Human ResourcesRecruitmentSourcing

The Employee Referral Dilemma

By May 14, 2015 4 Comments

I was at a cosy little launch party last night, tucked away upstairs at one of my favourite craft beer haunts.  The company had started out sharing office space with my own business but had quickly outgrown the co-working concept and moved into their own digs.  Speaking with the company owner, he told me how they were already running out of space again and had quickly grown to a team of nine, with more to come.

Don’t worry, readers, I didn’t let you down.  After a decade of recruiting, I naturally asked him how he had found and hired so many so quickly.  I was awaiting the familiar grimace, with mention of hordes of agencies firing CV’s at him and him making expensively confused hiring decisions based upon which agency pushed hardest.

But no.  In fact he looked taken aback at the question, and said that they were all from recommendations from within the networks of existing staff members.  As if that were the most normal and obvious source of hire with the best likely outcomes.

The thing is, he didn’t even realise how right he was.  There’s been much said over recent years about the power of employee referrals and how they are far and away the top source of hire for companies.  In this oft-referenced article from Dr John Sullivan, he reveals some compelling statistics that point to employee referrals being the number one source of hire for hiring volume, quality of hire, time to fill, and employee retention.

Great for HR and in-house recruitment teams.

Terrible for recruitment agencies, something not lost on Xero CEO Rod Drury.  After experiencing two disastrous hires at an executive level recently, the Herald ran an article titled Xero changes recruitment tactics following departures:

“The mis-hires have prompted Xero to rely less on recruitment agencies for top executives and more on its own networks and shareholders…”

The article itself is actually quite disingenuous.  Xero have long made it clear that they’d rather avoid using agencies and have offered their staff referral bonuses of agency-fee-proportions for recommending people from within their own networks.  The stuff about recruitment only forms a lesser part of the overall article which is actually about their capital raising and impact foraying into the US market.  But, as we all know, everyone likes to take a pop at recruiters, and nothing gets as many clicks as an article promising to take pot-shots at recruitment.  And clicks are the lifeblood of The Herald, with print revenues plummeting daily.

But still, the message is clear, and it’s gathering in volume.  I visited a corporate client last week who have had great success with one of their Sales Managers referring his mates into sales roles, but the well has run dry.  In their own words, that particular channel had “run out of friends to refer” so they wanted the other Sales Managers to cotton on to it and behave the same way.

But what role should all of the agency recruiters out there take in this?  As is clear from comments above, employee referrals are bad for agencies.  They are the number one way that clients can avoid having to pay for agency fees.  Whilst in-house recruiter performance is measured on metrics like time-to-hire and quality-of-hire, areas where employee referrals excel, agency recruiter performance is measured on revenue generation and fees billed.  Yet the best recruiters out there spout rhetoric about wanting to partner with their clients, add real value to recruitment advice, provide a true consulting service.

Clearly, then, genuine advice should include consulting around the benefits of robust employee referral programmes.  But with the prevalent business model in recruitment based around charging referral fees contingent on making a successful placement, on a no-win no-fee basis, there simply isn’t room for providing this kind of advice.  Better to keep flicking off CV’s and hoping one will stick, while quickly changing the subject if clients start talking about employee referrals.

Or, perhaps, changing your model and charging for all consulting advice, not just when we get lucky with the right CV.  Now there’s a thought.

Jonathan Rice

Jonathan Rice

MD at New Zealand rec-to-rec firm Rice Consulting and co-founder of on-demand recruiter offering Joyn. Recruitment agitator and frustrated idealist, father of two, husband of one, and lover of all things Arsenal and crafty beer.

4 Comments

  • Avatar pk says:

    But agency recruiters are sales people. As much as they like to call themselves “consultants”, they are not. I wouldn’t trust many of the agency recruiters to give me any consultancy advice – if I want a consultant on recruitment/hr things then I would seek out a proper, experienced HR consultant.

    Jon – would you pay a real estate agent a retainer to try and find you a new home? No, you wouldn’t. Would you pay the guy trying to sell you the latest and greatest ATS a retainer? No, you wouldn’t. You pay them nothing until the deal is done.

    Recruitment “consultants” are, for the vast majority, sales people. Yes, there are a very, very small number out there who can be consultative, but it’s still consultative selling. None of them are going to provide advice on a way to not use them. If recruitment agencies want to be true consultants then I would suggest they need to sack 99.9% of their staff, and hire true, qualified and experienced consultants – NOT sales people.

  • Avatar Anon says:

    If more agency recruiters in NZ found candidates via referral instead of the overload of ads up on seek and trade me then they would have a better profit per placement figure AND they would actually be able to provide clients with the best candidates in the market and not just the best who applied. As a client I would also be happier paying them a fee if I knew that the extent of their work wasn’t writing a job ad, placing a job ad, going through aps, doing 2 interviews and sending a CV (plus of course hours on the phone talking rubbish to both candidate and client).

  • Avatar FirstTimeCaller says:

    Jon,

    Thank you for yet another well written and informative post.

    As an IT-wallah I find the intricacies of the HRM-world rather fascinating after I was introduced to it via the impassioned rantings of one Sean Walters. I work in Management for a rapidly growing local business and so find myself having to ‘do HR’ all the time. Recruitment, training, reviews, resource planning – the lot. So the Friday installment of sage (and often: sardonic) commentary provided here is a welcome break from my norm of contracts, code, project plans and specification documents.

    Now on to the point of my comment – the topic of this blog post is front-of-mind for me at the moment. I do believe that gaining an employee via referral is more likely to result in a quality outcome than other methods. From the outset that candidate is likely to be a good fit culturally as they already have one friend in the game. The candidate is motivated to do a good job and thereby validate their referee’s decision. And the referee is keen to prove that they nominated a quality candidate so will probably keep the pressure on outside of work.

    A good friend of mine has actually built a business around this concept – check out http://www.ureferjobs.com/. As the site says: “We believe in the power – and untapped value – of our networks. We are excited about unleashing this value and reinventing the way all of us find and hire talent.”

    Most businesses (including the one I work for) try to monetise the value of networks by offering employee-referral bonuses, and thereby unearth candidates who would otherwise not appear in our field of view. Ureferjobs takes that same idea into a professional platform.. and I think it’s such an interesting concept.

    What do you reckon?

    • Thanks for your comment FirstTimeCaller. Your opening gambit flatters just about enough to allow the ensuing promotion of your friend’s business concept. Certainly looks like some high profile customers there already and the line “Authentic Jobs – There are no jobs by recruitment firms. Register and be kept up to date on opportunities from top organisations” shows further evidence of the gap widening between the traditional agency offering vs what really works.

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