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The True Cost of Having an Open Vacancy

September 7, 2017

How do we assess and attempt to quantify the damage an open vacancy does to a business?

 

Many of the costs of recruitment are easy to quantify, e.g. advertising or agency/consultancy fees, although the focus on these tends to blind many people to the very significant internal, often unaccounted for costs. Perhaps the true effect of ignoring or failing to understand the true cost of not recruiting, is having a vacancy open for a significant period of time. This can run into tens if not hundreds of thousands of pounds but are usually overlooked.

 

The costs and impacts of an open vacancy are significant, they start almost immediately and usually continue after the new incumbent starts until they are fully productive.

 

How do we assess and attempt to quantify the damage an open vacancy does to a business?

 

An open vacancy may directly lead to a loss of revenue, may lead to obvious additional costs and will have many other indirect effects which will impact the business.

 

First let’s consider the most obvious financial impacts and how to assess them.  In simple terms if you have a machine operator vacancy your direct cost is either the value of the output lost whilst the machine is idle/unattended. In reality it is likely that a business would want to avoid an idle machine so would utilise overtime or a temporary operator. In this case, the obvious direct cost becomes the additional cost for the overtime or the temporary operator. Hidden costs may include reduced output and or an increase in rejects or quality issues resulting from inexperienced or fatigued operators.

 

Of course, operators are direct labour and the cost is relatively easy to quantify, what about indirect staff, sales people etc.

 

The cost of a sales vacancy also has a ready formula for assessing business impact. If a sales person is targeted at £500,000 per year that’s potential lost revenue of £40,000 per month. Against numbers like that the cost of recruitment doesn’t look high anymore. Of course, it can be argued that for many products, new business comes in chunks and it is not simply the annual figure divided by 12. However in reality this is potentially even worse. Winning new business is a process with a cycle which needs managing. People buy from people and opportunities in progress may fall out of the sales funnel when the sales person driving them leaves. Any new incumbent will take several months to bring new opportunities to fruition. In the meantime, whilst the sales position is vacant the starting point of the sales cycles for opportunities will be missed and the opportunity may not come again for years. It is safe to say that one twelfth of the annual target is a reasonable measure of the monthly cost of a sales vacancy. The cost will accumulate from the opening of the vacancy (sometimes before if the individual is disillusioned) until several months after the new incumbent starts.

 

For indirect/admin staff the task of quantifying the cost of a vacancy is harder and more open to debate. There are a number of methods of calculating the cost with each having its merits. All can be argued for and against so typically I would suggest businesses use one which is simple to use. Of course, if the open vacancy is covered by a contractor or temp the additional direct cost may be measurable but should also consider the cost any reduced output or increased errors.

 

Simplistic measures of the cost of a vacancy can include:

 

Average revenue per employee

 

This is simply taking the company revenue and dividing by the number of employees to give an average revenue per employee. Divide this by the period the vacancy is open to give the cost as an indicator of lost revenue.

 

Salary multiplier

 

Studies have indicated the value of an employee is up to 3x their salary. Whilst it can be argued that the company is saving the salary cost of the employee they are incurring the loss of the value the employee would have added.

 

In any of the above examples if the role is covered by a colleague, as often happens, a range of indirect impacts kick in. Many employers believe that in having a colleague cover the vacancy they have avoided both lost revenue and additional cost. Whilst in theory this could be true it suggests that:

 

a) the business was very inefficient and under productive prior to the vacancy and

b) in reality there is no vacancy.

 

The soft, indirect impacts of a long open vacancy fall into the following categories:

  • Individual/team performance

  • Individual/team morale

  • Managemen