The cost of a bad hire varies by lots of different factors, including seniority, job title, importance to the business, geographic location, time spent to hire that person, and more. For two different roles in an organization, the cost of a bad hire might be drastically different. Still, we can try to figure out some math here.
The conventional approach is 30% of an employee’s first-year, pre-taxation earnings. To use simple math, let’s say a software developer was going to make $100,000 USD in his/her first year. If the hire turns out to be a bad one -- and roughly 4 in 10 new hires are considered the wrong hire by the 18-month mark -- that hire would cost you about $30,000. If you are a mid-size to big company making a lot of revenue, that might not feel like a lot -- but again, let’s say you make 10 bad software development hires. If you use the 30% math, now we’re at $300,000 cost.
And that’s just to start.
Let’s also say that the bad hires set back some of your current projects. So now the existing devs need to work on the set-back projects, so priorities are shifted all over the place. The backlog and the sprints become very messy. Business-critical projects may miss timelines. Now the $300,000 figure could be much higher, because if bad hiring impacts delivery and launch, you can lose partners and clients -- and now it can be into the millions of dollars.
You can think of the cost as less if you want. One survey by CareerBuilder found $14,900 is the cost of a bad hire. Again, it varies by position, seniority, geography, etc. There are also some numbers around lost productivity in EU countries based on bad hiring -- for example, German companies surveyed said bad hiring led to a 25% productivity decrease, UK 23%, France 15%, and so on.
This is all combined with ineffective leadership, which can cost companies $144,541.30 USD per day.
These numbers may sound small if you are generating $100MM+ in revenue, but they add up quickly -- and they also drive turnover, especially on software dev teams. If a few people end up doing all the critical work, they will get exhausted and burned out -- and eventually, they will look for greener pastures. Because they are talented (they just did all your critical work!), they will get hired and leave you with knowledge gaps. That is more cost.
You have basically three options:
Option (1 - Never hire anyone) is not possible. If you never hire, you never grow. If you don’t grow, you die. That is modern business in a nutshell. So (1) is out.
(2 - Get better at hiring) is a good option, but it’s very hard for companies. There is a lot of psychology and bias that goes into hiring. It’s hard to ever get it perfect. You may have luck with a few hires -- even a few hundreds -- but very few companies are consistently good at it. There are just too many inputs.
(3 - Hire some better and outsource critical projects) is the option most companies go with right now. They hire for some roles and do the best process they can. If some projects fall behind, or they need additional help, they bring in outsourced teams, consultants, contractors, etc. Basically they look for expertise elsewhere. This is a better cost position for the company. Ideally, they spend years working with the outsourced team or contractors, but if the relationship isn’t working, they can end it after paying the right amount of months or the amount remaining on the contract. It’s a much easier process of “divorce” than a full-time employee, and you are guaranteed a degree of expertise heading in -- you can even look at the past accomplishments of the team you will be working with (case studies, blogs, sample work, talk to others in the industry about them, etc.)
Especially right this second in business, with COVID-19, a lot of companies are (wisely) doing a hiring freeze. Hiring freeze + work still needs to get done + you need experts to get it done = the rise of outsourcing and bringing in extensions of your current team. (Here is some more on how our team extension model works.)
You are basically looking for a mix of expertise, background in certain projects, skill sets, flexibility, ability to work within your processes, and a cost structure that makes the best sense for you. For a look at all the potential factors to consider, consult this checklist: