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.
What’s interesting is that the same logic that justifies these recruiting fees is the basis for the main driver of savings from adopting ATS systems: decreasing time to fill.
What is Time to Fill?
Time to fill is the time it takes to go from needing an employee to having that employee working for the company. Your company may measure it from 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?
Calculate ATS ROI to See Why Time to Fill Matters
Time to fill is by far the largest cost associated with recruiting staff and ATS software can significantly reduce this.
How to calculate ATS ROI
The easiest way to calculate ATS ROI is to use our ATS calculator.
However, if you want to do it yourself, the basic formula for calculating ROI is:
ROI = (profit / investment) x 100
The profit part is self explanatory, while costs relating to talent acquisition can include money spent on external recruiters in addition to paying in-house staff to spend time on things like:
- Researching candidates
- Email correspondence with candidates
- Reviewing resumes
- Setting up interviews
How an ATS Reduces 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
The image below shows output from our ROI calculator that contemplates the value a 500 person company may get from a new ATS. It's clear that the vast majority of value from an ATS comes from decreasing time to fill:
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. The 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, but I hope this clearly illustrates the importance of ATS software in reducing time to fill.