It’s time to accept the truth: You are paying too much

Why does contingency recruitment cost more than double retained recruitment?

Recruitment of fresh talent, is often referred to as the lifeblood of an organisation. It's the process of identifying, attracting, and ultimately hiring the right talent to drive a company's success. However, beneath the surface of this seemingly straightforward process lies a complex web of costs and considerations.

Among the various recruitment methods, contingency and retained recruitment stand out as two prominent approaches, each with its own set of advantages and disadvantages. While contingency recruitment might appear more cost-effective at first glance, a deeper analysis reveals that it can often be more expensive than its retained counterpart.

Let's delve into the intricacies to uncover the true costs associated with each approach.

Understanding Contingency Recruitment

Contingency recruitment operates on a "no win, no fee" basis, where recruitment agencies only receive payment upon successfully placing a candidate.

This model is characterized by its speed and volume-driven nature, as agencies compete to fill roles swiftly to secure their fee. However, this speed and lack of exclusivity come with inherent risks.

One significant drawback of contingency recruitment is its relatively high failure rate, within the first year of employment, with the automotive sector recording a 27.4% first year leaver rate, for roles in the £40-70k salary range. That can be compared to a 5% failure rate for candidates hire through a retained search method.

With contingency recruiters working on multiple assignments simultaneously, and no upfront commitment from the client, the focus may lean more towards quantity or pace, over the quality of the service.

Subsequently, candidates sourced through contingency channels tend to mostly come from advertising responses and the low hanging fruit within job board databases.

This limited approach to sourcing and unsophisticated screening process, has a direct impact the subsequent talent pool quality, and fails to qualify applicants against their fit for the role or the organisation's culture. All leading to a higher likelihood of failure and first year leavers.

Subsequently, contingency recruitment nearly always relies on the clients to assess the applicants, but in the vast majority of cases, the screening and assessment processes applied in house also fail to assess the primary areas, that could help to avoid making bad hires.

According to extensive research commissioned by the REC, 39 per cent of all HR leaders surveyed, admitted that the interviewing skills and assessment processes used by their recruiting functions are not satisfactory.

The outcome in the automotive sector alone, is an astonishing 27.4% leaver rate in the first year of employment.

The True Cost of Contingency Recruitment

To understand the true cost of contingency and retained recruitment, we must factor in not only the recruitment fee but also the costs associated with bad hires.

Extensive research by Deloitte, PWC, KPMG, Gartner and even the recruit industries own governing body, The REC, concludes that the average cost of a bad hire equates to around 2.5 X the annual salary, and for revenue generating roles 3-4 X salary.

So let's crunch the numbers:

We can start with a few Assumptions that make the comparison easier:

• We will assume that the average salary is: £50,000

• We will assume that the average contingency recruitment fee is: 17.5% of salary

• We will say that the average failure rate in the first year of employment in automotive is: 25% via contingency and 5% via retained.

• And we will accept the institutional research that estimates the average cost of leavers in the first year as: 2.5 times salary

Calculation:

• Recruitment fee: £50,000 * 17.5% = £8,750 per successful placement (the agency fee)

• Failure rate cost per hire (factoring in the 25% leaver statistic): £50,000 * 25% * 2.5 = £31,250

• Giving us a total cost per hire of: £8,750 + £31,250 = £40,000

Unless you know that your leaver rate is lower than 25% or disbelieve the research by multiple major institutional companies, this is the harsh reality for most businesses in the automotive sector. The cost of hiring someone is in fact nearly as much as the first year salary.

Exploring Retained Recruitment

In contrast to contingency recruitment, retained search operates on a more exclusive and consultative basis. Clients engage with a recruitment firm exclusively for a particular role, often paying an upfront retainer fee. This fee contributes to a number of up front costs and services that will contribute towards a better outcome. This model allows for a more thorough and tailored approach to candidate sourcing, assessment and screening, reducing the risk of misalignment between candidate and company/job/culture.

Comparing the Costs

Now, let's compare the costs of contingency and retained recruitment:

Contingency Recruitment:

• Total cost per hire: £40,000

Retained Recruitment: (using the same model)

• Retained fee: 25% of salary = £50,000 * 25% = £12,500

• Failure rate cost per hire: £50,000 * 5% * 2.5 = £6,250

• Total cost per hire (retained): £12,500 + £6,250 = £18,750

Despite the modestly higher outlay to the retained recruiter, the true cost of using a retained recruiter is more than 100% lower.

Not to mention the frustration, distraction, and damage to reputation that bad hires have on the company.

Conclusion

While contingency recruitment may seem like the more economical choice upfront, a closer examination reveals its potential hidden costs.

Factoring in the higher failure rate and subsequent expenses associated with first year turnover, the true cost of contingency recruitment significantly outweighs that of retained search.

Retained recruitment offers a more strategic, comprehensive and personalised approach, thus reducing the risk of costly hiring mistakes and ultimately delivering better long-term value for organisations.

Here are the 8 primary indirect costs that Deloitte highlighted in their research paper:

1. Unrecoverable Salary

2. Wasted Management Time/Training

3. Recruitment Agency Fees

4. Lost Productivity

5. Lost Team Productivity

6. Indirect Staff Turnover

7. Loss of Business

8. Impact on Reputation

In the realm of recruitment, as in many aspects of business, it's essential to look beyond the surface and consider the full spectrum of costs and benefits.

If you don’t believe these numbers, do your research and wise up. Bad hires damage business reputations and are the worse possible setback to growth.

Automotive Recruiters have been delivering a 98% 1st year retention rate for candidates hired through their retained search programme, evaluating candidates on behalf of their clients using a blend of one to one assessment, video profiling, competency based assessment and using sophisticated behavioural assessment processes.

In fact, we are so confident in our hiring capability, we even offer a no quibble 12-month free replacement policy.

Get in touch and let us show you what we do and how we do it, including sample reports and behavioural assessments.

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