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1 A White Paper by Taleo Research Contact for Taleo Research: Yves Lermusiaux ext Contact for Taleo: Lisa Hartley ext Analytics and Strategies for Global Workforces

2 Table of Contents Executive Summary...1 Introduction...3 I. How Does Talent Acquisition and Mobility Impact a Company s Economics?...4 II. Corporate Spend on Talent Acquisition Labor Costs Expenses Process Leaks... 7 a. Inefficiencies linked to labor costs... 8 i. Inefficiencies in requisition management...8 ii. Inefficiencies in sourcing...9 iii. Inefficiencies in screening and assessment...9 b. Inefficiencies linked to expenses i. Search firms...10 ii. Advertising...10 iii. Relocation...11 iv. Additional Expenses / Missed Opportunities...11 a. Internal mobility b. Tax credits III. Full Scope of Economic Impactof Talent Acquisition Time to Contribution a. Time to Full Productivity b. Quality of Workforce c. Productivity Improvement Potentials Faster time to start Faster ramp up time Greater productivity Cost of a bad hire Turnover a. Explicit Costs of Turnover i. Separation...19 ii. Replacement...19 b. Productivity Loss c. Intellectual Property Loss d. Reduction in Costs Associated with Turnover Risk of Non-compliance a. Equal Employment Opportunity Reporting Contingent Workforce a. Cost of Procurement of Contingent Workers b. Co-employment i. Co-employment risk reduction...25 c. Contingent Workforce Management Programs Summary of Value Wasted...26 How Taleo Optimizes the Talent Supply Chain...28 About Taleo Research...30 About Taleo...30 Appendix A: Detail of Labor Costs of Talent Acquisition Direct Talent Acquisition Costs Indirect Talent Acquisition Costs Appendix B: Turnover Calculation...33 Appendix C: Key Financial Concepts...34 Definitions of Common Financial Metrics Limitation of a Purely Cost-driven View of ROI... 36

3 Executive Summary The economic impact of talent acquisition and mobility on an organization is enormous, yet not captured in most technology and process improvement ROI studies. The Hidden ROI of Talent Acquisition and Mobility provides a full understanding of the costs related to talent acquisition as validated by Taleo Research studies and the opportunities for cost reduction and improved corporate performance. The first, familiar category of corporate spend on talent acquisition includes internal labor costs and expenses. Opportunities for improvement include: 4Reduce HR staff and hiring managers time spent on activities such as requisition management, sourcing, and screening, and assessment. 4Reduce expenses through streamlined processes for search firms, advertising, relocation, and internal mobility. 4Capture all available tax credits through an integrated, efficient technologysupported process. The second, less familiar category is the impact best practice talent acquisition has broadly throughout the enterprise. This paper provides evidence that talent acquisition and mobility can contribute both significant costs and substantial enterprise-wide returns. For example: Time to contribution is impacted by both productivity and quality. 4Reduce the time to fill a vacant position to gain productivity faster. 4Improve the onboarding process to reduce the time to contribution for a new employee. 4Increase the quality of the workforce through an effective hiring process that leverages assessment tools, to reap more productivity in the short and long terms. Turnover costs include separation and replacement costs as well as productivity loss. 4Reduce separation and replacement costs by increasing selective internal mobility and avoiding unnecessary severance payouts. 4Reduce productivity loss by having a faster time to fill to ensure knowledge transfer and reduce vacant positions. 4Reduce intellectual property (IP) loss by making sure full time employees (FTEs) are hired and retained for sensitive positions instead of contingent workers. Have non-compete agreements in place if employees leave. In addition, substantial savings can be realized from mitigating risk of noncompliance with regulations. 1

4 Finally, this paper includes a discussion around the procurement and management of contingent workers. In addition to articulating hard and soft costs, Taleo Research finds: 4In many companies, the responsibility for contingent workforce management crosses departments such as HR, procurement, finance, and legal or does not reside in any one department, limiting the potential for accountability and savings. 4The contingent workforce is largely unregulated. Companies found to have misclassified independent contractors expose themselves to co-employment risk and are liable for huge fines and payments. 4A comprehensive vendor-neutral technology and services solution can leverage volume discounts and enforce rate agreements and similar tactics to reduce costs and create value. Understanding and being able to calculate total corporate spend and opportunity costs of talent acquisition and mobility clearly much greater than traditional cost per hire metrics enables executives to articulate its significance to the overall corporate budget. The Hidden ROI of Talent Acquisition and Mobility is the culmination of years of work and many ROI engagements. For additional information or consulting in this area, please contact us on our website at 2

5 Introduction The right people at the right time in the right job. To put this in perspective: At Bank of America, we have $28 billion of non-interest expenses. Of that, $15 billion is related to personnel everything from salaries, incentive plans and fringe benefits to talent retention programs and risk management strategies. If you can effectively manage those dollars, trying to get as high a return on investment as possible, then you approach the opportunity a lot differently. Source: Is Your HR Department Friend or Foe? Depends on Who s Asking the Question, August 10, 2005 Simple to the point but very hard to achieve. All organizations today are driven by people; 57 percent of the US GDP is spent on workforce related expenditures. 1 Workforce related expenditures are the most significant portion of spend for most organizations, so understanding where the investments are made, what form the investments take, the economics of their impact, and how to best optimize these resources is key. A multitude of activities, people, and resources contribute to new talent acquisition and the mobility of current employees. Each resource allotment has an associated expense and yield. Fundamental recruiting costs are obvious, such as the expenditure on job board advertising and the salaries paid to corporate recruiters. However, a more comprehensive analysis of the return on investment (ROI) of talent acquisition and mobility reveals hidden costs and broad economic impact as well as fresh opportunities for improvement and better returns from the corporate workforce. Through its research division, Taleo Research, Taleo has categorized and validated the value achieved from implementing best practice talent acquisition and mobility processes in more than 200 enterprise talent management implementations. Drawing on that expertise, the Hidden ROI of Talent Acquisition and Mobility provides a guide for all executives interested in leveraging talent management as a competitive advantage. The true costs and returns in the process to hire new employees, move employees within an organization, and procure contractors are dissected in this paper. For additional insight, case studies and real examples are included that show the direct effects of an optimized talent acquisition process on an organization s bottom line. According to the US Department of Commerce s Bureau of Economic Analysis, the amount spent on US labor in 2004 was approximately $6.6 trillion, or 57 percent of total gross domestic product. 3

6 I. How Does Talent Acquisition and Mobility Impact a Company s Economics? Talent acquisition and mobility have a much broader impact than is often recognized. Hiring employees or bringing in new contractors involves more than the time and attention of the HR department and hiring managers. The influence and economic impact of talent acquisition and mobility has a rippling effect throughout an organization, which, when quantified, shows substantial value. This paper begins by examining the typical acquisition cycle and the leaks inherent in the business process. Cost exposure including risk is specified at each step. The impact an optimized process can have on an organization in terms of better productivity, reduced turnover and higher quality of output is described as well. Areas of impact in two major categories are discussed: 1. Corporate spend on talent acquisition, which includes labor costs and expenses customarily included in the HR budget. These costs are generally familiar and directly quantifiable. 2. The full scope of economic impact extends outside of the traditional HR budget to capture the impact talent acquisition activities produce enterprisewide. Productivity and quality, turnover, risk, missed revenue or tax credit opportunities, and workforce management are all factors here. The HR budget in large companies represents a very small percentage of the overall operating budget. Budget line items are usually straightforward. Yet, as is validated in this paper, the economic impact that talent acquisition and mobility has on an organization is enormous, and much larger than the HR operating budget. A full understanding of the costs related to talent acquisition in the HR budget requires a detailed examination of the corporate spend, although that is limited in scope. Once that is clarified, a broad view of the full economic impact is meaningful. 4

7 II. Corporate Spend on Talent Acquisition Corporate spend on acquiring talent is relatively easy to measure. This is primarily because the bulk of it comes directly from designated budgets with clearly identified accountability either the HR budget, the hiring department budget, or even procurement if that department owns contingent labor procurement. 2 Even so, while broad categories of spend for things such as recruiting agency fees or advertising costs can be measured, most companies are hard pressed to identify the total corporate spend on talent acquisition per new hire, especially for mobility of existing employees and procurement of external contractors. Corporate spend on talent acquisition and mobility is defined to include the following two categories: 1. Labor costs (in terms of FTEs). 2. Expenses (costs directly associated with talent acquisition, other than internal labor costs). Corporate Spend on Talent Acquisition and Mobility (not a comprehensive list) Corporation Spend on Talent Acquisition and Mobility 1 2 Labor costs Expenses (internal and external) Recruiter FTE Talent Specialist FTE Hiring Manager FTE Online / offline advertising Search firm Background check and assessment Referral bonuses Relocation Source: Taleo Research 2 Contingent labor: Temporary workers, professional contractors, and professional services workers are generally categorized as contingent workers. 5

8 1. Labor Costs Talent acquisition costs come into play when a new position is being filled for the first time as well as when an existing position is refilled due to turnover or when employees are switching jobs within the organization. To avoid double counting, start by focusing specifically on hiring for new positions. 3 Labor-related cost is further divided into direct and indirect talent acquisition costs. 4Direct talent acquisition costs are defined as those labor costs in terms of FTEs that are directly tied to the HR department (HR recruiters, HR specialists, share devoted of HR generalists, HR admin, etc.). 4Indirect talent acquisition costs are defined as those labor costs that are used in the talent acquisition process, but not directly through the HR Department (the hiring manager, procurement department, etc.). Measuring the costs associated with both direct and indirect labor costs for talent acquisition requires a clear understanding of the time equivalency of internal resources expended on the effort. Typically, activity-based costing can make the most accurate estimations. A fully loaded FTE cost inclusive of salary, bonus, and an appropriate burden amount should be used for each resource involved. See Appendix A for Detail of Labor Costs of Talent Acquisition. The chart below provides an overview of a typical staffing supply chain. See Turnover section for corporate spend on replacement positions and the economic impact of lost productivity of the departed employee, an element not included in this section. 6

9 2. Expenses Talent acquisition expenses include the costs incurred in the talent acquisition process not related to internal labor costs. The list of discretionary spend items that companies incur in the talent acquisition process is extensive, and includes categories such as: 4Advertising (print, broadcast, Internet, events) 4Travel 4Agencies and search firms 4Relocation 4Assessment and test fees 4Signing bonuses 4Reference and background checks 4Opportunity cost of lost tax credits 4Referral fees 4Talent management software Some of these costs are more transparent to the total cost of talent acquisition than others. Discretionary costs are rarely rolled up in total or as line items to meaningful levels that can be applied to actual staffing activities or outcomes. 3. Process Leaks Process efficiency leaks can occur as a result of activities between departments, within the HR department or also in connection with external providers. A number of touch points, integration, and re-entry points in the talent acquisition process can be assessed for their contribution to the overall efficiency leakage. In today s organizations, no one person or department is generally held accountable for the total cost for talent acquisition and mobility. The leaks in the talent acquisition process are often not well minimized due to minimal motivation and lack of ownership to improve the effectiveness of investments spent on resources. Better processes, clear ownership, and integration can minimize efficiency leaks. The leaks can be evaluated in terms of labor and unnecessary expenses. The total economic value of process efficiency leaks related to talent acquisition is arrived at by combining the cost associated with the inefficient application of internal labor with the inefficient use of discretionary spending (e.g., search firms, print, or online advertising) along with a cost measure for two significant areas of often under-leveraged opportunity: internal mobility and tax credits. 7

10 Inefficiencies in Labor-related Talent Acquisition Processes Sourcing Significant sourcing costs can be wasted due to the lack of a formal sourcing strategy Paper-based or based employee referral programs add to the complexity of the most important sourcing tool Requisition Management Collaboration and decisions are difficult to manage Routing requisitions for approval in hard-copy or is slow and not tracked Response Management Candidate data stored in different formats, locations, and storage types is cumbersome and costly Documents may be lost in the inter-office paper shuffle Source: Taleo Research a. Inefficiencies linked to labor costs i. Inefficiencies in requisition management There are obvious sources of process inefficiency in the requisition management process. If hiring requests are made via ad hoc phone calls, face-to-face meetings, and paper or forms, then requisition management is usually primarily paper-based or -based, with manual verification of information and ad hoc application of business rules. Consequently, there will be very little consistency across the organization concerning skills and competencies required for job positions. Unnecessary cost will be incurred through the time spent in this part of the process. A requisition approval process that lacks workflow automation will also be slow and unresponsive and expensive. Some organizations have as many as six approval levels needed for a job. In an environment where controls are not in place, hiring managers may use contractors that are not approved, pay unjustified premium rates, or simply not leverage preferential rates with preferred suppliers. Regardless of the level or number of approvals required, companies may incur a significant loss in terms of time if the approval process is not automated, with the appropriate proactive auto-notifiers or escalation options. 8

11 ii. Inefficiencies in sourcing Inefficiencies can also be found in time consumed by HR personnel and hiring managers during the sourcing process. A lack of digital integration with media sources and a cumbersome identification process from an existing candidate pool will cause delays. For example, much time can be wasted by having to manually sift through paper or resumes received in the past, or by ineffective key word searches of poorly architected electronic databases to find candidates who might match the requirements. The ability of a company s staffing supply chain to move job postings out to media suppliers quickly and efficiently is severely hampered if paper-based or manual steps are involved. Ideally, job postings to the desired audiences whether it be through the company intranet site, the external corporate careers website, or public job posting boards occur automatically out of the requisition database when the status of the requisition changes to approved. Similarly, the removal of job postings should occur automatically, and in real time, according to the status of the requisition in the requisition database. System automation for tasks including job posting and unposting, along with database mining diminish the allocation of labor for non-value added steps and activities in the sourcing process. iii. Inefficiencies in screening and assessment Recruiters and hiring managers can spend a significant amount of time sifting through resumes without automated prescreening tools to help them quickly identify the initial short list of candidates. Historically, the largest block of time in the hiring cycle has been devoted to sorting and ranking of candidates based on reading and reviewing resumes. Online pre-assessment tools accelerate the filtering process, by eliminating from consideration those candidates who do not pass a minimum threshold score in the pre-assessment screen. Unqualified candidates are automatically filtered out not on the basis of their resumes but on the basis of a self-administered online test or questionnaire. The short-list creation activities in the recruiting process are streamlined. Significant amounts of time can be saved on each job requisition, allowing the recruiter to focus time and attention on the more promising candidates. Time can also be saved through integrated assessments, and integrated background checking. In addition to eliminating duplicate data entry, integrated offerings and efficient workflow provide needed data more rapidly, enabling recruiters and hiring managers to compress time associated with the process. Further efficiencies can be realized through the ongoing interview process if valuable information on candidates is captured in a central repository and made available to the appropriate audiences, along with a tailored interview guide. 9

12 b. Inefficiencies linked to expenses i. Search firms Many companies still have manual processes in place to source candidates, handle resumes, and track applicants. In such environments, it is nearly impossible for recruiters to share information about candidates or to access information about previous candidates. This lack of information visibility often causes companies to spend more on costly and time-consuming external sourcing activities such as external recruiting through third-party agencies. UnitedHealth Group Industry: Healthcare Revenue: $37.2B Number of employees: 29,000 UnitedHealth Group, a Fortune 100 company and innovative leader in the health and well-being industry, provides healthcare related products and services. UnitedHealth Group undertook an initiative with Taleo to free HR from the burden of administrative transactions, improve productivity, and contribute to the bottom line. Results include: 4Saved nearly $5 million in agency fees. 4Reduced advertising spending by $2 million. 4Increased volume of yearly new hires from 130 to 185 per recruiter. Some organizations source nearly 100 percent of their new external hires through agencies while others use virtually no agencies for sourcing. Search firm fees typically come out of the budget of the hiring department, and therefore, can be transparent to an organization through its HR department s accounting of talent acquisition costs. Typical search firm fees cost an organization from 15 to 35 percent of a new employee s base salary. Spending on agency fees can be controlled by automating agency management. Job requisitions viewed by agencies can be limited, and duplicate candidates who have already submitted a profile without agency affiliation can be automatically flagged. Efficient collaboration with agencies throughout the process, including clear identification of candidates referred by agencies, complete access to all candidate information and history by all approved parties, and automatic notification and correspondence throughout the process can optmize the value derived from fees paid to third-party agencies. ii. Advertising Advertising spend is a common source of maverick spend within a company. Offline/online advertising spend decisions are often times made on a blind basis with no idea of how much return on investment one is likely to get. Without the proper control over this type of spending, sourcing decisions are made at the moment of need based merely on previous advertising venues or on anecdotal results. Today, the capabilities of online tracking provide insights on past channel performance. Systems can not only monitor the volume of resumes received but also the number of hires by source and the long-term performance of employees per source, ensuring the ability to strategize on high return sources. Companies can also practice a cost-effective sourcing method by posting all job positions to the corporate website. The traffic to corporate sites provides a valuable source of candidates, and comes at a minimal cost compared to the exposure offered by job boards and other sourcing media. 10

13 iii. Relocation Relocation costs are incurred when a company has to extend its reach to identify qualified candidates. Relocation costs typically include the extensive cost of moving an individual, and possibly the family, including: 4Home sale or lease cancellation fees. 4House hunting and temporary living. 4Equity advances or bridge loans. 4Closing costs on destination residence. 4Transportation of household goods including vehicle shipment. 4Storage of household goods. 4En route or final move expenses. 4Spousal or elder care assistance. Specific searches of corporate candidate databases may instead identify a local best fit candidate. Effective database searches can be designed to mine local candidates first by zip or postal code or commuting distance from the hiring site, alleviating the need to absorb relocation or transfer costs. iv. Additional Expenses / Missed Opportunities Two very important areas of opportunity related to the talent acquisition process internal mobility and tax credits are the final topic for inefficiencies linked to expenses. While not generally considered an expense, underutilization or poor application of an internal mobility program triggers the necessity to incur direct expenses related to sourcing and acquiring talent from outside the company. Likewise, underutilization or poor application of a tax credit program means the loss of potentially significant tax credits or offsets. Companies should evaluate their current effectiveness in managing both types of programs. After all, in a nominal sense, the economic value of a dollar of missed tax credit is equal to the value of a dollar spent on recruiting fees. a. Internal mobility All throughout the talent acquisition process, extra costs will mount without a streamlined and efficient workflow. Another example of waste is not leveraging a formal internal redeployment process for internal hires. In addition to the added costs of searching for candidates outside of the company, strong internal candidates may be precluded from the selection process, limiting a fair and objective competition for the position. Paper still persists in the response channels of many corporate internal mobility programs. Paper processes are not scalable, difficult to share across the enterprise, and lack a common format for assessment. Poor visibility into internal opportunities makes it easier for employees to find jobs outside a company than inside. Uses of the corporate intranet for posting job opportunities and receiving applications from employees reduces discretionary spend related to external hiring. An internal mobility initiative results in direct cost savings through lower sourcing costs with no third-party agency fees or advertising, and a reduction in staffing department labor. Time spent screening applicants is much lower with 11

14 internal candidates. Internal mobility initiatives also reduce peripheral staffing expenses, such as signing bonuses, relocation expenses, and onboarding costs. Severance payments as well may be avoided by employee redeployment rather than separation. When the corporate internal mobility process is optimized, corporations can shift resources within the company to where they are most suited without the costs and delays of a conventional, external recruiting process. Internal mobility initiatives result in cost avoidance for corporations by increasing retention. Turnover is costly to an organization and has a negative impact on productivity. Productivity ramp up and time to contribution is faster for redeployed internal employees. b. Tax credits In most countries, nearly every company hires employees that qualify for some form of tax credit. Tax credits generally available at the national, state, and local levels range from hiring certain classes of disadvantaged people, to revitalization tax credits tied to geographies or industries. For example, in the US, more than 150 employment-related tax credits are available to encourage employers to hire certain qualified individuals. Tax credit programs are generally divided into different groups, such as screening credits, which are primarily created to encourage and/or reward employers for hiring individuals from targeted groups. Zone-based tax credits are based on employee and/or employers physical location(s). The total benefit of these tax credits is significant, with companies earning an average of $1,500 per qualified employee per year. Generally, about 6 to 12 percent of a large employer s new hires will appear to qualify for a tax credit. Therefore, on average, a company with 8,500 employees and a 25 percent turnover rate could gain nearly $300,000 in tax credits per year. Broadly speaking, there are four general groups of tax credits: screening, zonebased, job creation, and training incentives-based tax credits. The familiar Work Opportunity Tax Credit (WOTC) is a good example of a screening tax credit. WOTC is an incentive the government provides to businesses for hiring economically disadvantaged individuals or those with barriers to employment. Under WOTC, and the similarly structured Welfare-to-Work Tax Credit programs in the US, companies may claim up to $8,500 per employee in potential tax credits and can directly subtract the credit from any amounts owed to the IRS. Unused tax credits can be carried forward to future tax years. Regrettably, many companies do not take full advantage of available tax credits. Historically, the processes to research, identify, and implement tax credit programs have been the domain of a company s tax department, yet typically not at the top of its priority list. There are a myriad of tax credit programs. Understanding the availability and the intricacies of each program requires some effort. Consequently, a tax credit program that is not automated represents a daunting process for most companies. 12

15 There are a number of touch points in processing tax credits that if not managed well can have a negative economic impact on a company. Many can be more effectively managed with the help of the right automated tools. For example, by integrating the tax credit screening into the electronic job application process, a company is guaranteed that all employees hired through the automated system are screened for tax credits. For each applicant not screened on the front end, there is the risk that some tax credits may not be captured. It is not uncommon for new employees and/or employers to learn of the eligibility of a candidate for various tax credits on a post-hire basis. However, the law requires the screening to be completed on or before the day of job offer. Specifically, the economic value at risk to a company from not having an effectively managed tax credit program in place includes: 4Increased paperwork and printing costs. 4Increased salaries paid for HR and operational personnel to oversee the tax credit process. 4Missed tax credits as a result of not complying with appropriate identification and tracking of qualified individuals. 4Missed tax credits as a result of not expanding the program to track all applicable tax credits. 4Increased tax and labor audit exposures by having weak or non-existent process controls. By implementing a talent management system that includes an integrated tax credit screening solution encompassing both pre-hire and post-hire automation paperwork and printing costs can be reduced by as much as 94 percent. When tax credit screening is delivered through a robust talent management system, HR executives have the opportunity to increase the positive economic impact to their companies by: 4Reducing the amount of time spent on tax credit processes. 4Expanding the number of tax credits claimed. 4Increasing the company s employment-related tax credits. These benefits can best be achieved when the tax screening functionality is seamlessly and deeply integrated into the system software. Today, with the development of automated talent management systems such as Taleo, companies can automate and streamline their hiring processes, including the tax credit process. 13

16 III. Full Scope of Economic Impact of Talent Acquisition The delineation of the corporate spend on talent acquisition deals primarily with hard costs and effectiveness leaks. Yet the full scope of how talent acquisition and mobility impacts a company s economic value is a second, powerful major area that has both significant costs to the organization and can provide substantial returns. 1. Time to Contribution Productivity of the workforce can be positively impacted through the following actions: 1) Shorten employee time to full contribution by reducing the time to start and onboard, or 2) Increase the quality of the overall workforce by hiring higher performing employees. Average time to contribution of new employees combined with quality of workforce drives a company s overall workforce productivity. A shorter time to contribution and a faster rate of acquiring full productivity combine for a greater economic benefit to the company. A longer time to contribution and a slower rate of reaching full productivity combine to increase the economic cost to the company. An HR executive can have a significant impact on the economic value created or wasted by taking specific steps to improve the time to contribution and the overall quality of employees hired by a company. a. Time to Full Productivity Time to contribution for a given employee is influenced by several factors including job complexity and current/past employment with the company. By default, all new employees are only partially productive during the ramp-up period. However, as employees spend more time in their respective jobs, their levels of productivity may develop at different rates. A slower time to contribution can have a significant negative impact on the overall productivity of employees, and ultimately a negative impact to the economics of a company. 14

17 Time to Contribution Productivity Level Full productivity 1 st day on the job Time to contribution Time to contribution is determined by several factors: - Aptitude - Prior experience - Job complexity - "Fit" One study measured the differences associated with time to contribution by measuring the time to full productivity and the rate of acquiring full productivity. Lowered productivity is referred to as lost output, or the opportunity cost of the lost output that would have been generated if the employee were fully productive. Study results calculated lost productivity due to learning curves total between 1 and 2.5 percent of revenues. 4 b. Quality of Workforce Time in Job Source: Taleo Research Quality of workforce refers to the quality of an employee s performance over the course of employment. Although seemingly an intangible, McKinsey s acclaimed War for Talent study crystallized the impact of quality performers. It found that in the opinion of senior managers, high performers outperform average performers by a wide margin. According to the study, high performers in operations roles are able to increase productivity by 40 percent more than average performers; high performers in management roles increase profits by 49 percent; and in sales positions, high performers are responsible for 67 percent greater revenue. Even without metrics, intuitively it is clear that absolute productivity is different between individuals. Productivity Level Productivity Difference Between Employees Full Productivity of Employee A Delta of Performance Between Employee A and Employee B Full Productivity of Employee B Time in Job Source: Taleo Research 4 Source: Mellon Learning Curve Research Study Results, June

18 Good People are Great for Business Mean of responses from 410 corporate officers How much more does a high performer generate annually than an average performer? 67% 40% 49% Increased productivity in operations roles Increased profit in general management roles Increased revenue in sales roles Source: McKinsey s War for Talent 2000 survey off 410 corporate officers at 35 large US companies Dow Industry: Science & Technology Revenue: $40B Number of employees: 43,000 Dow reduced cycle time by 50% and centralized staffing processes globally. As a Six-Sigma organization, Dow measured a 75% improvement in its staffing process Sigma through improved global staffing practices using Taleo, equating to approximately $93 million in value creation over five years, or $0.02 per share. c. Productivity Improvement Potentials 1. Faster time to start Assuming no capacity constraints, and equal employee quality, the output difference between two employees with different start dates is represented by the shaded area in the chart below. Productivity Level Faster Time to Start with Equal Productivity Full productivity Staffing cost reductions are calculated at nearly $10 million over five years, and productivity and retention increase values at more than $80 million over the same period. Hire Date for Employee A Hire Date for Employee B Time in Job Source: Taleo Research As the graphic illustrates, a productivity gain may be achieved by shortening the time to start the benefits of which accrue over the course of an employee s ramp up period. The graphic compares the differential in productive output between two employees of equal quality. The difference is the actual hire date, which is sooner for Employee A, hired in five days less time than Employee B. Taleo customers have achieved reductions in the time to hire process in the range of 19.7 percent 71.4 percent. This verifies the great potential that resides in this simple approach to optimize productivity. 16

19 Watson Wyatt s Human Capital Index (HCI) study found that successful recruiting is a strong indicator of higher shareholder value. Recruiting and retention excellence is, in fact, one of the strongest human capital management (HCM) practices and had a total impact on shareholder value by 7.9 percent. Furthermore, they noted that companies that filled positions within two weeks provided total return to shareholders (TRS) of 59 percent between 2002 and 2004, versus 11 percent at companies that required at least seven weeks to fill positions. 2. Faster ramp up time All new employees go through a learning curve during which they perform below the level of a fully productive employee. Employee learning curves represent the length of time required for employees in new positions to achieve full productivity, and the rate at which they progress towards full productivity throughout the course of the ramp up period. The following graphic shows the typical learning curve for a new employee. Productivity Level Productivity Gains Tied to Quicker Onboarding Process Time to Contribution of Onboarding Process #2 Time to Contribution of Onboarding Process #1 Full productivity shaded region represents the gained productivity Time in Job Source: Taleo Research It is fairly intuitive to recognize that productivity generated by filling a vacant position sooner will have a direct positive effect on the overall productivity of the company. It is somewhat more difficult to demonstrate the potential impact on an organization from hiring individuals that can achieve full productivity quicker. Several practices are available to impact faster time to productivity. First, a more effective onboarding process enables new team members to gain access to information, tools, and materials needed to perform their function more quickly. Second, the assessment and testing tools available today empower organizations to hire the best individual who will not only have the skills required to perform in the short term, but also have the behavioral and attitudinal traits that characterize the best performers in the position. 17

20 The combination of more effective onboarding processes with the use of appropriate assessment tools enables organizations to achieve a faster overall time to contribution rate for the employee base. CFO s View of Employee Quality Industry: Manufacturing Number of employees: 60,000 Revenue: $9.8 B. This multinational corporation generates about $5 dollars in revenue for every $1 dollar invested in labor. When the cost of materials for production is removed, every dollar invested generates close to $2 dollars in net contribution. At a new hire rate of 10% per year (6,000 new employees), and using a conservative 1% increase in output productivity by those new hires, the company realized an increase of approximately $3.0 million dollars in pre-tax profits, or 4% and a corresponding increase to earnings per share of 5%. 3. Greater productivity What is the level of investment a company makes with each decision to hire an employee? Although most companies cannot provide for a full accounting, it is obvious that the economic investment is very significant. Regrettably, many companies do not approach the acquisition of human capital with the same degree of thoroughness used to acquire hard assets. Nonetheless, employee-related expenditures are often the most significant cost a company bears. While talent acquisition processes can be more efficient, companies also need to focus on making the talent acquisition process more effective. Here, the quality issues are key both in initial performance and during long-term performance of the employee. Assessment tools are an effective way to improve the likelihood that hired employees have the required skills and talent, and that they will likely prove to be a good fit from a company cultural standpoint. In many markets, assessments are becoming increasingly important as a tool to help improve hiring decisions. Specialized assessments enable hiring managers to focus on best-fit candidates, streamlining the process and reducing the risk of making a bad hire decision. The fusion of the right technology with new insights on assessment best practices empower companies to bring the best thinking and tools for hiring people to the workplace, along with the best technology for executing consistently and efficiently. Cost of a bad hire can be more than sublevel productivity; it can directly affect brand equity. A well publicized case of a financial service company subject to fraud found that it failed to properly check the background of some of its associates during the hiring process. Similarly, a pizza delivery service incurred heavy business impact when a deliveryman who offended a customer was known to be a repeat offender, yet was not screened out during the hiring process. 4. Cost of a bad hire In the US, managers spent 13 percent of their overall time managing poor performers, which translates into 1.5 percent of the US GDP. In Hong Kong, it is even higher at 21 percent, equivalent to 3 percent of GDP. 5 The cost of a bad hire for a software engineer or biotech researcher can exceed millions of dollars. For a CEO, it could cost more than $1 billion in market capitalization. The risks and potential losses from making a poor quality hire stem from poor productivity and a reduced quality of output. Poor quality hires may result in poor customer service, which leads to revenue loss and even loss of market share. A workforce with a lower overall quality of employee takes longer to bring products to market, resulting in lost competitive advantage. The cost of goods sold is also higher, as the company has to contend with lower productivity. The costs of poor quality are sensitive to the position, increasing dramatically for key positions. In the retail industry, bad hires may result in excessive costs due to inventory shrinkage and loss of brand equity from poor customer service. The wrong hire may cost the company hundreds of dollars in employee theft, or millions of dollars in a liability suit from cases involving criminal actions. Having made the wrong hiring decision, a company may seek to cut its ongoing losses by replacing the employee. Replacement costs, including sourcing costs, 5 Source: Getting the Edge in the New People Economy, Future Foundation 18

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