We are in the risk management business for reducing cost of sales turnover due to poor hiring decisions. I was just reading through a magazine that listed the top 500 Largest Sales Forces in North America. The total number of sales people employed in these top 500 firms is a staggering 21,300,000 people.
We know that organizations today – specifically in their sales force – have turnover numbers ranging from 5% to 30% (some even higher). I started to do the math on the cost of the bad hiring decisions in these top 500 Sales Forces. The numbers start to boggle the mind.
Let’s assume that the turnover rate for this example is at the lower stated rate of 5%. At a 5% turnover rate 1,000,000 sales people leave their jobs each year. If the turnover rate was increased to 10%, 2,100,000 salespeople will move.
We know that turnover in sales departments is sometimes good for all parties involved. However, when the turnover is due to poor hiring decisions then each company takes significant risk on their bottom line.
If we focus in on these 500 firms and we take the 10% turnover rate of 2,100,000 and assume that a conservative 30% of these salespeople are leaving due to a bad hiring decision, this would bring the “bad hiring decision” turnover rate to 630,000 sales people. Now, let’s input a conservative cost on this turnover. This turnover cost will vary depending on the level of the sales role, however, for this example we are going to assume a very conservative cost of $30,000 per bad hire. In many of these firms a bad hire will be 2 to 20 times this stated cost. The cost of sales turnover can be tremendous.
The end result for poor hiring decisions in these 500 firms is a staggering $18.9 Billion – that is with a “B” for Billion.
So, does cost of sales turnover hurt organizations and the economy? From the numbers produced in these firms the answer is clearly “YES”.
There are too many “calculators” that claim to assist a
sales manager in understanding the real cost of turnover in a sales department. The main fault in these “calculators” is overloading the sales manager with insignificant cost factors compared to the total cost of the bad hire. If we applied the 80/20 principle to the cost of your sales turnover, we would say that simply looking at your opportunity cost of hiring the wrong sales person is all you need to have a good handle on your costs related to making a poor hiring decision.
Forget the recruiter’s fee, the cost of interviewing the candidate, performing reference checks and other cost related to turnover costs. These cost are important but they have no comparison to the real cost of the bad hire.
Simply calculate the quota you assign to the new sales person and compare this number to the actual achieved sales results during their time with you. An example would be a sales person with a quota of $1,000,000 and their sales results being $650,000 for a specific timeframe. Forget about any other cost! In this case, the minimum cost to the organization for making a poor hiring decision is $350,000 (1,000,000 – $650,000). We really do not need to be too concerned about the recruiter’s $15,000 fee or related training cost. Bottom line, the bad hire lost the company $350,000 of revenue! Plain and simple!
Next time you want to think about what your next bad sales hire is going to cost you, just think of the lost revenue compared to the projected sales for the department. This alone will spur you on to making sure you put all the right risk management tools in place when you perform your hiring tasks.