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The Real Cost of Hiring Mistakes

INTERVIEW EDGE • FEB 2013

It's hard to remember Apple's lean times, especially now that the company's annual revenue outstrips the GDP of several countries, including Norway and Hong Kong. But in the 1980s and 90s, Apple was floundering under the leadership of CEO John Sculley; clashes with Sculley led to the late Steve Jobs' ouster in 1985. Although it was Jobs who originally wooed Sculley away from PepsiCo, he later admitted, "I hired the wrong guy."

Jobs is by no means the only one to make a hiring mistake. And no matter how large or small the company, those hiring mistakes can be staggeringly expensive — replacement costs can range from one to three times the open position's annual salary. In a company with 300 employees earning $35,000 to $150,000 a year and a turnover rate of 18.7 percent — the average for all industries in the United States — the annual cost of attrition is in the millions.

Why the cost of hiring the wrong person is so high

Angelo Kinicki, a management professor at the School of Business at Arizona State, says some costs of a bad hire are obvious, such as the time and personnel needed to recruit, interview, coach, mentor and develop a replacement. But he stresses that hidden costs of hiring the wrong employee, which don't show up on your profit-and-loss statement, can be far more damaging in the long run. They include:

• Stretched-thin staff. Somebody has to fill in until a replacement is hired and trained. As other employees try to pick up the slack, productivity and morale can suffer. The longer — and more often — permanent staff have to cover for the vacant position, the more tempted they'll be to start looking for a new job, too, leading to a downward spiral of discontent and possible defection That's no surprise to the folks at the Harvard Business Review, who attribute 80 percent of attrition directly –or indirectly to hiring mistakes.

• Lost time. Even the best and brightest don't work at full capacity the minute they walk in the door. It's estimated that new mid-level managers need about 6 months to learn new systems and processes. When bad hires don't reach the six-month mark — and many don't — the time they spend not working is another hit to productivity.

• Missed opportunities. Apple's decade of turmoil at the start of the tech boom may have set the company back several years. For many organizations, lost employees equal lost opportunities for attracting customers, growing the business or launching a new product.

• Depleted bench strength. Top companies have great bench strength — core people who can take over to ensure continuity and effectiveness in challenging times. It's hard to build a deep bench with subpar players.

• Low morale. If you can't select good people, even the most loyal employees will eventually lose faith, causing them to become disgruntled, less productive and, in the worst cases, leave your company.

Why so many companies are still making hiring mistakes

Given the high toll of hiring mistakes, why do companies keep making them? The number one reason is the need to fill open positions quickly, especially in fast-growing organizations. Other blunders include:

• Putting too much emphasis on good grades and a prestigious alma mater instead of what candidates can actually bring to an organization.

• Failing to assess for key competencies such as innovation, adaptability, communication skills and the ability to work well with others — all essential in a global economy.

• Not ensuring that employees fit with the corporate culture, or worse, not having a clear idea what that means or how to assess for it.

Avoid the cost of hiring the wrong person

Mistakes are inevitable in life, but hiring mistakes don't have to be. Effective Interviewing!ฎ provides a hiring process and methodology that can help you significantly reduce or even eliminate hiring mistakes.

Our approach uses behavioral competencies to define successful candidates who fit with your organizational values and culture. The process allows you to identify competencies quickly and easily and validate responses by drilling down with follow-up questions. These techniques include "real-time reference checks" that are invaluable in helping interviewers make the right hiring decisions.

Our clients consistently see lower turnover rates when they apply a focused interview process; some have even reduced turnover to 0. Not only does this save their company money, it leads to a more innovative, productive and committed workforce — the kind every successful organization needs.