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The cost of a bad hire rarely impacts an organization, however, the value of a great hire can often transform an organization.

As executive recruiters, we hear about the “cost per hire” regularly. It seems like every time HR calls, this topic comes up. However, I would suggest that a far better discussion for HR to have is on the “value per hire.” Having this discussion not with recruiters, but with the CEO is a far more meaningful and beneficial discussion. It not only helps justify that HR contributes revenue and value to the organization, but it also brings HR in as a strategic partner.

This also goes for the CFO of the organization, who should work with HR to help determine a way to calculate the value of a hire.

A few years back I was sitting in the office of the VP HR when the CFO came by and stuck his head in to say hi. During the conversation he commented, “You know, over the last x years we have paid you over $300,000 for your services.” I think he was expecting me to be apologetic. I replied, “That is all? I completely agree with you that I have been grossly underpaid.” I don’t think this was the answer he was looking for. I continued, “Considering that you are now a millionaire, and the rest of the executive team I have placed here are also millionaires, and that the company went from $50 million in revenue to $250 million in revenue with a valuation close to $1 billion, I believe the fees I have been paid are justified by the value these people contributed to the company. Wouldn’t you agree?”

This isn’t about me. It is to demonstrate that even CFO’s don’t step back and recognize that for some expenses there is often a lot of value created for the company. If you de-humanize this concept, an employee is just another asset. Many often say the most “valuable asset” in the company. So, if employees are assets then shouldn’t the CFO be capable of calculating an ROI just like any other asset?.

Would this concept benefit HR as they justify the costs to acquire these assets? Isn’t it fair to look at both sides of the equation?

Employees are often described as “human capital” so some sort of return on capital doesn’t seem unrealistic. I’m not suggesting that the calculation is an easy one. I’m sure whoever first figured out how to calculate ROI had to tweak the formula more than once before getting it right, but just because it is difficult to calculate doesn’t mean it shouldn’t be done.

Defining success in the role before you hire a person is a good start. Our Success Factor Methodology recommends developing a job description that defines what great success is in this role. Basically, by the end of the first year what would this person have to have accomplished so that the hiring manager would consider this person not just a good hire, but a great hire. In our book, You’re NOT The Person I Hired, we refer to these as,  “Success Factors.” I believe this is the starting point in determining the value an employee brings to the company. Top talent in your company will hit these. The average will hit these some of the time and below average will rarely hit the success factors. Obviously, for different levels within the company the value added will change.

At least now the company is starting to look at the value a hire brings to the company and can start to assess the ROI.

To learn more about the Success Factor Methodology to help you attract, hire and retain top talent, check out our best selling book, You’re NOT The Person I Hired.

You can also begin implementing the Success Factory Methodology with our comprehensive hiring system. CLICK HERE to review.

I welcome your thoughts, comments and feedback.

Brad Remillard

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Lora Bentley spoke with Amanda McPherson, marketing and developer programs VP at the Linux Foundation. She and two colleagues recently released a new paper, “Estimating the Total Development Cost of a Linux Distribution.”

Bentley: Your study found that it would cost $1.4 billion for a company to build the Linux kernel from scratch today, and $10.8 billion to build an entire Linux distribution similar to Fedora 9. Can you explain how you reached those figures?
McPherson: The conclusions were reached by using David Wheeler’s well-known SLOC tool, SLOCCount, which makes use of the industry standard COnstructive COst MOdel (COCOMO). This methodology takes into account lines of code written, the appropriate number of labor years, and salary adjustments for inflation. We wanted to come up with a real number based on the one thing you can quantify in open source — code. We used a well-regarded methodology and tool that had been used before. Instead of making random projects, we thought this was the best way to approach it.

Bentley: Why the Fedora community distribution and not another?
McPherson: Fedora is the basis for Red Hat Enterprise Linux, which represents a large percentage of the Linux market. This provided us with a very relevant model to assess. Also, David A. Wheeler had used Red Hat for his study in 2002. OpenSuse and Debian/Ubuntu would, of course, also be great targets for this study. We may do that at a later date. We also would like to use an embedded distribution.

Bentley: What do or should these findings mean to proprietary software vendors?
McPherson: I think it means the future of software development is collaborative. These systems have grown so powerful and so important that for any one company to fund the development on its own would be a foolish and possibly financially untenable decision. Software development today actually requires collaboration in order to innovate at the pace the market demands. Consider devices like the Kindle and Gphone. They wouldn’t likely be available today were it not for the billions of dollars worth of R&D that they can use from the Linux kernel. You see companies like Intel using Linux and open source components in the Moblin project to expand the use of netbooks running its products. Intel could instead develop proprietary software in-house to meet this need, but why would they when they can make use of billions of dollars of free R&D? Things have changed since the desktop computer revolution.

Bentley: Don’t many proprietary software vendors recognize the value of open source now given that so many use open source in some way or another?
McPherson: Absolutely! You can also look at our “Who Writes Linux” report to see that hundreds of companies support Linux development directly. This study shows that those companies (such as IBM, Intel, Red Hat, Novell and HP) have made a very smart decision. They can fully participate in a large ecosystem and make use of free R&D without having to shoulder the burden all alone.

Bentley: So why is a study like this one helpful?
McPherson: Sometimes it’s easy to take a ubiquitous piece of technology for granted, especially one you can use for free. I think it’s not just Linux we take for granted: Just imagine the R&D value of the Internet itself and what that means for our economy. Compared to that, Linux seems small, yet when you think about all the innovation it’s powered or is powering, you start to get the idea. I honestly can’t imagine where we would be if Google had had to pay a company a per-server fee for its servers. I do not believe the economics would have been there to build out the powerful search network that we all use everyday. This study makes us appreciate the sometimes-unheralded piece of software and the license that has powered this innovation.

Bentley: Do the findings have added significance in light of the current economic climate?
McPherson: I think so. Linux has always been a lower-cost alternative to Windows, but this report illustrates its economic impact on technology innovation. It’s exciting to see how the collaborative development model is fueling a new category of devices and technologies that would be at least a decade into the future if it weren’t for Linux. Let’s remember that in software, time is money; oftentimes time is more important than money. For a company like Google or Intel to be able to make use of this code that has taken years to develop, drives innovation and keeps costs low for consumers.