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Estimating the Financial Value of Staffing-Assessment Tools
Here is an explanation of some good formulas you can use to measure the return on investment of an assessment tool. The formulas will help you gauge the impact of a bad hire, a good hire, turnover, and a more efficient staff.
By Dr. Charles Handler and Dr. Steven Hunt
 t’s tough to determine the precise return on investment provided by the
use of assessment tools. Though it’s problematic to estimate the actual value
of a good hire--or the cost of a bad one--there are formulas available that will
help.
Such tools are most effective for jobs with large annual hiring volumes or
high levels of turnover, or in cases in which the financial value of performance
is high. That’s the amount of revenue generated by a single employee, a figure
often assumed to be about 2.5 times the average employee salary.
In general, staffing-assessment tools are used for jobs with high turnover or
growth, or where the difference between low and high employee performance has a
major impact on the company’s bottom line. Many of the jobs that meet these
criteria are either high-volume hourly positions in manufacturing, retail, or
customer service, or high-impact positions such as first-line supervision, store
management, sales, information technology, and senior leadership.
Determining how much to budget for the use of assessment tools
Costs for staffing-assessment tools fall into two general categories: initial
setup costs and ongoing or "per usage" fees. Setup costs depend primarily on
the nature and design of the assessment tools, whether customization will be
required, what technology will be used, the need for hiring-manager or recruiter
training, and the number of candidates to be assessed. For common jobs that
don't require highly specialized skills, it may be possible to set up a simple
but effective "off the shelf" assessment system for less than $20,000.
On the other hand, a highly tailored, validated, Web-enabled assessment
system can easily exceed $500,000 in development and deployment costs. When used
to support high-volume or high-impact positions, these tailored systems quickly
return this initial investment through increased employee performance, tenure,
and staffing efficiency.
Vendors offer a wide variety of costs and pricing structures around ongoing
or "per usage" fees. Fees typically range from as little as $3 per candidate
for simple prescreening measures to more than $500 per candidate for job
simulations or talent assessments. Unlimited-use licenses are also an option for
high-volume staffing processes. Per-usage prices are constantly changing as the
market evolves, and ultimately the only way to ensure a fair price is to shop
around.
ROI to expect from the use of assessment tools
Most companies do not track data at the level of detail needed to compute the
ROI generated by staffing-assessment tools. This includes how differences in
employee performance affect profitability, the true cost of turnover caused by
work-flow disruptions, and loss of intellectual capital, or staffing costs.
Without this data, it is not possible to calculate the exact value of assessment
tools. Nevertheless, some estimate of ROI is needed to generate a business case
for the use of assessment tools. The following spreadsheets can help in
estimating four types of ROI provided by assessment tools:
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The value of better hiring decisions
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The value of avoiding "catastrophic" hires
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The value of reduced turnover
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The value of increased staffing efficiency
The spreadsheets include some "industry standard" estimates in case you
do not have access to all the data required to compute the ROI.
Spreadsheet #1: ROI Provided Through Better Hiring Decisions
The main value of assessment tools comes from improving the average
performance of newly hired employees. Imagine the impact if the average
performance of each employee in your company improved by 5 percent. Extensive
private and public research has shown that well-designed staffing-assessment
tools can provide such results.
The following spreadsheet estimates the potential ROI to be gained by using
staffing-assessment tools to increase employee performance. Note: The ROI
estimates provided by this spreadsheet may seem unrealistically large. However,
they accurately reflect the long-term impact that assessment tools can have by
improving the average performance of an entire workforce.
You will need the following data to use this spreadsheet:
Hires (N)
The number of people hired per year due to growth and turnover for the
position(s) for which you are using assessment tools.
Tenure (T)
The average number of years that employees work in the position(s). Indicate
tenure using decimal values (e.g., if the average tenure is 9 months, set this
value at .75).
Value of High Performance (Zx)
The differences in revenue generated by high- versus low-performing
employees. This is commonly set at 40 percent of the average employee salary.
Increased Hiring Effectiveness (rxy)
An estimate of how much the use of assessment tools will improve the quality
of hiring decisions. Effectiveness ranges from 0 (random hiring) to 1.0 (perfect
hiring).
Accurately calculating hiring effectiveness is a highly complex mathematical
task. However, the table below can be used to calculate a very rough estimate
for this value.
To calculate Increased Hiring Effectiveness, subtract the effectiveness of
the assessment methods you are currently using from the assessment methods you
are considering deploying. For example, if you currently use Unstructured
Interviews (effectiveness of .02) but are considering using measures of Ability
(effectiveness of .25) and Personality (effectiveness of .15), then the
Increased Hiring Effectiveness would be equal to (.25 + .15) – .02 = .38.
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Assessment Method
|
Effectiveness
|
Cost
|
| Random Hiring
|
0
|
0
|
| Unstructured Interview
|
0.02 |
$50
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| Structured Interview
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0.10
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$75
|
| Knowledge & Skills Tests
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0.15
|
$50
|
| Talent Measures:
Workstyle/Personality
|
0.15
|
$75
|
| Talent Measures: Ability
|
0.25
|
$75
|
Note: This table provides only assessment tools designed to predict superior
performance. It does not include assessment tools that add value primarily by
reducing administrative time (e.g., qualifications screens) or reducing the risk
of catastrophically bad hires (e.g., background verifications).
Per Usage Assessment Cost (Cy)
How much the use of assessment tools will increase the cost of evaluating
candidates. Rough cost estimates are provided in the table above. The costs of
interviews in this table are associated primarily with time spent by recruiters
and hiring managers conducting the interviews.
Selection Ratio (SR) (default value: 5)
The number of candidates you typically assess before making a hiring
decision. It is usually somewhere between 3 and 10. If you do not have this
statistic, we suggest setting it at 5.
Formula 1: ∆$performance = [(N) (T) (rxy) (Zx)] – [(N)(Cy)(SR)]
Spreadsheet #2: ROI Provided by Avoiding Catastrophic Hires
Although good employees can be a company’s greatest assets, the wrong
employees can be a company’s largest liabilities. Certain assessment tools
such as drug screens and background checks reduce the risk of hiring employees
who may engage in counterproductive activities such as theft, violence, or
sabotage. The following spreadsheet estimates the savings associated with using
assessments to avoid hiring individuals who are likely to engage in
counterproductive activities. You will need the following data to use this
formula:
Hires (N)
The number of people hired per year due to growth and turnover for the
position(s) for which you are deploying the assessment tools.
Cost of Bad Hire (CBH) (default value: $7,500)
The average loss incurred by hiring an employee who engages in theft or other
counterproductive behaviors. It should include legal and security fees incurred
as a result of counterproductive behavior. We have conservatively set this value
at $7,500, based on retail theft statistics.
Percentage of Catastrophic Hires Avoided (HA) (default value: .05)
The percentage of candidates screened out through background checks who would
have engaged in employee theft had they been hired. Industry statistics suggest
that around 10 percent of background verifications uncover something
substantially negative about candidates. If we estimate that half of these
candidates would in fact engage in counterproductive behavior, this value can be
set at 5 percent.
Assessment Cost (Cy) (default value: $45)
How much the use of assessment tools will increase the cost of evaluating
candidates. Most background checks and drug screens cost between $25 and $100,
with an average probably around $45. It is assumed that these assessments are
conducted late in the staffing process as a final check prior to employment.
Saving due to Assessment = (N * CBH * HA) – N*Cy
Spreadsheet #3: ROI Provided by Reduced Turnover
Many assessment tools are specifically designed to help organizations reduce
turnover. When designed properly, these tools can reduce turnover by 10 percent
or more. This spreadsheet estimates the financial value of using assessment
tools to reduce turnover. You will need the following data to use this formula:
Hires (N)
The number of people hired per year for the position(s) for which you are
deploying the assessment tools.
Annual Turnover Rate (TR)
The percentage of the workforce that currently leaves each year due to
turnover.
Average Time to Fill (TF)
The average number of weeks required to fill a vacant position.
Value of Performance (VP)
An estimate of the cost of the annual revenue generated by employees in this
position. This is commonly set at 2.5 times the average employee salary.
Hiring Cost (HC) (default value: $3,000)
The average costs associated with hiring an employee. These include time
spent by recruiters and managers sourcing and screening candidates, time and
expense invested in training new hires, and any coming-on-board costs such as
relocation or orientation. Industry studies place typical hiring costs at $3,000
for hourly employees and $10,000 for exempt employees. We have set the default
value at $3,000.
Assessment Cost (Cy) (default value: $30)
How much the use of assessment tools will increase the cost of evaluating
candidates. The cost of assessment measures specifically designed to reduce
turnover commonly ranges between $10 and $75, depending on the design. An
average cost might be set at $30.
Selection Ratio (SR) (default value: 5)
The number of candidates you typically assess before making a hiring
decision. It is usually somewhere between 3 and 10. If you do not have this
value, we suggest setting it at 5.
Value of Reduced Turnover = (N * TR * ((TF * VP)/52) + HC) * .10) – (Cy *
SR * N)
Spreadsheet #4: ROI Resulting from Reduced Administrative Costs
Perhaps the most visible short-term benefit of using assessment tools is the
reduced administrative time spent screening candidates. The following
spreadsheet gives a very general estimate of ROI provided by reducing
administrative costs.
You will need the following data to use this formula:
Hires (N)
The number of people hired per year for the position(s) for which you are
deploying the assessment tools.
Time Spent with Candidates (TC)
Average number of hours spent evaluating candidates who are not hired. This
includes time spent reviewing résumés, coordinating and conducting interviews,
and holding recruitment conversations.
Average Cost of Recruiting Time (RT) (default value: $50)
Estimate of the hourly cost of recruiters and hiring managers who spend time
with unqualified candidates. An average cost for this factor might be $50 per
hour.
Hiring Cutoff (HC) (default value: .50)
The number of people who will pass the assessment tool you use. The actual
number depends on a lot of factors, but might be set at 50 percent for the
purpose of this exercise. This would mean that the assessment tools would screen
out half of the candidates because of failure to meet key job requirements.
Assessment Cost (Cy) (default value: $20)
The degree to which the use of new assessment tools will increase the costs
associated with assessing candidates. Most reductions in administrative costs
come from the use of relatively inexpensive prescreening questionnaires. An
average cost for these might be set at $20.
Selection Ratio (SR) (default value: 5)
The number of candidates you typically assess before making a hiring
decision. It is usually somewhere between 3 and 10. If you do not have this
value, we suggest setting it at 5.
Value of Reduced Admin = (N * TC * RT * HC * SR * .50) – (Cy * SR * N)
Workforce Online, March 2003 -- Register Now!
Dr. Charles Handler is the president
and founder of Rocket-Hire, a
consultancy dedicated to helping organizations use technology and best practices
to build effective, legally sound employee selection systems. Before
founding Rocket-Hire, Dr. Handler spent almost a decade developing and
validating employee selection systems for a wide variety of jobs in a number of
settings including, retail, manufacturing, telecommunications, high-tech, and
public safety. Dr. Handler is an
internationally known thought leader in the development of
online screening and assessment technology.
Dr.
Steven Hunt is a strategic human resources consultant specializing in
technology enabled methods for hiring, developing, and retaining high performing
talent. He has helped clients implement a variety of Web and PC-based
staffing systems including applicant tracking and pre-screening systems,
employee reliability and customer service measures, predictors of culture fit
and retention, interactive job simulations, and assessments of leadership
potential.
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