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Why is it so important to define the ROI of hiring the right talent?
As headhunters, we see that some companies have a reactive approach when it comes to getting external help with finding the right talent for their teams. Once the role has been opened for a long time and results are not being delivered, they consider the option of getting external help to fill in the role.
After studying the reasons why our clients ask us for help and defining what makes companies successful, we decided to come up with a probabilistic method that defines the ROI of strategic hires so that they can avoid excessive loss. Many would think that our recommendation would always be to get external help, but this is not the case. If we analyze the numbers, there are a lot of roles that are not suited for executive search hiring but they still are relevant for the organization. To calculate this, we use an expected value model:
Let me give you an example. Everyone would agree that a commission-only sales representative that brings in 100K Euros to the business and gets paid 70K Euros is definitely a good investment for the company, so the faster we find this person, the more revenue the company will make. This is 100% true and companies should try to find these individuals as fast as possible but the ROI of getting external help is 90.8% which makes this role not suitable for executive search. Check out the example below.
So, when do we know that we need external help? The answer is, it depends on the value creation that the role will bring to the company. In general terms, every time a role creates value for the organization that exceeds their salary by 5 times, the company should consider the use of external help. The reason for this can be found in the ROI of finding that individual versus the opportunity cost of not finding him/her faster. Let me give the example of a Supply Chain Director that we recently placed. This individual’s total salary was 200K and his main task was to save the company 5M Euros in the next 2 years. This means that the total outcome value to salary per year is 2.5M Euros. If we introduce these numbers into our model we can see that the ROI is 798.9% and this means that the company did the right thing putting an executive search firm as possible to find this individual in the fastest way possible. Check it out in the image below.
Now, a lot of people might think that these numbers are awesome but that the ROI would be even bigger if they do not get external help to fill in the role, and they are right. However, there is something that everyone should consider, the opportunity cost of not hiring this individual. In order to analyze this, we have created what we call, the Speed Breakeven Point. The Speed Breakeven Point tells us how many days, the opportunity cost of not having this person performing the job, outweighs the extra cost of getting external help.
In our Supply Chain Director example, the Speed Breakeven point is 3.87 days. Even if by incurring extra cost, you can find this person 4 days earlier, a savvy executive should make the decision to hire external help.
Check out the Speed Breakeven in this example in the model below.