While HR are people focused, often the C Suite are more focused on finance – and therefore want to know the financial return on everything. It’s widely accepted that a good background screening programme can add value to a business – this article focuses on how HR can quantify the financial value when requesting a budget for implementation.
To be able to accurately calculate the value of a background screening program, it’s first important to look at key areas where it provides benefits. One of these is reducing employee turnover. With replacing a bad hire estimated to cost around 100%-250% of an employee’s annual salary, expenditure in this department could be crippling to a business’s bottom line.
However, background screening can reduce turnover by identifying applicants with CV discrepancies, gaps in employment or even credit problems, for example –helping companies make smarter hiring decisions. By determining which data points are meaningful for an optimised workforce, companies can hire employees with a far lower likelihood of early departure, and drastically cut their employee turnover.
Occupational Fraud and Theft
Preventing fraud is another benefit that comes with robust background screening checks. Employee fraud and theft is a commonly occurring phenomenon. According to the Association of Certified Fraud Examiner’s(ACFE) Report to the Nation’s 2018, the annual global cost of occupational fraud is estimated to be a staggering £3 trillion.
Through successful background screening however, companies can better spot red flags that might otherwise go unnoticed. According to the ACFE Report, in 85% of fraud cases the perpetrator displayed at least one red flag that was not picked up on.
Workplace violence might be the harshest consequence of a bad hire, and its cost might reach far beyond litigation and company turnover. A criminal record check, employment verification and reference checks with former employers or supervisors can reveal possible risks and help organisations protect their people.
Calculating the Return on Investment
With the above in mind, it is possible to develop a monetary ROI value for background screening. In all cases, before making any calculation, you should first determine which costs are relevant to you. Each company will have different KPIs, costs, strengths, and weaknesses thatthey must focus on. There are industry average turnover rates, costs and revenue figures based on data collected in past studies that can help determine your final figure.
To understand further, let’s look at a fictitious example, Alpha Industries:
- Alpha Industries has 5,000 employees and a staff turnover rate of 5%, resulting in annual hires of 1,950 employees.
- The company grows by 4% each year, adding an estimated 200 more employees annually for a total of 2,150 new hires.
- It takes Alpha Industries approximately three weeks to fill a vacancy, and employees generate an average of £4,051 each in revenue per week.
- A bad hire, which is considered to be an employee dismissed for theft or fraud, costs the company £16,021, or 75% of the average salary. Approximately 2% of hires are dismissed for these activities.
- Hiring a new employee costs the company £1,982 plus a background check, which in this instance costs around £40. Alpha Industries screens two applicants per position.
If the company avoids bad hires and reduces its staff turnover rate by 15% as a result of a screening program, here is what its return on investment will look like:
Reduction of Staff Turnover
First, we can calculate how much Alpha Industries will save by reducing its staff turnover by 15%:
(Hires x Turnover %) x [(Weeks to Replace x Average Revenue per Employee) + Hiring Cost] x Reduction in Turnover:
= (2,150 x 37.5%) x [(3 x £4,051) + £1982] x 15%= 806.25
x £14,135 x 15% = £1,709,497
STEP 2: Cost of Bad Hires
Then, we calculate how much Alpha Industries spends on bad hires:
Hires x Cost of a Bad Hire x Percentage of Bad Hires = 2,150 x £16,021 x 2% = £688,894
STEP 3: Savings
From this, we can work out the savings achieved by implementing a robust background screening programme
Savings = Reduction of Turnover (£1,709,497) + Cost of Bad Hires (£688,894) = £2,398,391
STEP 4: Cost of Background Screening
After this, we need to factor in the the cost of the background screening programme:
Hires x Background Screening Cost x Number of Applicants Screened Per Position = 2,150 x £40 x 2 = £172,000
STEP 5: Value of Screening Programme
Finally, with this information, we can calculate the value of the screening programme andthe ROI.
(Savings – Cost of Background Screening) = £2,226,391
RETURN ON INVESTMENT = 1,294.41%
Make sure the shoe fits
Ultimately, while every business is structured differently and will have its own metrics to monitor, these formulas, based on industry averages, can be used by most employers to determine return on investment from a background screening programme.
Doing this will enable HR to visibly demonstrate value to the wider C-Suite, and enjoy the advantages of a robust employment screening program.