Amazing how 2019 seems so long ago when the unemployment rate hovered comfortably in the mid to upper three percent range. Fortunately, the double-digit rates seen in mid-2020 seem to be past us. However, a labor market once defined as tight has now become an outright challenge as the volume of vacant positions continues to climb. The big question for many businesses is, what is an unfilled position really costing me?
While it can be simple to calculate the average cost of an unfilled position by the day or week, what can be more challenging is quantifying the value each employee has at an individual level. Unfilled positions take their toll in the form of fatigued employees, dissatisfied clients, and lost revenue. In simplest terms, vacant positions negatively impact the bottom line. And, given the economic climate, some organizations may be tempted to adjust and adapt to fewer employees.
Business leaders know they need to remain in a growth mindset to be competitive. So understanding the consequences of lingering unfilled positions is essential.
In the article, we’ll explain the real and implied costs of vacant positions and why maintaining your hiring momentum is still a better option than letting those open positions remain unfilled.
The Financial Costs of an Unfilled Position
It’s important to understand both your real and implied costs of employment vacancies because they impact your business in different ways. Real costs are easier to understand because you are dealing with factual numbers that have a direct impact on your business operations.
Calculating the real costs for most professional positions
The most straightforward method of calculating the cost of an unfilled position is to find your average daily loss when factoring your gross annual revenue and number of employees across the average number of working days in a calendar year. Then multiply by the time it takes to fill any vacancy.
Let’s use a business with 50 employees and gross annual revenue of $5 million. Dividing 5 million by 50 gives us an average revenue per employee of $100,000. Divide again by the average number of working days in a calendar year ($100,000 / 245 = $408). Then multiply by the average number of days to hire a new employee. Your average loss for an unfilled position in this simple example would be approaching $17,000.
We have to pause here for a moment to explain some of the figures used in this example. First, the number of working days in a calendar year. We started with the total number of weeks (52) in a calendar year, subtracted three weeks for holidays and vacations, and then multiplied by five working days each week. To make this calculation more accurate, you will need to adjust based on your PTO package and how that may vary by seniority and tenure.
Next, we used a LinkedIn study that analyzed 400,000 confirmed hires across fifteen industries to find the average time to hire. Sales and accounting positions were among the lowest at 38 and 37 days, respectively. Meanwhile, positions in finance and business development took almost two business weeks longer at an average of 46 days each. While we used an average of the reported industries, you will want to consult your records or review this study to see the average for the unfilled positions you have.
Finally, it is necessary to clarify the difference between time to hire and time to fill. Time to hire refers to only the time required for your hiring process and would include sourcing, recruiting, interviewing, and hiring a candidate. Time to fill encompasses that plus the time spent before your search begins for planning and clarifying your search needs, as well as the time required for your new employee to start and onboard into their new role.
This would include spending a week or two before you begin your search in earnest to clarify the role, expectations for the first year, and qualifications. Also, consider that new hires typically require a minimum of two weeks to offboard from their current employer before even starting at your organization. This may be even longer for some senior and executive-level positions. Don’t discount time to onboard your new hire either. They will need time to acclimate to your organization and to learn your processes. Meaning, they won’t be operating at their full potential immediately.
The reality is that whatever your time to hire period is, it could be doubled to accurately reflect your true time to fill. This makes the rounded estimate for the cost of an unfilled position of $17,000 likely half of the true cost, if not more. And that is for just one vacant position.
Calculating the real costs for revenue-generating roles
While this figure is likely to grab your attention, it also assumes that all roles contribute equally to your bottom line. What about vacant positions directly focused on driving revenue and developing business, such as a sales position?
The math involved is similar for calculating this potential cost, however, you probably should be sitting down first.
For revenue-driving positions, factor their contribution to your revenue by subtracting the annual compensation from the annual sales quota for the position you are evaluating. Now divide again by the average number of working days in a calendar year to find your answer. Then multiply by the average number of days to hire a new revenue-generating employee. Your average loss for an unfilled position that directly impacts your business revenue would be well over an annual salary. Keep in mind your time to fill may be even more delayed as a new producer will require more time to ramp up their sales pipeline.
The Implied Costs of Vacant Positions
Implied costs — the financial impacts that are hard to place a numerical value on — are just as impactful even though indirectly related to your bottom line. Yet in many cases, they may have larger associated costs.
We are referring to skills and qualities individual employees bring to the table for your organization that can act as multipliers in the equations above. The exact cost can be hard to calculate, but the impact is real and must be considered. Such unique costs can include:
Individual employee capabilities and knowledge
Organizational investment in training
Employee influence on other employees
Strong employee relationships with clients
In addition, if an employee takes their skills to a competitor the depletion can be compounded.
Consider for a moment an above-average salesperson leaving to work for a direct competitor. They take with them the value of at least a percentage of their book of business, their knowledge of your unique processes, their experience across industries and verticals, and their contact list of your partners, vendors, and other employees. The damage can be staggering.
Today’s employers must also consider the repercussions of employee turnover from a future recruitment perspective. For instance, one of the first things that happen when an employee leaves is that other employees must fill the gap left by their colleagues. This can lead to added stress, more work, tired employees, and diminished company culture. If the employee was a solid, respected leader, then the loss can result in disillusioned, unfocused teams. The company’s brand as an employer-of-choice will also be impaired as job vacancies continue or multiply.
Unfilled positions lead to a breakdown in communication between customers, partners, and team members. The result? Confusion, unhappy employees, angry customers, and lost revenue to name a few. Consider again the example of the salesperson who leaves to work for a competitor. If someone from your team doesn’t bridge the gap and stay in touch with the clients in their book of business, they run the risk of leaving — running right into the arms of your competition.
The Advantages of Maintaining Your Hiring Momentum
It doesn’t matter if the subject is exercise, locomotive trains, or hiring; maintaining a steady pace is always easier than starting again after a dead stop. Your acquisition costs and time commitments can be managed by the pace of your talent acquisition process.
Consider the following reasons how a continual hiring mode can benefit your organization.
It provides faster recovery after a position has been vacated because a continual hiring mode reduces that static time to fill period.
Your rate and risk of turnover due to employee burnout and frustration are reduced. It is much easier to support abandoned workloads temporarily than to accept them with no end in sight.
Continual hiring closes gaps in work inefficiencies that can decrease your market competitiveness.
It fosters proactive versus reactive hiring decisions. Don’t force your hiring managers and HR professionals to make snap decisions.
Ongoing hiring affords you the ability to maintain your high-quality standards in candidate selection rather than forcing you to hire out of desperation.
We do need to mention one very important note of caution though. Working to fill vacant positions does not mean rushing through the hiring process just to find a replacement. The cost of making a bad hire due to a rushed process or hasty decisions will cost you even more than leaving a position unfilled. You still need to follow a structured hiring process that clearly defines your talent needs.
Here’s the bottom line. Before you justify an unfilled position with the recovered costs of salary and benefits, think for a moment about what the vacancy might be costing you in the long run. Whether you realize it or not, the risks probably far outweigh the rewards. This is also why many organizations know that partnering with the right recruitment firm can help speed up and support their hiring efforts.