Managing Hiring Risk

Risk management in hiring

The cost of a bad hire gets a lot of press. The recruiting costs, the lost wages, the cultural impact, the replacement time, etc—all of these things are clearly bad things. We and our clients go to great lengths to minimize these costs, but there’s another side of the coin that doesn’t get enough attention. What is the cost of the great hire that you don’t make?

Every now and then, we come across a job for a new client that has been open for 9 months. Those of us in recruiting knows what that usually means—unrealistic expectations or a job that doesn’t really need to be filled. In some rare instances, we come across a company where there are multiple jobs that are open for 9+ months. This is a company that is negatively impacting its core business by not incorporating hiring risk as a reality.

I’ll use an analogy from my investment banking days—credit risk. There is an optimal level of risk in any securities portfolio—loans, equity, whatever. The riskier the loan, the more money the bank makes from it. The more secure the loan, the less money you make. If you are looking at a group of loans, you know that some of them will not be repaid. I remember talking to one of the grizzled credit guys one day (the guy that decides the riskiness of the loan and how to price it), and he mentioned that the bank’s portfolio didn’t have enough defaults over the last 6 months. He explained that if there aren’t at least some defaults, it means the bank isn’t taking enough risk and reaching the optimal risk/reward ratio.

This is the counter point to the sub-prime mortgage debacle, where the banks were taking too much risk and screwed up the equation in the other direction. What most people don’t realize is that neither scenario—too much risk or not enough risk—is the optimal balance for the business.

If you don’t make an occasional hiring mistake, chances are it’s not because you are just really, really good at interviewing. There’s a better probability that you are missing out on some great talent because you are scared to make a hiring mistake. Simply put, your human capital loan portfolio is not optimized. You may be avoiding the costs of a bad hire, but you may also be bleeding the company via key roles that sit unfilled, unrecognized opportunities from passed over candidates and the strain on your existing employee base of carrying too heavy a workload.

Every company has an optimal level of hiring risk, and it’s not zero

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