Who is making the decision the applicants you interview? If the person does not what it takes to be a great sales professional, you might be at risk of hiring poor performers, that usually ends in turnover eventually.
To compare in-house hiring vs. outsourcing, let’s break down the costs and risks of hiring in-house, particularly if the new hire turns out to be a poor performer and stays for 2 years.
1. In-House Hiring Costs
According to SHRM, the average cost to search and hire is about $2400. Our analysis breaks down these numbers to illustrate how these calculations can be delivered.
Recruiting Costs:
- Job postings: $600
- Resume reviews: 300 applications × 2 min = 600 min (10 hours) × $35/hr × 1.35 (benefits) = $472.50
- First interview calls: 25 × 20 min = 500 min (8.33 hours) × $35/hr × 1.35 = $393.75
- Second interview calls: 10 × 20 min = 200 min (3.33 hours) × $35/hr × 1.35 = $157.50
- Formal interviews: 6 × 1 hr × 2 managers = 12 hours × $45/hr × 1.35 = $729.00
- Total recruiting cost: $2,352.75
Salary and Benefits for 2 Years
For this analysis, we will use a $75,000 salary plus 35% benefits. Your situation could be higher based on the industry and type of products.
- Base salary: $75,000 × 2 years = $150,000
- Benefits: $150,000 × 1.35 = $202,500
- Bonus (assuming poor performance, no bonus paid): $0
Opportunity Cost of Poor Performance
We establish a benchmark for our target salesperson and the fictitious territory. This is for illustration purposes only. We will assume the territory will produce $1,000,000 per year in orders.
- If a good hire results in 5% growth on $1M revenue (+$50,000/year), and a bad hire results in stagnant or lower performance, assume only 1% growth (+$10,000/year).
- Lost revenue impact per year: $40,000 lost/year
- Lost revenue over 2 years: $80,000 lost
Turnover Risk (25% industry average)
- If they leave within 2 years, you need to restart hiring, adding $2,352.75 in hiring costs again.
- There’s also an empty seat revenue decline: If the position is vacant for 6 months (half a year), you risk a 1.5% revenue decline (-$15,000 impact).
2. Total Cost of a Lousy Representative for 2 Years
| Cost Component | Amount |
|---|---|
| Recruiting Costs | $2,352.75 |
| Salary & Benefits (2 years) | $202,500 |
| Lost Revenue Impact (2 years) | $80,000 |
| Turnover & Vacancy Cost | $17,352.75 |
| Total Cost | $302,205.50 |
Comparing to Outsourcing
An outsourced recruiter charges $25/hr.
- If they spend 100 hours to fill the role, the cost = $2,500.
- If the outsourcing firm guarantees performance, you avoid the $80,000 lost revenue risk.
- Even at $10,000 placement fees, outsourcing can be significantly cheaper if it ensures higher-quality hires.
Conclusion:
- In-house hiring can cost over $300K if you hire the wrong person.
- Outsourcing is cost-effective if it provides better quality hires with lower risk.
- If industry turnover is high (25%), optimizing hiring quality is critical.
Cost Comparison for Hiring Scenarios
(Over 2 Years)
The major question is who decides who should be interviewed among the 300 applications and resumes. The second consideration is timing. “A” players are not on the market very long. Taking 60 days may cause you to hire only the ones left in the pool.
- Excellent In-House Hire: $119,852.75
- Bad In-House Hire: $185,440.94
- Outsourced Hire: $120,000.00
Key Takeaways:
- A bad in-house hire costs nearly $65,588 more than an excellent hire due to lost revenue and turnover.
- Outsourcing results in a similar cost to an excellent hire, assuming better hiring quality.
- If outsourcing ensures a better-quality hire, it is the safer choice, preventing lost revenue.
ROI Comparison for Hiring Methods (Over 2 Years)
- Excellent In-House Hire: -16.56% ROI
- Bad In-House Hire: -89.21% ROI
- Outsourced Hire: -16.67% ROI
Key Insights:
- Bad hires are extremely costly, with nearly 90% negative ROI due to lost revenue and turnover.
- An excellent in-house hire and outsourcing yield similar ROI, but outsourcing reduces the risk of hiring a poor performer.
- A break-even or positive ROI requires additional sales performance beyond 5% growth or reducing hiring costs further.
Recommendations to Optimize Hiring Costs and Improve ROI
1. Reduce Hiring Costs Without Sacrificing Quality
✅ Use niche job boards & referral hiring
- Instead of posting on three general job boards ($600), focus on industry-specific job sites or leveraging employee referrals, which typically yield higher-quality candidates at a lower cost.
✅ Automate resume screening
- If 300 resumes take 10 hours to review, consider using AI resume screening tools or pre-qualifying questions to filter applications faster and save recruiter time.
✅ Streamline interview process
- Adding a quick pre-screening test or recorded video responses can reduce the first round of interviews from 25 to 15 applicants.
2. Improve Retention to Avoid Turnover Costs
✅ Target candidates with industry experience
- Hiring someone with a shorter learning curve increases early productivity, reducing lost revenue.
✅ Enhance onboarding & sales coaching
- If first-year performance is crucial, a structured 90-day training plan with milestone-based incentives can accelerate ramp-up time.
✅ Compensation & career growth transparency
- A competitive compensation plan tied to performance reduces turnover risk.
- Career path discussions during hiring show candidates the long-term value of staying, reducing churn.
3. Consider a Hybrid Approach
(Partial Outsourcing + Internal Hiring)
- Instead of fully outsourcing, consider using external recruiters for pre-screening and shortlisting candidates while keeping final interviews & hiring decisions in-house.
- This can reduce internal workload while keeping quality control over final hires.
Potential ROI Impact of These Changes
If hiring costs drop by $2,000 and revenue growth improves from 5% to 6%, the ROI could turn positive, making hiring a profitable investment rather than a cost burden.
Would you like me to model different revenue growth scenarios to find the break-even point?
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