Understanding the True Cost of Recruitment

Finding the right talent is crucial for any business, but for small and medium-sized enterprises (SMEs) in New Zealand, the true costs of recruitment can often go beyond the initial budget. While securing top talent is essential, understanding the hidden costs associated with the recruitment process allows SMEs to make informed decisions and optimise their hiring strategies.  

This guide looks into the various cost factors involved in hiring the best candidates for your NZ business, helping you navigate the recruitment process efficiently and cost-effectively.  

Defining recruitment costs 

Recruitment costs are the expenses involved in finding, hiring, and onboarding new employees into your organisation. These can be direct costs, like recruitment agency fees, or indirect costs, like the time spent by hiring managers throughout the recruitment process.   

By understanding recruitment costs, both direct and indirect, you can gain a clearer picture of the internal and external financial impact of hiring new employees.   

Direct costs of recruitment 

Direct recruitment costs are the most apparent expenses associated with the hiring process. These include: 

• Advertising fees: Costs related to posting job vacancies on job boards, social media platforms, and industry-specific sites. 

• Recruitment agency fees: Expenses incurred if a company opts to utilise recruitment agencies, usually a percentage of the candidate’s annual salary for a successful placement. 

• Background checks and screening: Costs for conducting necessary background checks, reference checks, and any job-specific testing to ensure a potential candidates' suitability. 

• Recruitment technology and software: Investment in Applicant Tracking Systems (ATS) and other recruitment software to streamline the hiring process. 

• Travel and relocation expenses: Reimbursement for travel costs incurred by potential candidates or interviewers and potential relocation assistance for new hires. 

What are recruitment fees in New Zealand?  

Average recruitment costs in New Zealand can vary significantly depending on several factors, such as the industry, the level of the position being filled, the use of recruitment agencies and the recruitment process employed.   

For entry-level positions, costs might be lower, primarily consisting of advertising and administrative expenses. In contrast, executive or highly specialised roles could see significantly higher costs, incorporating executive search fees, extensive background checks and potentially higher advertising costs across specialised platforms.  

Typically, recruitment agency costs vary depending on their fee structures, like retained search, contingency search, or project-based fees. In New Zealand, these can range from 15% to 20% of the candidate's annual salary for permanent roles. For a mid-level position with an annual salary of $70,000, recruitment agency fees alone could range from $10,500 to $14,000. This does not include other direct and indirect costs associated with the recruitment process.  

Understanding recruitment agency fee structures 

This is crucial for budgeting and making informed decisions. Here's an overview of common agency fee structures:  

1. Retainer Fee: 

Agencies charge an upfront, flat fee for a specific period. This fee typically covers dedicated time and resources spent searching for and presenting qualified candidates, regardless of placement success. 

• Benefits: Retainer fees offer exclusive access to the agency's expertise and resources throughout the search period. This can be beneficial for complex or niche positions where a dedicated search is required. 

• Drawbacks: Retainer fees are usually higher than other structures, and there's no guarantee of successful placement. 

2. Contingency fee: 

Agencies only receive a percentage of the new hire's first-year salary (typically 15-20%) if they successfully place a candidate. 

• Benefits: This structure minimises upfront costs for businesses as no payment is due unless a hire is made. This can be attractive for businesses with limited budgets or uncertain hiring needs. 

• Drawbacks: Agencies might prioritise filling the position quickly over finding the best fit, potentially increasing the risk of a bad hire. 

3. Hybrid Fee: 

This combines elements of both retainer and contingency structures. Businesses pay a smaller upfront fee that covers initial search activities, followed by a success fee upon successful placement. 

• Benefits: Offers a balance between cost and commitment. Businesses have some control over upfront costs while still incentivising the agency to find the right candidate. 

• Drawbacks: The success fee can still be significant, and the upfront fee might deter businesses on tighter budgets. 

4. Project-based Fee: 

Agencies charge a flat fee for specific tasks within the recruitment process, such as attracting candidates, screening resumes, or conducting interviews. 

• Benefits: Offers greater cost control and flexibility as businesses only pay for specific services needed. 

• Drawbacks: May not be suitable for full-cycle recruitment needs, and businesses might need to manage additional responsibilities outside the agreed-upon project scope. 

Additional considerations: 

• Some agencies might offer hourly billing, where businesses are charged for the time spent on recruitment activities. 

• Carefully review the fee structure outlined in the agency's contract, including success bonuses, termination clauses and any additional charges. 

Indirect recruitment costs  

Though less obvious, indirect costs can significantly impact the cost of the recruitment process. Things that can indirectly affect the recruitment budget can include: 

• Time spent: The hours invested by HR personnel and department managers in talent acquisition, including crafting job descriptions, reviewing applications, conducting interviews, and onboarding new hires. 

• Training and development: The investment in training new employees to reach full productivity levels, including orientation programs and any necessary skill training. 

• Opportunity cost: The potential revenue or productivity lost due to the vacancy remaining unfilled or the time spent by existing staff on recruitment activities instead of their core duties. 

• Cost of a bad hire: Hiring the wrong candidate can be detrimental, leading to low morale, decreased productivity, customer dissatisfaction, and potential retraining or replacement costs. 

• Employer branding efforts: A negative candidate experience can harm your employer brand, making it harder to attract qualified candidates in the future. 

Calculating the total cost of recruitment 

Understanding the true recruitment cost of a role goes beyond simply adding up agency fees or job board postings. Here's a step-by-step guide to help you calculate the total cost of recruitment for your New Zealand SME:  

Step 1: Identify direct costs 

• List all directly attributable expenses: This includes advertising costs, recruitment software subscriptions, agency fees, background checks, travel expenses for interviews and potential relocation assistance for new hires. 

• Gather concrete figures: Collect invoices, receipts, and quotes to accurately quantify each direct cost. 

Step 2: Estimate indirect costs 

• Time investment: Estimate the time spent by your team on tasks like writing job descriptions, screening resumes, conducting interviews, and onboarding a new hire. Assign an hourly rate to your team's time to estimate the cost. 

• Lost productivity: Consider the impact of vacancies on your existing team's productivity. Quantify this by estimating the percentage decrease in productivity and multiplying it by the team's average hourly rate and the duration of the vacancy. 

• Cost of a bad hire: While difficult to predict accurately, factor in the potential cost of a bad hire, including severance pay, training and development costs for the replacement and lost productivity during the search for a new candidate. 

Step 3: Calculate the total cost 

• Add up all the direct and indirect costs you identified and estimated in the previous steps. 

Step 4: Analyse the results 

• Compare the total cost of recruitment to the new hire's annual salary. This ratio provides a benchmark for future hiring decisions. 

• Identify areas for improvement: Analyse where the highest costs lie and explore strategies to optimise these areas. This could involve negotiating agency recruitment fees, leveraging free job boards, or investing in time-saving tools like applicant tracking systems. 

The impact of the job market on recruitment costs 

The current state of the job market in New Zealand plays a significant role in shaping the cost of recruitment for your business. Understanding whether it's a candidate-driven or employer-driven market is crucial to developing an effective and cost-conscious recruitment strategy.  

Candidate-driven job market 

In a candidate-driven market with more vacancies than qualified applicants, attracting top talent can be challenging. This competitive landscape often necessitates businesses offering competitive salaries and attractive benefits packages to stand out from the crowd. Additionally, investing in employer branding becomes crucial to cultivating a positive image and attracting qualified talent without relying solely on expensive advertising or recruitment agencies. These efforts, while essential in attracting top talent, can potentially increase recruitment costs compared to an employer-driven market.  

Employer-driven job market 

Conversely, in an employer-driven market, with a surplus of qualified candidates vying for fewer positions, businesses have greater leverage in talent acquisition. However, it’s important to maintain a fair and competitive recruitment process to avoid damaging your employer brand and potentially facing legal ramifications. While recruitment costs might be lower in such a scenario, neglecting ethical and fair practices can lead to long-term negative consequences.  

Strategies to optimise recruitment costs 

Understanding recruitment costs can be eye-opening, but it doesn't have to be daunting. By implementing strategic approaches, New Zealand SMEs can optimise their recruitment process, attract top talent, and maximise the return on their investment. Here are some practical strategies that can help you make recruitment more cost-effective while achieving your hiring goals. 

• Understanding recruitment fee structures: Before engaging recruitment agencies, it's vital to understand recruitment fees so you can compare suppliers and budget effectively. 

• Streamline the recruitment process: Utilising technology to automate parts of the recruitment process can save both time and money. 

• Build a strong employer brand: A positive employer reputation can reduce recruitment costs by attracting a larger pool of candidates organically. 

• Invest in employee development: Reducing turnover through career development opportunities can lessen the frequency and necessity of recruiting new staff. 

• Employee referral programs: Encouraging current employees to refer suitable candidates can speed up the hiring process and reduce advertising and agency recruitment fees. 

• Explore cost-effective alternatives: Leverage internal recruitment resources with existing employees or online job boards, which typically charge lower recruitment fees compared to traditional recruitment agencies. 

Making sense of the investment in quality recruitment 

Understanding the nature of recruitment costs enables businesses to make informed decisions and invest wisely in their hiring strategies. By balancing direct and indirect costs with strategic investments in technology, brand and employee development, companies can not only reduce expenses but also enhance the quality of their hires.   

The goal is clear: to view recruitment not just as a cost but as a critical investment in the future of your organisation.  

Expert HR and recruitment advice for New Zealand businesses  

For Kiwi businesses seeking to refine their recruitment process or explore innovative hiring solutions, our team offers expert advice and support tailored to your unique needs. Reach out today to transform your recruitment strategy into a competitive advantage.