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