It’s practically inevitable that a company will have at least one vacant position at any given time. This could be because an employee earns a promotion, takes a job at another company, or is terminated. Despite no longer paying the employee’s salary, the vacancy they leave behind doesn’t necessarily mean the company is saving money. Employment vacancies affect the business—both in terms of real dollars and team morale—should be a significant concern for every company.
The cost of vacancy, or COV, is an important metric we can use to determine the actual business impact of open positions in the form of dollars and cents. COV takes into consideration not only business impacts like the cost of lost productivity, but the gap between the time talent is needed and the time it takes the recruiting team to supply said talent.
So what’s the COV in your organization? Read on as we explore how much a vacant position actually costs and how those costs are measured.
WHAT ARE THE CONS OF OPEN POSITIONS AT YOUR COMPANY?
Vacant position costs can vary depending on a variety of factors. In general, they can be broken down into three primary categories, which we’ll cover here.
The Hard Costs of a Vacant Position
When you have a job vacancy, it means that the work that would have been completed by a person in that role still needs to be accounted for in some way. This can be done either by contracting the services of a temporary or contract employee, paying other employees overtime to help make up the work, or letting the work go unfinished.
There also is the concern of employee turnover costs, which include the additional expenses to source, attract and hire an employee to fill your vacant position. These costs include every aspect of hiring: marketing the role, onboarding, training, ramp-up time to full productivity, and business error rates resulting from a new hire.
The Soft Costs of a Vacant Position
Lost productivity is the most obvious example of a soft vacancy cost, but there are quite a few others. Additional vacant position costs that fall within this category include the negative impacts to employee morale, reduced quality of customer service, and harm to your company’s image or reputation in the eyes of customers and competitors from having a position sit open.
Lost Opportunities That Result from a Vacant Position
Finally, we must consider the lost growth opportunities that come from not having a person in a particular role. When productivity is down, it affects your bottom line in several ways.
Not only does it mean that you’re potentially paying extra money in overtime costs, but you’re also missing out on business and product development opportunities that you can’t take advantage of or explore with strained operations. This, in turn, thwarts your business’ growth and stifles its ability to scale.
HOW TO CALCULATE VACANCY COSTS FOR YOUR BUSINESS
The longer a position remains open, the more costly that job vacancy becomes. There are a few widely accepted methods we can use to evaluate the cost of a vacancy. For these examples, we’ll assume a hypothetical role with a salary of $50,000.
Simple Salary Multiplier
Research has shown that an average employee’s value to the organization is between one and three times their annual salary. Let’s take the middle ground and say that $50,000 employee brings the organization $100,000 in value every year.
If we divide their value by the 260—the average number of working days per year—we get a value of $384.62 per workday. That’s how much we’re losing in value for every day the position sits open. If it’s vacant for 35 days, which is roughly how much time it takes the average company to fill a position, that’s a total vacancy cost of $13,461.
This COV method works well for revenue-generating jobs like salespeople or loan officers. The principle here is that if there is a vacant job in a revenue-generating position, that revenue will be lost if no one is in that slot.
You can probably estimate the average yearly revenue generated by any given position (look at your sales targets for guidance on this). Let’s say the average outside sales rep generates $150,000 in annual revenue for your company. If we divide this by those 260 working days in a year, that’s $596.92 per day, or $20,192 total revenue lost for a 35-day vacancy.
This method can also be applied to non-sales roles by zooming out and looking at the average revenue generated by every employee. To get to this number, you’d divide your total profits for the year by your total number of employees. This gives you a ballpark of how your average worker translates in terms of revenue, which you can then use to calculate the lost revenue per day.
Budget Expenditure Lost Per Employee
We have yet another way to look at vacancy costs if we examine departmental budgets. The principle with this method is that if you don’t have an employee on the job every day, they can’t produce the value reflected in the budget allocated to them.
To use this method, we take a department’s annual budget and divide it by the number of employees in the department. This gives us the average budget expenditure per employee.
So, let’s say your marketing department has a total annual budget of $1 million and is staffed by 8 people. If we divide $1 million by 8, we find that each of those employees has a budget value of $125,000 to the department.
Once again, using 260 working days in a year, we can calculate that the lost budget value for every day an employee is not in a role is $480.76. If the role sits vacant for 35 days, that’s a total cost of $16,826.
Using the hypothetical examples we outlined above, we can see that our COV is anywhere from $380 to $600 per day—quite a hefty sum. And every additional day without a person in the role only multiplies the cost.
HOW TIME AND POSITION AFFECTS JOB VACANCY COSTS
Thus far, we’ve been using a standard time to hire, which is typically anywhere between four and six weeks depending on the industry. But some industries and roles take much longer to hire for, and this impacts your COV. According to research¹ from Deloitte, it can take 70 days to hire skilled production workers and more than 90 days to recruit highly skilled workers like engineers, researchers, and scientists.
Knowing that a $50,000 position that sits open for a month can result in more than $20,000 in lost revenue is rough. Now, imagine how much more it will cost your business to have a vacant scientist or engineering position that has a salary surpassing $100,000 and a high contribution to the organization’s output. You’re talking about a significant amount of potential lost productivity and revenue.
In short, the more specialized or advanced the position, the more it costs you on average to leave that position vacant.
PRODUCTIVITY COST CONSIDERATIONS
Not all vacancies result in a total loss of productivity—if you hire a temp to tackle some of the work, for example, or split it among other employees. However, you’ll need to consider the implications of these options as well.
A temporary worker will typically have lower productivity than someone who’s been given time to fully train and onboard into a role. If a manager is having to absorb some of the additional work, this means some of their time is taken away from higher-priority tasks, which also comes with a cost. Finally, consider the cost of any overtime pay if other regular employees are being tapped to tackle the additional workload.
HOW A RECRUITING AND STAFFING AGENCY CAN REDUCE THE COST OF A VACANCY
To minimize vacancy costs as much as possible, some companies choose to work with a headhunter or a professional recruiting firm like 4 Corner Resources (4CR) to help fill their open positions. A staffing agency helps large and small businesses meet their staffing needs and hire skilled workers faster by recruiting, screening, and placing the ideal candidates. Working with a staffing agency can result in reductions to your time to hire, cost per hire, and other key recruiting metrics that impact your overall hiring expenses.
4 Corner Resources is an award-winning staffing agency headquartered in Orlando, Florida. We serve businesses in numerous industries throughout central Florida and across the United States by offering a variety of direct-hire, contract-to-hire, and temporary staffing solutions to fit your needs. Whether you’re a small business looking to make strategic hires to help you grow or an enterprise-level organization needing to fill high-volume roles, we have a staffing solution to fit your needs and budget.
To learn more about how working with our team of staffing professionals can help you lower costs, keep morale high and hire the right candidate the first time, schedule a time to speak with us today.
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