The cost of a vacancy
It is important to calculate the cost of a vacancy in your business. Despite that it is a motivation to speed up the recruitment process, an open position has a significant impact on the business.
What most business leaders underestimate is the degree to which a vacancy harms their company. While direct costs are more tangible and easily understood, the opportunity costs and increased risk of a vacancy can be the silent killers.
Although most business owners and executives know that unfilled positions can hurt profit, few are able to quantify exactly how much these vacancies cost.
Known as COV or “Cost of Vacancy”, the selection and recruitment metric can help you recognize how much it costs to have a vacancy in your company.
The impact of a vacancy
A vacancy impacts a business in 3 significant ways:
1.Direct Cost of a Vacancy
Direct cost is the most tangible as it is the literal loss of revenue and productivity due to the loss of an employee. More on this later in the article.
2.Indirect Cost of a Vacancy
Indirect cost covers the effect a vacancy has on the department it occurs in, and the consequences of leaving the position vacant.
In particular, vacancies spark widespread apathy. As an indirect cost of a vacancy, apathy leads to employee disengagement, and eventually resentment. Employees working in an under-staffed department are often responsible for forming some temporary solution to cover the loss of productivity.
This increase in work decreases bandwidth and causes other team members to pick up the slack of those employees. While this solution may work for some time, it is far from sustainable.
Not only are employees affected, but managers leading perforated teams also have higher rates of stress, frustration, and resignation. In setting an environment of empty chairs, the workforce becomes disgruntled, overly critical of management, and apprehensive of the company’s long-term outlook.
In short, by leaving a position vacant, the potential for more vacancies to appear becomes significant. Says Adrienne Ervay from Search Solutions Group.
3.Risk of a Vacancy
Vacancies increase the risk from external forces a company faces. The loss of competitive advantage and potential loss of market share are components of risk, which is ultimately a cost of a vacancy.
Externally, a vacancy, when perceived by the market, will create a negative consumer perception, a decreased growth rate, and a loss in a competitive edge.
Customers are often directly affected by vacancies. As production time increases, communication collapses, or product stagnation sets in, which consumers are going to notice.
These factors lead to building a negative perception of the company. Changing that negative perception will become next to impossible to reverse. The loss of the company’s target market will, in a competitive market, quickly be converted by the company’s competition.
The loss of customers will have a direct effect on sales and moreover on growth rate. With a smaller base of revenue, there are fewer resources to invest in business growth. This cycle creates a negative loop damaging the company further with the loss caused by the vacancy.
Therefore, all these risks contribute to the cost of a vacancy.
How to calculate the cost of a vacancy
Grab your calculator!
We’ll use the following example, with round figures.
Company ABC has lost a Front-End Developer with an annual income of R 100 000. The total number of Developers in the company is 100 and they bring R 20 million in revenue. The HR department calculates they will need 60 days to find a replacement.
1.Determine lost revenue.
Start by calculating the average employee revenue (AER).
Annual revenue / Number of employees = AER
R 20 000 000 / 100 employees = R 200 000
Now, estimate the daily employee revenue. Assume 260 working days per year.
AER / Working days per year = Daily Employee Revenue
200 000 / 260 = 770 (using rounds numbers)
Therefore, Company ABC has a daily employee revenue of R770 for each of their Developers.
2.Determine the revenue of a specific role
Use a pre-determined multiplier. (Possibly talk to your finance manager to have a better perspective).
Use the following:
1 – for entry or junior roles
2 – for impact roles, like a salesman, developers, mid-level management.
3 – for leadership and executive roles.
In our example, we will use 2.
Daily AER * specific multiplayer = Specific Role Daily Revenue
R 770 * 2 = R 1 540
Therefore, the average daily revenue for a Developer in Company ABC is R 1 540.
Now, multiply this number by the number of days it takes to fill the vacancy. In our example it is 60 days.
R 1 540 * 60 = R 92 400
3.Determine the saving for not having a person in the role
Calculate the savings you have due to the fact you haven’t had to pay the employee salary and benefits (assume the benefits are 32% of the annual salary of the employee).
Annual salary * 0.32 = cost of benefits
R 100 000 * 0.32 = R 32 000
Salary + Cost of benefits = Cost of the Employee
R 100 000 + R 32 000 = R 132 000
Next, we want to know how much cost the employee in a day.
R 132 000 (cost of the employee) / 260 (working days) = R 508.
R 508 (Daily cost of the empoyee) * 60 (days we need to find another person) = R 30 480 saving for not having a person in the role for 60 days.
4.Calculate the Cost of Vacancy
COV = Salary and benefits savings – Revenue lost to vacant role
R 30 480 – R 92 400 = – R 61 920.
Therefore, the cost of a vacancy is higher than to fill the position.
How to avoid the cost of a vacancy
Apart from obvious solutions to avoid the cost of a vacancy, like speeding up the recruitment process, CoLAB Talent Placements has a solution aligned with the future of work: Appoint a contract worker.
As a business leader, you will have
- Flexible, off-payroll resource capacity that matches your need through contracting,
- High-performing people without the recruitment burden (we take the pile of CVs off your desk), and
- Reduced mis-hires through the temp-to-perm journey.
CoLAB Talent Placements provide high-performing contract resources to complement your current workforce. This gives you a flexible workforce to scale with your demand needs.
We help business leaders to
- Scale execution capacity with high-performing individuals,
- So that leaders can focus on driving strategic results,
- Without employing permanent resources.
Sounds good? Connect with us HERE, by setting up a quick chat about your resource needs.
At CoLAB we are easy to deal with, very approachable, and we are passionate about what we do!
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