Sunday, July 27, 2008
Costs 101
The legacy of RPO may just be that recruiting managers begin to understand costs, and how to manage them. I don't mean manage as in 'limit', although that's a fine thing. I mean manage costs as in structuring them to maximize the use of resources.
The crux of this issue begins by distinguishing between fixed and variable costs. Fixed costs are infrastructure costs that are necessary to enter a business. Once incurred, they are fairly stable. They include things like office rents, recruiter salaries, hardware, and software costs. They are part of the price of entry. On the other hand, variable costs fluctuate with activity. As activity rises, so do variable costs - things like advertisements, commissions, and travel costs.
From an accounting standpoint, it is preferable to have ratio of lower fixed costs to variable costs. That is, you want to minimize your fixed overhead relative to variable costs. Why? Because your fixed costs, remain stable as activity increases, meaning they can be amortized across more hires as activities increase. Variable costs fluctuate with activity, increasing with higher production, and decreasing when activity slows. This ratio matters less during high demand, as costs will generally be the same, but becomes very important as demand recedes. For example, a company with 10 full-time recruiters will invariably have to lay some of them off in order to reduce (fixed) costs during a recession. On the other hand, an organization with the same workload but only 6 full-time recruiters who have outsourced certain components, won't likely lay off staff. The difference is that those outsourced components are likely to be variable costs, which decrease as activities decline. Therefore variable costs cut themselves, and your staff remains intact.
Managing this ratio is more important when demand cycles hasten or are unpredictable. The moral is that anything that can be removed from your fixed costs, and converted into a variable cost is a management coup.
The crux of this issue begins by distinguishing between fixed and variable costs. Fixed costs are infrastructure costs that are necessary to enter a business. Once incurred, they are fairly stable. They include things like office rents, recruiter salaries, hardware, and software costs. They are part of the price of entry. On the other hand, variable costs fluctuate with activity. As activity rises, so do variable costs - things like advertisements, commissions, and travel costs.
From an accounting standpoint, it is preferable to have ratio of lower fixed costs to variable costs. That is, you want to minimize your fixed overhead relative to variable costs. Why? Because your fixed costs, remain stable as activity increases, meaning they can be amortized across more hires as activities increase. Variable costs fluctuate with activity, increasing with higher production, and decreasing when activity slows. This ratio matters less during high demand, as costs will generally be the same, but becomes very important as demand recedes. For example, a company with 10 full-time recruiters will invariably have to lay some of them off in order to reduce (fixed) costs during a recession. On the other hand, an organization with the same workload but only 6 full-time recruiters who have outsourced certain components, won't likely lay off staff. The difference is that those outsourced components are likely to be variable costs, which decrease as activities decline. Therefore variable costs cut themselves, and your staff remains intact.
Managing this ratio is more important when demand cycles hasten or are unpredictable. The moral is that anything that can be removed from your fixed costs, and converted into a variable cost is a management coup.
Selective RPO
With all the attention given to Recruitment Process Outsourcing (RPO), expect the next big thing to be Selective RPO. That is, instead of outsourcing the entire effort, organizations will maintain aspects they are good at, and outsource components where they're weak.
The first big round of RPO has not been a success. Not for the clients, and not for the vendors. Clients miss the in-house familiarity they expect, and providers aren't making money. Many clients feel they threw the baby out with the bathwater in order to get a better handle on their costs. And, while costs are better measured, the job isn't getting done.
The next iteration will consist of companies realizing their recruiters do some things well - like posting jobs, working with hiring managers, etc., but are not so good at others. In particular, sourcing passive candidates. In an effort to play to their strengths, they'll maintain these efforts and outsource weak areas. Overall, they'll have better control and better results.
The first big round of RPO has not been a success. Not for the clients, and not for the vendors. Clients miss the in-house familiarity they expect, and providers aren't making money. Many clients feel they threw the baby out with the bathwater in order to get a better handle on their costs. And, while costs are better measured, the job isn't getting done.
The next iteration will consist of companies realizing their recruiters do some things well - like posting jobs, working with hiring managers, etc., but are not so good at others. In particular, sourcing passive candidates. In an effort to play to their strengths, they'll maintain these efforts and outsource weak areas. Overall, they'll have better control and better results.
