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Estimating the Financial Value of Staffing-Assessment Tools

February 27, 2003
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It’s tough to determine the precise return on investment provided by theuse of assessment tools. Though it’s problematic to estimate the actual valueof a good hire--or the cost of a bad one--there are formulas available that willhelp.

    Such tools are most effective for jobs with large annual hiring volumes orhigh levels of turnover, or in cases in which the financial value of performanceis high. That’s the amount of revenue generated by a single employee, a figureoften assumed to be about 2.5 times the average employee salary.

    In general, staffing-assessment tools are used for jobs with high turnover orgrowth, or where the difference between low and high employee performance has amajor impact on the company’s bottom line. Many of the jobs that meet thesecriteria are either high-volume hourly positions in manufacturing, retail, orcustomer service, or high-impact positions such as first-line supervision, storemanagement, 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: initialsetup costs and ongoing or "per usage" fees. Setup costs depend primarily onthe nature and design of the assessment tools, whether customization will berequired, what technology will be used, the need for hiring-manager or recruitertraining, and the number of candidates to be assessed. For common jobs thatdon't require highly specialized skills, it may be possible to set up a simplebut effective "off the shelf" assessment system for less than $20,000.

    On the other hand, a highly tailored, validated, Web-enabled assessmentsystem can easily exceed $500,000 in development and deployment costs. When usedto support high-volume or high-impact positions, these tailored systems quicklyreturn this initial investment through increased employee performance, tenure,and staffing efficiency.

    Vendors offer a wide variety of costs and pricing structures around ongoingor "per usage" fees. Fees typically range from as little as $3 per candidatefor simple prescreening measures to more than $500 per candidate for jobsimulations or talent assessments. Unlimited-use licenses are also an option forhigh-volume staffing processes. Per-usage prices are constantly changing as themarket evolves, and ultimately the only way to ensure a fair price is to shoparound.

ROI to expect from the use of assessment tools
    Most companies do not track data at the level of detail needed to compute theROI generated by staffing-assessment tools. This includes how differences inemployee performance affect profitability, the true cost of turnover caused bywork-flow disruptions, and loss of intellectual capital, or staffing costs.Without this data, it is not possible to calculate the exact value of assessmenttools. Nevertheless, some estimate of ROI is needed to generate a business casefor the use of assessment tools. The following spreadsheets can help inestimating four types of ROI provided by assessment tools:

  1. The value of better hiring decisions

  2. The value of avoiding "catastrophic" hires

  3. The value of reduced turnover

  4. The value of increased staffing efficiency

    The spreadsheets include some "industry standard" estimates in case youdo 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 averageperformance of newly hired employees. Imagine the impact if the averageperformance of each employee in your company improved by 5 percent. Extensiveprivate and public research has shown that well-designed staffing-assessmenttools can provide such results.

    The following spreadsheet estimates the potential ROI to be gained by usingstaffing-assessment tools to increase employee performance. Note: The ROIestimates provided by this spreadsheet may seem unrealistically large. However,they accurately reflect the long-term impact that assessment tools can have byimproving 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 theposition(s) for which you are using assessment tools.

Tenure (T)
The average number of years that employees work in the position(s). Indicatetenure using decimal values (e.g., if the average tenure is 9 months, set thisvalue at .75).

Value of High Performance (Zx)
The differences in revenue generated by high- versus low-performingemployees. 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 qualityof hiring decisions. Effectiveness ranges from 0 (random hiring) to 1.0 (perfecthiring).

    Accurately calculating hiring effectiveness is a highly complex mathematicaltask. However, the table below can be used to calculate a very rough estimatefor this value.

    To calculate Increased Hiring Effectiveness, subtract the effectiveness ofthe assessment methods you are currently using from the assessment methods youare considering deploying. For example, if you currently use UnstructuredInterviews (effectiveness of .02) but are considering using measures of Ability(effectiveness of .25) and Personality (effectiveness of .15), then theIncreased Hiring Effectiveness would be equal to (.25 + .15) – .02 = .38.

Assessment Method Effectiveness Cost
Random Hiring 0 0
Unstructured Interview  0.02 $50
Structured Interview 0.10 $75
Knowledge & Skills Tests 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 superiorperformance. It does not include assessment tools that add value primarily byreducing administrative time (e.g., qualifications screens) or reducing the riskof catastrophically bad hires (e.g., background verifications).

Per Usage Assessment Cost (Cy)
    How much the use of assessment tools will increase the cost of evaluatingcandidates. Rough cost estimates are provided in the table above. The costs ofinterviews in this table are associated primarily with time spent by recruitersand hiring managers conducting the interviews.

Selection Ratio (SR) (default value: 5)
    The number of candidates you typically assess before making a hiringdecision. It is usually somewhere between 3 and 10. If you do not have thisstatistic, 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 wrongemployees can be a company’s largest liabilities. Certain assessment toolssuch as drug screens and background checks reduce the risk of hiring employeeswho may engage in counterproductive activities such as theft, violence, orsabotage. The following spreadsheet estimates the savings associated with usingassessments to avoid hiring individuals who are likely to engage incounterproductive activities. You will need the following data to use thisformula:

Hires (N)
The number of people hired per year due to growth and turnover for theposition(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 othercounterproductive behaviors. It should include legal and security fees incurredas a result of counterproductive behavior. We have conservatively set this valueat $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 wouldhave engaged in employee theft had they been hired. Industry statistics suggestthat around 10 percent of background verifications uncover somethingsubstantially negative about candidates. If we estimate that half of thesecandidates would in fact engage in counterproductive behavior, this value can beset at 5 percent.

Assessment Cost (Cy) (default value: $45)
How much the use of assessment tools will increase the cost of evaluatingcandidates. Most background checks and drug screens cost between $25 and $100,with an average probably around $45. It is assumed that these assessments areconducted 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 reduceturnover. When designed properly, these tools can reduce turnover by 10 percentor more. This spreadsheet estimates the financial value of using assessmenttools 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 aredeploying the assessment tools.

Annual Turnover Rate (TR)
The percentage of the workforce that currently leaves each year due toturnover.

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 thisposition. 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 timespent by recruiters and managers sourcing and screening candidates, time andexpense invested in training new hires, and any coming-on-board costs such asrelocation or orientation. Industry studies place typical hiring costs at $3,000for hourly employees and $10,000 for exempt employees. We have set the defaultvalue at $3,000.

Assessment Cost (Cy) (default value: $30)
How much the use of assessment tools will increase the cost of evaluatingcandidates. The cost of assessment measures specifically designed to reduceturnover commonly ranges between $10 and $75, depending on the design. Anaverage cost might be set at $30.

Selection Ratio (SR) (default value: 5)
The number of candidates you typically assess before making a hiringdecision. It is usually somewhere between 3 and 10. If you do not have thisvalue, 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 thereduced administrative time spent screening candidates. The followingspreadsheet gives a very general estimate of ROI provided by reducingadministrative 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 aredeploying the assessment tools.

Time Spent with Candidates (TC)
Average number of hours spent evaluating candidates who are not hired. Thisincludes 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 timewith unqualified candidates. An average cost for this factor might be $50 perhour.

Hiring Cutoff (HC) (default value: .50)
The number of people who will pass the assessment tool you use. The actualnumber depends on a lot of factors, but might be set at 50 percent for thepurpose of this exercise. This would mean that the assessment tools would screenout 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 costsassociated with assessing candidates. Most reductions in administrative costscome from the use of relatively inexpensive prescreening questionnaires. Anaverage cost for these might be set at $20.

    Selection Ratio (SR) (default value: 5)

    The number of candidates you typically assess before making a hiringdecision. It is usually somewhere between 3 and 10. If you do not have thisvalue, we suggest setting it at 5.

    Value of Reduced Admin = (N * TC * RT * HC * SR * .50) – (Cy * SR * N)

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