For companies to thrive in today’s economy they need to maintain their competitive edge, which includes employing highly productive, well-intentioned, and motivated employees. Employing the wrong candidates can lead to monetary loss due to decreased productivity, employee attrition, and internal theft or fraud. Seeking replacements for these poor hires requires the expenditure of additional resources and takes managers’ attention away from other valuable tasks. The following paper offers a detailed discussion regarding the benefits of using a third party pre-employment screening solution, both in terms of reducing the costs of hiring the wrong people, and the return-on-investment (ROI) gained by employing the right people.

The cost of employee turnover is high, and most commonly is calculated at 150%i of the lost employee’s annual compensation. The average Canadian salary was $53,000ii in 2007/2008, resulting in an average turnover cost of $79,500 per employee. This cost is the result of many factors, including time spent to balance task management among remaining employees, overtime incurred to cover understaffing, the loss of job knowledge, the resources required to hire and train replacement, and productivity loss – it is not uncommon for new employees to have a productivity rate of 50%iii  that of existing employees.

The following example illustrates how implementing a pre-employment screening program through a third party will reduce employee turnover costs, and pay for itself several times over:

A company that hires 500 new employees annually without conducting background checks will likely hire at least 166 employees that would have had a ‘red flag’ revealed if a background check had been conducted. Assuming that these employees earn the average Canadian salary, the cost to turnover one employee is $79,500. If the company experiences a 10% annual turnover rate, 16 of the red-flagged hires will leave within the first year, amounting to an annual cost of $720,000.

By contrast, a comprehensive background check package, complete with a criminal record check, reference checks, education verification, and employment verification costs approximately $265 per employee, or $132,500 for 500 annual hires. The ROI based simply on the cost of turnover is nearly 10:1.

In addition to reducing employee turnover costs, the implementation of a proper background screening program will also reduce the cost of hiring the wrong employee. A background check can reveal many ‘red flags’, such as a candidate’s poor performance record at their previous place of employment, altercations with previous employers, past and present financial difficulties which may lead to internal theft or fraud, and even the existence of a criminal record. A thorough background check can reduce the likelihood of employing unqualified hires who take longer to learn the position and make costly mistakes even months after completing their training. When the wrong candidate is hired, the resources of experienced staff must then be spent on correcting these employees’ mistakes. Moreover, the cost of training can become a forfeited expenditure, should the new employee decide to leave the company prematurely. These indirect turnover costs further evidence the importance of making an educated hiring decision.

Another important factor to consider when screening candidates is their potential quality of hire return-on-investment (ROI). The first step in calculating the quality of hire ROI is to formulate a talent scorecard which measures incoming candidate quality, and secondly, formulate a means of converting this information into their potential financial contribution. A background check that includes reference interviews can aid hiring mangers in determining their candidates’ talent level. In the tableiv   below, employees are divided into five talent categories, and are assigned a financial impact factor. An employee who is categorized as talent level “A” recoups four times their annual salary, whereas an employee assigned to talent level “F” costs more to employ than they produce.

Why Choose a Third-Party to Conduct Background Checks?

Conducting background checks internally can be a time-consuming and costly endeavour. Human resource professionals and line managers have many duties beyond interviewing past employers and gathering information pertinent to the hiring decision. To balance their workload, the HR department or line managers often work overtime or seek to expand their full-time staff in order to meet the recruitment demands. By employing a third party to conduct pre-employment background checks, companies can take advantage of the economies of scale these specialized screening companies offer, as well as the improved turnaround times experienced from the leveraging of established relationships between HR and payroll departments and the screening provider. In short, the information can be expediently gathered and delivered at a reduced cost, allowing the company’s hiring managers and line managers to focus on other HR related tasks, while at the same time making informed hiring decisions.

Effectiveness and Completion Rates
Background checks are most effective when completed by a third party. The cost benefit of having a third party conduct these checks is twofold: firstly, the capacity of the screening provider is pivotal in reducing hiring delays, which in turn leads to faster profit procurement; and secondly, the amalgamation of unbiased candidate information allows hiring managers to objectively choose the best applicant. The hiring manager benefits from a larger pool of applicants to select from, as well as more time to ensure the proper hiring decision is made, thus increasing the potential ROI of the successful candidate.

Partnering with a third party screening provider also introduces an element of discipline and objectivity into the hiring process. Rather than relying on a manager or recruiter’s intuition, employers can obtain a neutral, thorough, and regimented assessment of each candidate. This removes the risk of making hiring decisions based on the inevitable biases that develop when interviewing a candidate. A qualified third party provider may also be able to keep the hiring manager updated in real-time via an online delivery system. Real-time results allow the hiring manager to keep up-to-date on missing information, red flags raised, and services as they are completed. Furthermore, liability concerns are diminished as the third party provider takes responsibility for the information gathered during the pre-employment screening process. This is one less risk for employers to consider in their risk assessment.

During these tough economic times it is imperative that companies cut costs while maintaining their competitive edge. One way to achieve this is by contracting a third party pre-employment screening provider, as this will lower a company’s cost of hiring while increasing the calibre of hires. As fewer poor hires are employed, the staff productivity and hiring ROI of new employees will both increase, thus creating greater profits for the company.

Tim Ansley is the director of marketing for BackCheck, which specializes in pre-employment background checks, including Criminal Record Checks, Credit Bureau Inquiries, Investigative Reference Checks, Employment Verifications, Education Verifications, and Driver Abstracts. With thousands of clients ranging in size from under 50 to over 150,000 employees, BackCheck is a leading provider of pre-employment screening.