We're going to begin this article with the assumption that you are at least familiar with this phrase. If you are, then you have also possibly heard of the potential gains to be made.
An ERP is an incredibly effective method of reducing your cost-per-hire, building your talent pool while simultaneously rewarding your staff and building engagement. ERPs can slash thousands of dollars from your sourcing costs and have a dramatic effect on retention.
Some of the international HR gurus, such as Dr John Sullivan, suggest that a well-developed and promoted ERP should be filling over 50% of your vacancies, and if it isn't then you really aren't world-class.
So why aren't all organisations hitting these numbers?
A bit of history
Years ago, this was really the only way people were hired. Back in medieval times, you raised an army by spreading the word there was going to be a stoush, there were rich kingdoms to plunder and that everyone would share in the pickings. You'd set a messenger off on a shaggy donkey with stories of wealth and glory, and back would come your mercenaries.But as time went by things got more complicated - recruitment teams were slashed during down-cycles, we were told to outsource so third-party recruiters became easier to use, and ad agencies arrived telling us to spend a king's ransom on building our employer brand. Getting staff for free (or a minimal bribe at least) just seemed a distant memory.
Fast forward
We have now come to realise word of mouth (or viral marketing, as we now call it) is still the most cost-effective method of spreading news.
The fact is that the most powerful channel in the world is The Grapevine. This is the understanding that bad news travels faster than good, but that a personal recommendation far outweighs any marketing message (for example, how did you hear about your favourite restaurant; how did you choose your hairdresser; and how did you meet your partner). If we can harness the emotional drivers which influence people to make recommendations, then we can tap into this media channel.
The theory behind asking your existing staff to refer your next hires goes a bit like this: People herd. We are not generally solitary animals - we choose the company of like-minded people to hang out with. Often the like-mindedness derives from sharing a common profession or skill set, so the truth is that where you find one accountant, for instance, you'll find a whole cluster.
A captive audience
English brainiac and heroic-moustache wearer Professor Robert Winston, presenter of the televsion show The Human Body, suggests that the average 40 year-old human has a personal network of over 200 people, and can recognise a further 2,000 by name and/or face.
If you have 10,000 employees in your organisation, that's a potential audience of 2,000,000 people at your immediate disposal just by talking to your staff. No newspaper in Australia has that size readership, and most televsion networks would charge you a princely sum to reach that many people.
A better fit
There is statistical evidence too that referred staff stay longer. A recent Ohio State University study shows that employees hired through referrals have a retention rate 25% higher than that of employees hired through other methods.
Think about it and it makes sense. When a friend recommends another friend to consider joining a company they usually give them a 'warts and all' picture of the employer. To do less would be tantamount to deceit, and none of us would like to be seen as deceiving our mates. They are also highly likely to only recommend people who are good at their job, reliable and likely to fit the culture of the organisation - your own staff are the best judge of your culture after all.
So with a match that well-made prior to introduction, the chances of a good fit are much higher. And as they already have a buddy now at work, their initial experience of the organisation is going to be more comfortable and less scary too, so they'll feel more at home and less likely to leave.
Plus a quicker fit
Employees are selling the company to the people they refer, so the candidates are pre-prepared. Interviewers can spend their time evaluating a candidate's background and qualifications. Employees also tend to recommend people who they know are ready to make a job change, which also speeds the hiring process.
Charity begins at home
Your staff will love you for giving them cash instead of giving it to a recruiter or job board. Rewarding your staff like this should build engagement while reducing your costs. Everyone loves a bonus.
Take some good news to your CFO
The best news of all is that you decide the cost-per-hire. So, what's this worth to your organisation? Well, let's look at the maths. You need to know your current rate of referrals as a percentage of your overall hires. Let's say it's currently 5%, and that your ERP reward is $1,000.
Next calculate your average cost-per-hire - let's say it's $5,000.Then, estimate the number of hires you want to make next year (assume 20% growth in company and 20% staff turnover) - let's call it 400.
And lastly, set your goal for internal referrals - let's be easy on ourselves and shoot for 20% within 12 months.
So the maths goes like this:
- 400 hires x 15% (difference between current 5% and goal of 20%) = 60 hires as a goal
- Cost saving per ERP hire ($5,000-$1,000) = $4,000
60 x $4,000 = $240,000.
That's the budget we have to achieve this. Now all we have to do is hit 20%. Then look to improve this by 5% each year.
Reward the right things
There is little evidence to support the notion that increasing the reward you give for referrals results in increased referrals in ratio. That is, if you double your bonus, it's highly unlikely you'll double your referrals.
In our experience, it's more closely linked to the employee's engagement level and the way you promote the program. With that in mind, it's better to spend the money on the program than on the rewards.
And please get your timing right - the referrer must be fully engaged with the company to be comfortable enough to recommend it to their friends. It's unlikely this will happen in the first few days or even weeks.
Contrary to popular belief, employees will not recommend their family and friends into their employer lightly - there is a lot at stake here. Their reputation as a friend and employee are on the line - if they disappoint either side there is a price to pay. There will also be a commitment to making the partnership
work, as they 'buddy' their referral's early path through the business, and carry the expectations of both their friend and employer on their shoulders.
As employees, why would we do all this - why would we take these risks when we really don't need to
Well, we believe it has a lot to do with the right reward: recognition. We need to reward the referrer for the act of referral, not for a successful hire, as many employers tend to do. You simply can't treat your employees as recruiters - that is too much to ask of them. Reward them for the referral and then you do the work you are paid to do in screening and assessment.
The most successful ERPs have a tiered-reward system - early less-valuable rewards for referral, larger rewards for successful hires and then a sweep winner every year with a huge grand prize. This serves to reward and recognise the referrers, while publicising the ERP to the whole company and beyond. Endorsement by senior management is vital, as is the linking of this to the organisation's values.
And ERPs can be turned onto specific areas of skills shortage, or Narrowcasted. For example, back in 1999, we worked with a well-known global company to ask all employees in the company to refer IT staff to help solve the Millenium Bug/GST crisis. The might of your whole organisation can be tuned and focused on one specific area, often with amazing results.
Keeping count
Of course, you will need help in tracking all this. If you have a good ATS (applicant tracking system) then you're home and hosed. If you don't (or worse still think that ATS stands for the Australian Thoracic Society) then you'll need to go shopping. The fact is you must diligently track the numbers here - both for the referrers and your own benefit.
The last word
One word of caution with all this - if you are not prepared to manage it well, see it through and support it with time and resources, then stay well away.
This can just as easily have a negative effect on engagement and costs. If referrer's aren't rewarded and recognised properly it will destroy engagement. If referred people aren't dealt with quickly and appropriately they will erode your employer brand. And they'll gripe to the referrer, who will blame you for their embarrassment and this can only have a poor effect on their morale.
So please, do it well or leave it alone.