10 January 2020

The causes and (financial) impact of one single bad hire.

A bad hire. A failure. Or at least that’s how it feels. You failed to hire the right person for the right job. You were simply not able to predict this candidate’s potential properly. So you must not the best recruiter, Head of HR or founder. 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 of a bad hire;
  • The 3 categories of financial impact of a bad hire;
  • 3 tips to prevent yourself from making a bad hire.

The 3 most common causes of a bad hire

Every company’s success (and yes, every company) is determined by the impact of its team. Each single team member impacts your company performances and therefore influences your success. And the smaller your team or the younger your company, the more impact this one single team member will make. So therefore a bad hire affects startups and scaleups ten times heavier than an enterprise organisation.

Research over the last three years has shown that, especially in young, scaling companies, these are the three main causes of making a bad hire:

  1. Lack of resources;
  2. Lack of data usage;
  3. Lack of internal insights.

1. Lack of resources

Hiring requires efficiency and guidelines. It’s all about setting up the right processes and stick to that. Alright, that’s something we can all manage, but once we have these processes we also need some human power to implement these. This implementation might be a tough challenge for scaling companies with limited human resources, financial resources and a high need for new colleagues.

This is what we often experience when talking to these scaling companies:

  1. The People Team is very small while the need for new colleagues is high. In order words: They have too much on their plate.
  2. The hiring intensity and team development requires for budget to professionalise and automate processes, while there’s hardly any budget allocated to HR/Recruitment.

How this causes a bad hire

The consequence of these practices: The People Team is way too busy and has insufficient tools to work efficiently, which stimulates mistakes, inaccuracy and the chance of candidates walking away to the competitor.

2. Lack of data usage

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

Why? Well, simply because data learns. A suitable 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 with 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 the of room watching us. So yes, we also learn for sure, but we will always leave our door open for bias and potential mistakes. Data doesn’t.

Again the budget issue is a relevant one here, because properly using data in hiring decisions requires working with tooling that supports running these data analyses.

Equalture’s predictive hiring technology combines neuropsychology and AI to predict a canddiate’s potential fully data-driven. Click here to find out more.

How this causes a bad hire

I won’t say that data is a most have to prevent any bad hires, but it certainly helps you reducing it to a minimum level. Without data usage in recruitment, hiring decisions are more based on gut feeling and bias rather than objective evaluations and mistakes are often made more than once because our brain doesn’t allow us to remember and learn from every single decision.

3. Lack of internal insights

Maybe this is even the most painful one, because this is the one we don’t expect to be relevant to our organisation. Because we know what’s happening in our very own team right? We know what people we have on board, what our values are and who fits into this rockstar team.

Internal insights are the insights that tell you more about your current team composition and therefore your hiring needs. We call this a team benchmark. The team benchmark allows you to assess your current team to create an overview of skills and cultural traits. This information can be used to determine your next best-fit hire for the team who both fits your culture and adds value to the team in terms of skills.

We have experienced that scaling companies go through different growth stages:

As you can see there are some team growth stages in which your knowledge of job fit and cultural fit decreases. And that’s completely normal. Companies change when they grow and so does the company culture and team skill set. Therefore it’s extremely important to master your internal insights to prevent yourself from hiring for skills which are irrelevant to your growth stage.

How this causes a bad hire

When companies are transitioning from one growth stage to another, hiring needs change as well. Unfortunately many companies aren’t aware of this transitions and therefore hire people who would have fit the company maybe a year ago, but not at this point. Or maybe it would be the perfect hire next year, but for now it’s too soon.

Curious how much time and money you can save by working with a predictive hiring technology that prevents any bad hires? Calculate your ROI here!

The 3 categories of financial impact of a bad hire

Okay, so you made a bad hire. Yes, it’s painful, but it’s not the end of the world. The financial impact, however, is something you should definitely be aware of.

One single bad hire impacts the following three cost categories:

  1. Salary;
  2. Company results;
  3. Hiring costs.

1. Salary

In 71% of all cases, a bad hire isn’t recognised 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 The Netherlands 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).

For example, you hire a Sales Executive with a gross monthly salary of €3,500. This is an annual salary of €42,000. Take 70% of this annual salary and you will end up with a loss of €29,400.

2. Company results

This is slightly tougher to calculate, but let’s give it a try.

Imagine you’re hiring a Sales Executive. It’s expected that this Sales Executive will start closing deals in her/his third month at your company. From that moment this colleague should close 3 deals per month, representing a yearly value of €3,000 per deal. This means that during the first 7-months contract your Business Developer should be able to close 12 deals, representing a total value of €36,000.

Now let’s assume that your Business Developer, due to under-performance, only closed 30% of the deals (s)he was supposed to close. This means that your colleague earned only €10,800 while (s)he should have earned €36,000. €25,200 (the difference between those numbers) is the amount of sales you lost due to your colleague’s under-performance.

Please note that this does not only apply to commercial positions. When you hire a Software Engineer who turns out to be a mismatch with your job or company culture for instance, which causes delay in our product roadmap, your current clients might decide to walk away or sales deals are postponed. This also causes a significant financial loss.

3. (Human) hiring costs

Last but not least, there’s the effort of hiring a new colleague. Please note that we here only focus on human effort, all marketing costs and hiring tools are disregarded for this calculation.

Let’s say that your team spends on average 40 hours on hiring a new colleague. This includes sourcing, evaluating applicants, creating a short-list, interviewing and actually hiring a this person. Also, both founders/leaders and recruitment experts are involved.

We always work with the rule of thumb that the average team member is worth €50 p/hour. Multiply this by 40 hours and you have got your human hiring costs: €2,000.

Taking all three categories together, the total loss of hiring the wrong Business Developer is €56,600, while the annual gross salary of this colleague was €42,000. This means your bad hire costed you 134% of this person’s annual salary. Ouch.

3 tips to prevent yourself from making a bad hire

More than 130% of someone’s annual salary. I can imagine that this percentage might scare you a bit. The good news: Bad hires can be prevented!

And yes, I’m going to provide you with three tips, because that’s what I promised you when you started reading this blog, but the real secret follows after my three tips.

Tip 1. Get budget for tooling by creating a business case

There’s a reason why the market for hiring technologies is exploding. It’s because these tools help you! Hiring technologies help you hire faster, better, fairer and automate significant parts of your hiring process. However, since HR is often experienced as a burner department rather than an earner department, you should convince your company’s management team by creating a solid business case.

Our technology, for example, helps scaling companies (i) identify their hiring needs, (ii) predict a candidate’s fit and (iii) ultimately make the best possible hiring decision.

Maybe this sounds like a nice-to-have, but once you quantify a tool, it all of a sudden becomes an absolute need-to-have. You should find out (and write down) the following things:

  • What’s the annual/monthly fee for system X;
  • What’s the goal of working with system X;
  • How to quantify this goal.

For example, Equalture:

  • Starts from €250 p/month;
  • Helps you save 54% of your time spent per job opening, prevents a bad hire and moreover ensures you will hire a top-performer;
  • When hiring one Business Developer, this saves you 21.6 hours (€50 p/hour, which results in €1,080) and ensures a financial result of €36,000 during the first 7 months (the closed deals).

So, taking the risk of making a (very costly) bad hire while spending more hours on hiring versus ensuring the best-fit hire in less time spent on hiring. There you go. Now it’s a must-have, because it’s a proven business case.

Tip 2. Data is your best friend!

I think this is a no-brainer, but I’m mentioning it anyway. The market is full of incredible tools able to boost your hiring process y using data, but that will never work for you unless you have the right mindset.

Data is not an enemy. It’s not going to replace your job. It won’t take over world power. It’s just there to help you. Where data can for instance save you time and bias by creating a first impression of a candidate, it can also automate low-hanging fruits so that you can focus on what’s really important: Hiring strategies.

However, like I mentioned, finding the right tooling to get you started making data-driven decisions isn’t the challenge. You are. And your colleagues are. It’s all about mindset.

Tip 3. Your company is your very own data set

Okay, so data is cool. You know what’s even cooler? Your team! Or actually knowing what’s in your team. Which skills do we master? Which skills are we missing? What are the personal traits indicating company culture? And are there any missing personality traits that could be of added value to our team?

You can actually measure this quite easily, for instance by using an assessment for your own team. Our product helps you identify your hiring needs by analysing your current team through neuro-assessment games.

Now at least you won’t open a new position in your team based on guessing, but on actual data.

The real secret

The real secret to prevent yourself from making a bad hire? Acknowledge that company sustainability starts with hiring success.

Your team is your everything. It’s your strategy, ambition, critical view and execution. There is no company without a team. Once you start realising that, hiring is no longer an operational tasks. It’s the most important strategic pillar at the table! Hopefully 2020 will be the year in which more and more companies realise that HR deserves a seat at the table. And that’s all you need to deal with hiring the right way.

I hope that this blog has helped you understand the causes and impact of a bad hire, but moreover how we can prevent ourselves from making such a painful mistake. And please remember the following two things:

  • We now talked about company impact, but please don’t forget about team impact. Bad hires can really damage team dynamics and your colleagues’ motivation, which has way more impact than some financial losses.
  • Yes, it’s painful to your company that this happened. Just keep in mind, however, that it might be even more painful to your (ex-)colleague who is told to leave the company after 7 months.

Cheers, Charlotte