Research continues to point to an increase in the time it takes employers to fill open positions. On average, it took employers 29 working days to fill vacancies in 2016, with nearly 60 days for engineering and other technical roles. There are a number of reasons for this trend, including less available talent, increased recruiter workloads, and cautious decision making as managers try to avoid hiring mistakes or keep interviewing until the “perfect” candidate finally comes along. Regardless of the reason, as the time-to-fill measure drags on, so does the price tag associated with that unfilled position, also known as the Cost of Vacancy (COV).
Vacancies create a number of costs, including lost production, inconsistent client delivery, departmental and cross-departmental disruptions, and ultimately, diminished revenue. There are also less-tangible costs. Departments that are perpetually short-staffed can become plagued with burnout, reduced quality, and morale issues – potentially leading to even more turnover.
Most managers know the issues that open positions cause within their departments, yet quantifying those issues can often be daunting. Determining the cost of a vacancy can help decision makers focus vague notions of impact into financial realities.
To truly assess COV requires in-depth analysis and examines both direct and indirect costs tied to an open position, such as gaps in leadership, operational deficits, and damaged customer relationships. These analyses can be complex and time-consuming, yet important for key positions. While it may be impractical to calculate the true COV for each vacancy in an organization, there are several relatively simple methods for estimating the financial impact of an open position that can be generally applied:
Lost Revenue Formula – used for revenue generating positions such as sales or billable professionals:
Daily Cost of Vacancy = Annual Revenue Generated by the Typical Person in that Position
220 Annual Working Days
Average Revenue for a Lost Employee - when data is not available on the revenue potential for a specific position:
Daily Cost of Vacancy = Annual Revenue ÷ 220 Annual Working Days
Number of Employees
Salary Multiplier of Lost Revenue – grounded in the premise that every employee contributes financially to the organization above what he or she earns (the “salary multiplier”). Used when data is not available for a specific position:
Salary Multiplier = Annual Revenue ÷ Annual Payroll
Number of Employees Number of Employees
Daily Cost of Vacancy = Salary Multiplier X Salary of the Position
220 Annual Working Days
Simple Salary Multiplier of Lost Revenue – based on research that shows that individual employees contribute between one and three times their salary in value to the organization. The finance department can provide insight on what this multiplier should be:
Daily Cost of Vacancy = Simple Salary of the Position
Salary X 220 Annual Working Days
Once the COV has been calculated, the resulting data can be used for a variety of purposes, including workforce planning, financial justification for re-filling positions, and underscoring the importance of efficient recruitment processes and of equipping recruiters with necessary tools.
Of course, there is much more to effective hiring than doing it quickly. Making a poor hiring decision can ultimately be more costly than not filling the position at all. Understanding the cost of a position being left unfilled; however, gives employers a much clearer view into the impact on the organization and bottom line, and underscores the importance of filling the position with the right person as quickly as possible.
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