A lot of people think the fees third party headhunters make are insanely high. Until this morning, I was definitely one of those people. Then I had a realization.
20-30% of first year’s salary, just for find the right person, seems like borderline extortion. But, it actually “makes sense” for companies to pay this rate, assuming they can’t do the same job as quickly as these recruiters can. The reason is simple: each day an employee isn’t working at the company, they are costing the company huge amounts of money.
Now of course many companies don’t pay these fees (kudos - that means you have a great internal recruiting function! Or, at least are very stubborn). It’s also worth noting that rationalizing recruiting fees isn’t the point of this article.
What’s interesting is that the same logic that justifies these recruiting fees is the basis for the main driver of savings by adopting a new Applicant Tracking System: Decreasing Time To Fill.
Applicant Tracking System ROI
Getting a new ATS helps your business in many ways:
Increased recruiter productivity
More applicants due to easier apply, that is mobile optimized
More hires due to better candidate experience
Higher recruiter retention from using a better system day in, day out
More collaboration across the entire company in the recruiting process (referrals, etc)
The list goes on, and can include various functions that are specific to a given ATS, like a unique sourcing ability, or email marketing module.
Here’s the interesting and counter intuitive thing: When we do the math out, the overwhelming driver of ROI comes from decreasing the time to fill for new hires.
Time To Fill
Time to fill is the time it takes from needing an employee, to having that employee working for the company. Your company may measure it by posting to offer acceptance. Or, maybe it’s the first interview to that person starting. It could also be the time from posting a job to a new hire reaching productivity (for example, a sales person hitting quota). Whatever the case may be, the philosophy is the same: how long does it take us to fill a position we need to fill.
How The ATS Affects Time To Fill
How your ATS affects time to fill depends on which ATS you use. Here’s how most ATS’s decrease time to fill:
More quality applicants faster due to mobile optimized application workflows
More applicants through better referral programs
More applicants by searchability of past applicants within the database
Better candidate experience that leads to faster interview cycles and higher acceptance rates
Better workflows that leads to higher recruiter productivity
Time To Fill
We can see from our ATS calculator that the vast majority of value from an ATS comes from decreasing time to fill. Here’s an output from our ROI calculator that contemplates the value a 500 person company may get from a new ATS:
It may seem crazy that so much value can come from modest decreases in time to fill. But, let’s think about this for a second.
How Much Is An Employee Worth?
The easiest person to value in the company is a sales person. We can look at the money they bring in, and contrast that with their salary.
Let’s say we have a sales person that brings in $1 mm in new revenue each year, and they work 250 days/yr. So, that’s $1 mm / 250 days = $4k/day that they bring to the company. So, each day we don’t have that one sales person, we lose $4k as a company. If we can decrease our time to fill for this one req by 2 days, that’s 2 * $4k = $8k of value. Now, if we hire 10 of these people per year and decrease our time to fill by 2 days for each, that’s $8k * 10 = $80k.
For this sales person, they probably get $200k/yr in total compensation. So, they are worth $1 mm / $200k = 5x their salary. While each company is different, it’s safe to assume that each employee is bringing in value that is on average 3x their salaries.
So, let’s say the total salaries of everyone we hire is $5 million for a given year. They value they bring to the company is then $5 mm * 3x = $15 mm. The value per day is $15 mm / 250 working days = $60k. So, for each day we decrease our time to fill, we are gaining $60k in value for the company.
For any finance geeks out there, yes there are a few simplifications being made here :)
Calculate this for your own company:
If you’re on this page, you’re probably looking at new ATS’s. Check out our full advice on buying a new ATS, including the ROI calculator, an organizer to map all the vendors, questions to ask on demos, and whole lot more. There’s also a few videos explaining things like how to actually use this spreadsheet.
Good luck, and let us know how you calculated the business case for a new applicant tracking system!