Do you think you know how much it costs to recruit a manager or executive? You might take a moment to calculate the costs of advertising and agency fees, the time it takes to screen resumes and interview candidates, and the cost of onboarding. But if that’s all you’re thinking about, you’re barely scratching the surface. Let me share a story that highlights the issue.
A Lame Duck
When conducting the research for my book, Succession Planning That Works, the VP of HR at a large community college told me the following story. The president who hired this VP turned around and gave notice of his own resignation within her first few weeks on the job. One of the senior executives was appointed interim president and the search for a permanent replacement began. Unfortunately, because of budget constraints and other reasons, the search took a full year until a suitable replacement was found. On the surface, this might seem like just an unfortunate circumstance for the college. But the VP of HR remarked that the real problem was that the interim president was effectively a lame duck president—unable to make any major decisions. And who could blame him? At any moment, a new president could be announced who might reverse the interim president’s decisions. The interim president had no way of knowing that this search would drag on for a whole year. As a result, projects stalled and some initiatives were put on hold altogether. Think of how much time and energy was wasted by countless individuals during that year!
Most people don’t consider the opportunity cost that is lost when a position is left vacant because they don’t think there is any alternative. Compare the scenario above to an organization that has a succession plan that works—one that enables a seamless transition from the person exiting to their successor, a scenario in which the organization doesn’t miss a step. A succession plan that works allows the organization to:
- Eliminate the lost time that would have resulted from the vacancy.
- Reduce or eliminate the ramp-up time of the incoming successor. Before the outgoing incumbent leaves, they would have opportunity to walk the incoming successor through all the open files on their desk. The successor would be able to hit the ground running.
- Avoid the uncertainty and anxiety that often follows when people learn that a senior manager is leaving. Organizations with a succession plan that works often announce the incoming successor in the same announcement of the departing manager.
Calculating Lost Opportunity Cost
There are a number of free online ‘cost of turnover’ calculators that calculate the hard costs of filling vacancies through recruiting. But these costs are minuscule compared to the opportunity cost of leaving the position vacant. That opportunity cost is the value that’s not being generated while the position is vacant. The key to understanding this cost is wrapping your head around this one principle: People create value. When a position is left vacant, value is not being created.“People create value. When a position is left vacant, value is not being created.” Click To Tweet
Some might say that it’s impossible to calculate opportunity cost. That’s not true. There is a very simple and accurate way to calculate opportunity cost. You just need to determine how much value the people create in your organization. That’s easy. Divide total revenue by total compensation. In most companies, that ratio will be somewhere between two and six dollars of revenue for every dollar of compensation paid. On average, that ratio is 4 to 1. In other words, every dollar spent on compensation produces four dollars of revenue. Note that I did not say may produce or should produce. If you have calculated the ratio for your specific organization, this is not theoretical. These are the facts.
Now let’s put these facts to work.
Question: What is the opportunity cost of having a senior position vacant for six months?
- Let’s say it takes six months to find a replacement for a VP who was earning $200K per year.
- The revenue per compensation dollar ratio is 4 to 1.
Most organizations have no idea that the drawn-out, careful process of recruiting is actually costing them that much money. In fact, the example I provided used a conservative estimate of the time it sometimes takes to fill a VP-level position. The actually opportunity cost is often much higher, but now you can calculate it for your organization to know for sure. Remember: people create value. When a position is left vacant, value is not being created.
Are We Really Losing That Much Money?
Some may argue that the company is not really losing out on all that revenue because other people take on the critical tasks of the vacant position. That hypothesis assumes that the people covering the critical tasks of the vacant position a) are not already working at full capacity, and b) have the same capability as the outgoing incumbent. If people are covering for others, it usually means they are dropping the ball on their own important, but perhaps less urgent, responsibilities. The common reality is that when there is too much work for too few people, strategic responsibilities are often sacrificed in favor of urgent activities. Which do you think are more valuable to the organization?
There is far less costly, far more reliable, and far more effective alternative to recruiting your leaders: develop them yourself! Organizations that don’t develop the talent they already have are abdicating that responsibility to the organizations they hope to recruit from. No organization is as qualified to train your leaders as yours is!“There is far cheaper, more reliable, and more effective alternative to recruiting your leaders: develop them yourself!” Click To Tweet
If you’d like to learn how to implement a world-class leadership and talent development program, you should check out the book Succession Planning That Works. It contains information and downloadable tools that will help you improve your talent development program no matter what stage its currently at. If you’d like to learn more about how to improve your talent development program, contact me to schedule a free consultation.