The Startup Recruitment Conundrum

Imagine you’re in charge of a quickly growing startup or expansion stage company. You’d like to scale your staff to match that growth and your hiring plans for the year involve five entry level employees and five managers.

On average, let’s say those entry level employees come with a price tag of $50,000 per year and the managers come in around $100,000. You can afford them because the growth of your business justifies their addition.

But what about the fees you’re going to pay to find the right candidates?

You can typically expect a search firm to charge a 20 percent finder’s fee. That means if they find a candidate that you end up hiring, you’ll pay them 20 percent of that person’s first year salary (sometimes it’s 15 or 30 percent, but 20 is, on average, the magic number).

Using the example above, you can expect to pay a minimum of $150,000 in recruitment fees. Yikes. Young, often resource-strapped companies could do a lot with that kind of cash.

So, that begs the question: Would it be worth it to consider hiring a recruiter in-house?

Well, my friends, that depends on your cost-benefit analysis. There are numerous questions you need to answer before deciding which option is best for your business. For some organizations, an in-house recruiter makes complete sense. For others, a recruiting agency or executive search firm is more appropriate.

First, your organization would need to perform some quarterly or annual forecasting to determine the number of people you’d like to hire, for which positions, and at what salary level.

As long as the hiring of those 10 employees is nicely spread out over the course of a year, most in-house recruiters would agree that the workload is a manageable solo effort. And, considering Salary.com suggests that a Boston-area corporate recruiter with three to four years of experience should make around $63,200 a year, the cost-benefit analysis in this scenario points to hiring someone in-house.

Keep in mind, however, that when you hire a recruiter full-time, you’d need to provide health benefits on top of their annual salary. That, of course, is an additional cost that you wouldn’t have to worry about if you used a search firm. On average, research performed by America’s Health Insurance Plans revealed that health benefits cost approximately $3,000 a year for a single person and $6,300 for a family. So, in all, you’re committing a little bit more than $70,000 to the average in-house recruiter.

At the end of the day, making the decision between hiring that recruiter or paying a recruiting service’s fees seems relatively simple: compare the costs side-by-side. Whichever one is less is probably the one that makes the most sense for your business. Going back to the previous example, $150,000 in fees seems exorbitant. If your company is in a similar situation, it may be worth considering an in-house or corporate recruiter.

Of course, there are some wild cards to consider:

• Will your hiring strategy change in the future?
• Do you expect to target a lower volume of hires in ensuing years?
• Will you be hiring mostly entry-level employees in the future that cost far less (and demand smaller fees by recruiting agencies)?

Answering those questions is crucial. You may hire 10 new employees this year, but only three the following year. If that’s the case, then you’ll be paying your in-house recruiter far more than the fees you would have paid an external recruiter. Likewise, if you’re hiring volume continues to remain high, but at mostly entry-level positions, the cheaper option might be using a recruiting agency.

A thread on Quora solicits a few great thoughts from startup founders, executive recruiters, and HR directors alike on the topic. The general consensus, however, is that it depends on your business, your hiring needs, and the type of candidates you’re trying to find.

There are certainly more than just two black-and-white options, as Fistful of Talent’s Kris Dunn points out. But it all boils down to the same question: Does it make more sense to pay someone else or an employee of your own?

Thankfully the math is fairly simple and a quick crunching of the numbers can help you determine which move is the best for your team.