RPO Solutions - What are the choices?

Updated: July 02, 2009

Strategy and choice

One of the natural outcomes of a capability review is an evaluation of approaches to recruitment. Typically the choices are whether to create an in house function or whether to outsource to an external partner? If the choice follows an internal model, questions arise around what kind of investment, structure and performance measures are required? If resourcing is outsourced, the questions relate to whether a purely transactional relationship with agencies is appropriate or whether a more intelligent solution is crafted? Beyond cost there are a number of important considerations.

Outsourcing decisions have evolved from focusing on cost savings to encompass a strategic consideration of which business processes or activities provide a comparative advantage and which do not. What capabilities are unique to the organisation and are core to its success and what are not[1]. The recruitment function is a case in point. Is your internal recruitment function hard to copy and replicate? Does it distinguish your organisation from others? Does your recruitment function mark your organisation out as a leader in your sector with a brand that attracts the talent you need?

The choice to outsource recruitment can have different levels of intimacy and confidence. On one level it can be a purely transactional service model based on vacancy generated needs where an agency charges a margin on the salary of the candidate. At another level it may be a contractual relationship with a preferred supplier, featuring elements such as volume discounts, mutually agreed performance standards and value added services; or at yet another level it may be a recruitment process outsourced (RPO) model where a provider serves as an organisation's internal recruitment function for some or all of its jobs.

In RPO, providers manage the entire recruiting/hiring process from job profiling through the on-boarding of the new hire, including staff, technology, method and reporting. This differs from recruitment agencies and search providers in that RPO assumes ownership of the design and management of the recruitment process and accountability for results.

Choosing a recruitment model must be based on a defined recruitment strategy that identifies the organisations hiring objectives. Without a strategy it is unlikely either approach will deliver value. A reactive model without a strategy is time consuming, costly and likely to have a negative impact on your ability to source and attract good people. A recruitment strategy should encompass a quantitative cost benefit analysis and a qualitative assessment of the beliefs and principles that the organisation values.

Value Analysis

Value is determined by the receiver and may be defined as something we would rather have than not have. As organisational leaders, we form a view about whether we are getting value for money from the recruitment function. Do we get good people? Do we get them quickly? Do they come up to speed quickly and deliver results? Do we keep them? Being clear about how you will measure the performance of your recruiters, whether they are internal or external, enables you to define the criteria for success and then allows you to make a better choice as to whether internal or external is the way to go.

Conducting an analysis of costs and benefits requires a robust set of metrics that should include:

Cost
Staffing Efficiency Ratio
Time to start
Organisational fit
Hire Quality
Candidate experience

How do the different models of recruitment (internal or external) measure up?

Cost. Cost is related to volume. A low volume of hiring diminishes the case for having an internal recruitment function. It also follows that if you do have an internal function then it would be wise to assess the cost effectiveness of outsourcing relative to the cost of having an internal team and the necessary infrastructure and recruitment information system. The key cost factor here is utilisation. The total cost of ownership of maintaining an underutilized capability can be significant.

For small organisations with high volume recruitment needs using external recruiters on a transactional basis can be expensive. There are clear cost advantages of acquiring or accessing a recruitment technology capability, complemented by a small in sourced recruiter team on site who knows your business, your brand, and your culture.

Cost is also closely connected to speed and brand. A smooth and timely process saves money and reinforces your brand. Accessible databases of interested, qualified and available (IQA) candidates give considerable speed and market advantages. Top candidates have choices and will not wait if decisions are delayed or processes have to be repeated.

Staffing Efficiency. The blunt measure of cost of hire[2] doesn't reflect the fact that some positions are more expensive to recruit than others. Staffing efficiency on the other hand is a measure of total staffing costs divided by the total cost of remuneration recruited. The data required is both fixed and variable staffing costs incurred over a period and this is then divided by the sum of the starting salaries of all the positions filled over the same period. In 2002, recruiting research company Staffing.org[3] found an overall Staffing Efficiency ratio of 11.6 percent in the group of companies participating in their study. In other words, the average staffing function cost the organisation $11.60 for every $100 in salary of those recruited. This is a much better benchmarking metric than cost of hire and also allows you to compare external fees with internal costs.

To put the Staffing Efficiency ratio into perspective, it is interesting to compare an internal staffing function to third party agencies. A typical agency fee might be in the range of 20 - 25 percent of the first year salary of the position being filled. By comparison, Staffing Efficiency ratio represents the ‘fee' that an average internal staffing function or RPO approach would charge back on a cost recovery basis. Considering it this way makes clear the premium one pays for an external service.

When analyzed by industry, size and region, substantial differences in Staffing Efficiency ratios emerge. One pattern appears to be that larger organisations have a lower Staffing Efficient ratio than smaller organisations. Large companies enjoy higher volumes, with greater repeatability among hires, and possibly enjoy certain economies of scale with respect to recruiting overhead and infrastructure.

Time to start. Time to fill is a common metric, and it can be even more meaningful when expressed as time to start. For line managers concerned with productivity, the key recruiting result is when a new employee or contractor starts to work. Effective recruiters will always have a pool of potential candidate and jobs can often be filled faster by using agencies (particularly within specialised sectors) because they have large applicant pools. This is only part of the equation. Managing the process and ensuring effective orientation and on boarding is a key to business continuity and productivity.

When recruiters are short listing and presenting candidates, internal processes can delay selection and appointment. Priorities change and requirements are sometimes revised. Managing these changes so that relationships with candidates are not compromised is a core challenge. In a competitive market there are two customers… the candidate or the hiring manager. Everyone who experiences your recruitment process becomes by default a brand manager for your organisation.

Even though a vacancy may be budgeted, conflicting schedules, agendas, or priorities can cause either delays in interviews, and/or extending the number of interviews or assessments beyond what was originally planned. This increases cost and time to start and alienates candidates. When organisations use an RPO model, they have pre-screened IQA candidates that can be channeled through the internal process and have decisions made about them. This enables rapid follow up and in a competitive labour market this is simply a ticket to the game.

Organisational Fit. Internal recruiters are often best placed to answer questions about what it's like to work in your organisation and as a result some organisations think that recruitment is best managed by an internal team who know the culture and understand stakeholders' interests. However in the model where external recruiters are placed on-site, working with business units on a day to day basis this advantage is soon diminished.

One way to measure results in this area is to assess organisational or cultural fit. This is best done by comparing success rates between internal and external recruiters to identify who is making better assessments of organisational fit. The most valuable metric here is voluntary turnover within 12 months. The one caveat with this is that line managers also play a part in ‘fit' outcomes and patterns of turnover in business units needs to be considered to avoid attributing poor recruitment to what in fact might be poor orientation and incompetent engagement by the hiring manager.

Hire Quality. Related to fit is quality of hire. Nowadays most internal recruiters in medium to large sized companies rely on web-based systems to do the initial screening of applicants. There are usually no incentives or penalties for how well they recruit. With external recruiters, there may be no metrics in place at all, other than time to fill. If metrics for hire quality are clearly tracked and compared between internal and external recruiters, it can help identify the best recruitment model for your business because you will be able to tell who is providing the highest-quality candidates.

Linking recruiter rewards to quality of hire is a critical step in ensuring that recruiters make solid recommendations to line managers. It is the line manager who manages the employment relationship and as such carries the recruitment risk. Agency recruiters can be measured based on client feedback and the number of times roles have to be re-filled at no charge to the client, which can happen if the wrong hire is made and if the client organisation does not have a means of measuring its recruitment suppliers on this metric.

In a hybrid model, measuring and comparing both internal and external recruiters on the quality of new hires offers some potential value as it enables comparison of placements at say six and twelve weeks, again at six months, and then at regular intervals.

Candidate Experience. Every time you go to market you send messages about your organisation to potential candidates. How you do this can impact the way your offering is perceived by candidates, so understanding the impact of what you do is important. Blind advertisements by internal recruiters through an agency do not build or add to your own brand recognition. Any efforts to co-brand or represent your organisation must be handled correctly or the brand can be damaged. If external recruiters are compromised in any way; don't respond to candidates, or respond slowly, people will link that response to your brand, leaving a negative impression about your organisation.

Communicating with potential employees through your website also makes an impression on candidates about your organisation, good or bad. An employment website serves four key purposes[4]:

Reception: It is one of the first places that a potential employee encounters your organisation and is the source of lasting first impressions.
Gateway: It is a filter that encourages some candidates while frustrating and discouraging others.
Data Source: It is the place from which most data enters the applicant tracking system. It is the source of the quality problems in your talent pool database.
Opportunity: It is the best place to catch the people you want.

While a conversion of print advertising to online delivers cost savings, the results from both traditional print advertising and online services has declined over the past decade. The actual cost of obtaining the same results this year as previous years has risen as early adopter advantages ebb away. Online advertising by itself does not make a comprehensive e-Recruiting proposition; the site must be ‘sticky' and compelling with a design that makes it easy for people to join your talent community.

The real cost of fully implementing an e-Recruiting methodology is essentially the cost of changing the process from reactive to proactive. Needs anticipation is the central feature of a well planned recruiting framework and this involves planning, forecasting, outreach and data collection. Staffing the participation in these activities is not enough. The development must reconcile the various needs of the organisation and this can be a significant challenge. The tracking systems, sourcing inventories and communications systems required to implement a proactive approach are considerable and for many organisations, external expertise is needed to deliver a competitive online presence. The following checklist[5] sets out some good practice design guidelines on employment web pages.

A clear, easy to find link from your home page
Job listings are available within three clicks from your home page
A window title that begins with your organisation's name, followed by a brief description of the site
A one-sentence tagline that summarises what the site does
The things that an applicant can do when visiting the site are listed
Examples of real site content
No Login is required just to browse
A search input box - at least 27 characters wide
All corporate information is in one distinct area
Opportunities are published so that search engine results are improved and the search engine position is managed
Links are presented once per page and naming is consistent
Link names begin with the most important keyword
Clear, employment specific policies regarding: privacy, intellectual property, hiring process, data storage and security
The pitch is matched with a substantial understanding of the job itself. It's readable and interesting.
Your organisation's culture is described
Includes Email a Friend feature
Meaningful graphics - "Who is your audience and is the material usable for the audience in the way that they want to use it?
Receipt of an application is always acknowledged and where possible personalised
It is clear who fits and who doesn't - get to "No" as quickly as possible

A strengths based choice

Internal recruiters have the advantage of resident organisational and cultural knowledge. However unless correctly incentivised around results, there is a risk that they do not have the same service delivery and results accountabilities. Maintaining an effective internal function also requires an investment in information systems if the organisation is to remain competitive in a labour market that is now virtual. Depending on recruitment volumes, internal functions carry a cost risk around underutilisation. Multi tasking in broader HR tasks to mitigate this utilisation risk threatens the focus and development of recruiter competence. In today's labour market, your recruiters better have developed a competitive sourcing strategy; have well developed networks and the capacity for speed. Three compelling reasons stand out in support of an RPO model:

gaining outside expertise not available in concentration internally;
improving systems quality; and
focusing on the core business of the organisation

Measurement is critical to cost and value accountability. You cannot manage that which you cannot measure and it is inherently easier to manage suppliers than it is to manage staff. The RPO approach to service delivery is that it brings dedicated recruiter expertise into the organisation with its own infrastructure and information systems that enable economies of scale and scope. Database tools and networks enable the organisation to rapidly access IQA candidates. RPO changes fixed under utilisation costs to variable but actual utilised costs and working in-house with managers on a day to day basis mitigates the organisational fit risk. The following table summarises the value proposition.

Table 2: RPO Value proposition[1]

Description

Benefit

Proactive Recruitment Implementation (PRI)

Improved hiring decisions
Reduced turnover / increased retention
Reduced management time & stress
Reduced time to hire/fill
Reduced cost per hire

Consolidated Invoicing

Consolidated invoice for all recruitment activity

Reduced time managing the recruitment process

Reduced Hiring Manager time spent on recruitment process

Talent Acquisition strategy

Improved ability to create and manage workforce planning
Enables creation of workforce pipeline for future hiring
Enables better management of internal workforce
Improves quality of organisation's talent pool
Reduces time to fill

Supported by Technology

Enables re-engineering of process
Allows easy reporting
Allows measurement of performance

Capability development

Knowledge transfer to senior Managers, Hiring Managers and HR practitioners from specialist expertise

Appendix: Metrics

Recruitment Performance data

Metric

New Hire Quality

Average hiring manager rating - 90 and 180 days subsequent to employment. Expectations set at hiring time

Time-to-Fill

Average actual time to hire in days

Customer Satisfaction

Average Hiring Manager Rating (Post-hire based on

pre-hire standards)

Staffing Efficiency Ratio

Total recruiting costs divided by Total remuneration recruited

Recruiting costs

Internal recruiting expenses
External recruiting expenses
Travel, relocation expenses

Remuneration costs

Total annual base remuneration of all external hires

Voluntary Staff Turnover

Turnover as a percent of new staff hired
Cost of voluntary staff turnover per annum = total voluntary turnover x average salary recruited x 2 (or 3)

Vacancy ratio

(B) Budgeted staff

(A) Actual staff

Formula:

(B - A) = C / B = x%

Staffing Metrics (Example data)

Factor

Metric

Notes

Total HR/Personnel cost

$ 68,321,163

10% of total income

15% of total costs

Recruitment Costs

Total Recruitment Cost

$ 1,414,581

Includes direct costs and staff time[1]

Total remuneration recruited

$ 10,026,805

Average salary recruited was $ 50,640

N of staff recruited

198

Staffing efficiency ratio

14%

Total recruitment cost divided by total remuneration recruited

Cost of hire

$ 7,144

Time to hire (days)

Staff levels

Total budgeted staff (FTE)

1056

Actual staff (FTE)

1003

Average salary

$ 53,886

Average daily salary

$ 244.94

Vacancies

Vacancy ratio

Daily loss from vacancies

$ 244,788

$ 13,218,540[2]

Daily savings from vacancies

$ 153,209

$ 8,273,300[3]

Real cost of vacancies

$ 4,945,240[4]

Salaries saved through vacancies

$ 1,005,219

Staff Turnover

Total voluntary staff turnover (VST)

103

9% of budgeted staff

Forced turnover

0.04% of budgeted staff

VST within 12 months

18% of total VST

Cost of voluntary staff turnover

$ 10,431,840[5]

15% of HR costs & 2% or 3% of total costs

Organisational Position

Total operating revenue

$ 710,722,000

Ave daily revenue per employee $ 3,220

Total direct cost

$ 444,831,000

Ave daily cost per employee $ 2,015

[1] 3 x HR staff at 75% and 80 Managers at 7%

[2] Missed income (daily loss of missed income x 54 days)

[3] Costs not incurred (54 days of direct costs avoided)

[4] Annual cost of missed income - costs not incurred

[5] 2% or 3% of total costs

[1] Recruitment and Resourcing in the Health Sector. TalentPoint Ltd, June 2009

[2] 3 x HR staff at 75% and 80 Managers at 7%

[3] Missed income (daily loss of missed income x 54 days)

[4] Costs not incurred (54 days of direct costs avoided)

[5] Annual cost of missed income - costs not incurred

[6] 2% or 3% of total costs

[1] Ron Stuart, Director, TalentPoint Ltd. Managing Outsourced Projects. June 2009

[2] Total recruitment cost divided by number of recruits

[3] http://www.taleo.com/research/articles/strategic

[4] John Sumser. Electronic Recruiting News. www.interbiznet.com

[5] ibid

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