Calculating the Cost of a Vacancy in a Revenue-Generating Job
Written by: Dr. John Sullivan
It should be obvious to everyone that whenever you have a "vacancy" or opening in a revenue-generating position, the total revenue that your firm generates will go down. For example, if you operate a bank branch, a significant portion of the revenue you generate will come from the loans made by your loan officers.
To calculate the average revenue lost as a result of a vacant position "day" for a loan officer, take the average yearly revenue generated by a person in this job and divide it by the number of working days in a year.
Incidentally, for some positions like loan officers, the revenue losses might equal $5,000 per day. With a 60-day time-to-hire, that's $300,000 in lost revenue.
Another method to identify the differential in the dollar loss between revenue-generating positions and "average" positions: compare the firm's revenue per employee per day (the total revenue of the firm divided by the number of employees and that resulting number is divided by the number of work days) with the direct revenue loss from a vacancy in a revenue-generating position.
Fortunately, most of this revenue loss can be minimized with effective HR actions, including:
· Hire quality individuals. Recruit individuals with high skill levels who will be top performers.
· Motivate and develop. Excite and improve existing employees in order to increase the revenue they generate.
· Retain. Treat the most productive employees properly so they don't quit.
· Minimize vacancies in revenue-generating positions. Rehire the vacated positions rapidly to ensure there is no drop in revenue as a result of "excessive" position vacancy days.
Of these four approaches, the last one, minimizing vacancy in revenue-generating positions, is the approach that receives the least attention within HR and recruiting. I'm unsure why most in recruiting don't see this impact in the importance of focusing on revenue-generating positions.
For example, it's fairly obvious that if an airline has a shortage of pilots as a result of turnover or slow hiring, a smaller number of planes will fly, fewer passengers will be served, and as a result, less revenue will be generated.
A single day's vacancy in a revenue-generating position impacts revenue, but a long-term vacancy will invariably mean a dramatic lowering in the revenue that the business will generate. Of course, every vacancy has some impact on revenue, but the impact is not only larger for revenue-generating positions, it is also more immediate and obvious.
There are two basic categories of solutions to the cost of a vacancy in a revenue-generating position. The first is to hire everyone faster (fewer "vacancy days") and the second is to prioritize hiring so that it focuses on these critical revenue-generating positions.
Solution # 1: Hire Everyone Fast
This might seem like a good idea on the surface, but hiring fast and minimizing vacancies throughout the organization is expensive, hard work that is sometimes unnecessary. For example, replacing a PR person rapidly at an insurance company wouldn't have the same impact on revenue as minimizing the vacancy days for your insurance sales positions.
In addition, because hiring "fast" might have a detrimental impact on the quality of individuals, changing the speed of hire alone will not automatically increase revenue. As a result, a superior approach to increasing the overall speed of hire within an organization is to prioritize revenue-generating positions and then to fill them both rapidly and with high-quality hires.
Solution #2: Prioritize and Focus on Revenue-Generating Jobs
Because revenue generating jobs have an immediate impact on revenue, it only makes sense that you focus your recruiting time and resources on these positions in order to ensure that 1) these positions remain open for only a short period of time and 2) that they are filled with highly skilled individuals that will become top performers on the job.
Prioritization is a common practice of business because every problem that an organization faces does not have equal importance or equal consequences. Decision-makers and people who control budgets have limited resources, and as a result, they must learn to allocate resources based on the severity of the problems that they are facing.
The best solution to this dilemma of limited resources and time is to develop some logical process of allocating resources so that the largest amount of resources goes to the "right" problems (in this case, the right jobs) .
It's not unusual for individuals in recruiting and HR to actively resist any attempts to prioritize positions. Perhaps this is because so many HR people have a "social work mentality" that leads them to believe that it's important to treat everyone equal.
Unfortunately, any attempt to treat all jobs equally when it comes to reducing vacancy days automatically limits the recruiting team's ability to be successful.
What recruiting must do is to stop recruiting jobs based solely on the requisition date. Instead, focus on these critical revenue-generating positions and begin hiring immediately after a revenue-generating position becomes vacant, or better yet, as soon as there is a realistic probability that one may soon become vacant.
Reduce the Number of Vacant Days
Some of the actions that you should consider when you are trying to reduce the number of days that revenue-generating positions are vacant include:
· Act on them first. Prioritize revenue-generating positions so that such requisitions are acted on immediately while other open requisitions are given a lower priority. In some cases, begin during the preliminary stages of requisition approval (because these positions are almost always approved) in order to get a jumpstart. Preliminary recruiting should also start when an employee gives his or her notice, or when it is determined that an individual on a performance management program is likely to be released.
· Allocate superior resources. Assign your top recruiters to these positions and use the best sources, even though the cost-per-hire for these positions will be higher. Because employee referrals produce the highest quality hire, the referral program should specifically target revenue-generating positions so employees focus their search for referrals on those jobs.
· Time to fill target. The target "days to fill" for revenue-generated position should be set to at least half of the target for average jobs. Incidentally, a superior option is to focus on the "need date" rather than the time to fill. What this means is that recruiting focuses on getting critical positions filled as close as possible to the day they are needed, as opposed to focusing on the general average hiring time for filling all jobs.
· Applicant pool. Rather than waiting for a position to open up before beginning to look for possible candidates, develop a pool of qualified applicants who can be contacted immediately when a revenue-generating position opens up. This improves your speed of hire because the sourcing and prescreening have already been completed. Individuals in your applicant pool should be prescreened both for their qualifications and for their interest in your job. The names of these individuals can be generated through a variety of sources including individuals who rejected previous offers, individuals who needed just a little more experience, individuals who applied when you had no openings, and employee referrals who were finalists for previous positions.
· Continuous recruiting. While expensive, continuous recruiting also increases the likelihood that you will identify the very best in the field because there is no rush to fill immediate vacancies. Some firms go even further and designate one or two high-volume revenue jobs as "evergreen" jobs, where they hire all of the top candidates they find, even though there is no current opening.
· Death by interview. It's also wise to change the interview process for these revenue-generating positions so that the assessment process is completed faster. One approach that many firms take is to schedule all interviews for a single day, while others simply reduce the number of "required" interviews for these special positions. Conducting initial interviews by telephone can also speed up the process by reducing travel time and you can also decrease the number of individuals who must be included in any particular interview. Give applicants real problems they will face on the job in order to assess the steps they would take to resolve the problem.
· Succession planning. Vacancies in these management positions not only affect the performance of individuals under the manager, but can also bring a halt to all new hiring, thus increasing vacancy days. The most common solution involves developing a succession plan where internal "backfill" candidates are pre-identified. The very best succession plans go a step further and require that you designate at least one external candidate who would be considered for future openings.
· Retention planning. Because some turnover is inevitable, implement a process for identifying which individuals are "at risk" of either resigning or retiring, so that the recruiting process can get a head start on identifying possible replacements.
· Prioritize your business seasons. In some businesses, a significant portion of the total revenue for the year is generated during a particular season. For example, in retail, most of the revenue is generated during the holiday season. As a result, it's critical that you put special focus on minimizing position vacancies during this high-volume season. Incidentally, this might mean that some revenue-generating position requisitions are not given a high priority throughout the year but instead are only prioritized during their "pre busy season."
· Prioritize your revenue-generating jobs. Because not all revenue-generating jobs produce the same dollar amount revenue, rank each job on the amount of revenue that's lost each day that the position is vacant or when it is filled with a bottom performer.
· Identify revenue-generating jobs. In some cases, the corporation has already categorized all of its jobs into revenue- and non-revenue-producing jobs. If your organization has not categorized them, generally the fastest way to identify these jobs is by simply asking your departmental managers. Focus on revenue-generating business units, but never assume that jobs in "overhead" functions don't have direct revenue impacts.
HR professionals are constantly saying they want to be business partners. To me, the best way to be a business partner is to act in a "business-like" manner. That means calculating the dollar impact an individual position has on the revenue of your firm and focusing your recruiting and retention efforts on those positions with the highest revenue impact.
Report to senior managers the total annual increase in revenue that resulted from prioritizing recruiting on revenue-generating positions. By focusing on revenue-generating positions, you're not saying that "revenue influencing" or non-revenue jobs are not important, because they are.
All prioritization means is that when you are faced with limited resources and a differential in impact, you must focus your recruiting time and budget where it can have the most direct and measurable business impact, which is the same way that every other business unit acts.