At Sterling, we’re fully aware of the numerous ways that background screening can add worth to a business. However, we are often faced with the question ‘what’s the value beyond ticking boxes and completing due diligence?’
Despite effective background checks demonstrably improving employee retention, reducing background fraud and minimising occupational fraud – putting a specific monetary value to these factors is often difficult. So, when HR is asked to justify the spend, how can they illustrate the true benefit?
Areas of Value – Employee Turnover
There are two key areas where background screening can offer value to a company.
One of these is turnover. Turnover is the rate which employees leave an organisation. There are a number of estimates of how much this costs a business, but most sit between 100% and 250% of an employee’s annual salary. This is a significant sum when, on average, employee turnover is 13.2%.
Background screening reduces turnover rates by identifying applicants with criminal records, CV discrepancies or credit problems – helping companies make smarter hiring decisions. By determining which data points are meaningful for building a stable, optimised workforce, companies can hire employees with a far lower likelihood of early departure.
Occupational Fraud and Theft
Unfortunately, employee fraud and theft are commonly occurring phenomena. In fact, the Association of Certified Fraud Examiner’s (ACFE) Report to the Nations 2018 revealed that organisations lose 5% of their annual revenues to fraud. The annual global cost of occupational fraud is estimated to the equivalent of just over £3 trillion.
Background screening can help employer’s spot red flags that would otherwise go unnoticed and reduce the risk of falling victim to these crimes. According to the ACFE Report, in 85% of fraud cases the perpetrator displayed at least one red flag: 43% were living beyond their means and 23% were experiencing financial difficulties.
Calculating the Return on Investment
With the above in mind, it is possible to develop a monetary ROI value. In all cases, in order to calculate the financial contribution of background screening, you should first determine which costs are relevant to you before making any calculations.
To understand further, let’s look at a fictitious company, Alpha Industries, click below to view the case study:
Alpha Industries has 5,000 employees and a staff turnover rate of 37.5%, resulting in annual hires of 1,950 employees.
The company grows by 4% each year, adding an estimated 200 more employees annually for a total of 2,150 new hires.
It takes Alpha Industries approximately three weeks to fill a vacancy and employees generate an average of £4,051 each in revenue per week.
A bad hire, which is considered to be an employee dismissed for theft or fraud, costs the company £16,021, or 75% of the average salary. Approximately 2% of hires are dismissed for these activities.
Hiring a new employee costs the company £1,982 plus a background check, which in this instance costs around £40. Alpha Industries screens two applicants per position.
If the company avoids bad hires and reduces its turnover rate by 15% as a result of a screening program, here is what its return on investment will look like:
STEP 1: Reduction of Turnover
First, we can calculate how much Alpha Industries will save by reducing its staff turnover by 15%:
(Hires x Turnover %) x [(Weeks to Replace x Average Revenue per Employee) + Hiring Cost] x Reduction in Turnover:
= (2,150 x 37.5%) x [(3 x £4,051) + £1982] x 15% = 806.25
x £14,135 x 15% = £1,709,497
STEP 2: Cost of Bad Hires
Then, we calculate how much Alpha Industries spends on bad hires:
Hires x Cost of a Bad Hire x Percentage of Bad Hires = 2,150 x £16,021 x 2% = £688,894
STEP 3: Savings
From this, we can work out the savings achieved by implementing a robust background screening programme
Savings = Reduction of Turnover (£1,709,497) + Cost of Bad Hires (£688,894) = £2,398,391
STEP 4: Cost of Background Screening
Then we need to calculate the cost of the background screening programme:
Hires x Background Screening Cost x Number of Applicants Screened Per Position = 2,150 x £40 x 2 = £172,000
STEP 5: Value of Screening Programme
With this information, we can calculate the value of the screening programme and finally, the return on investment
(Savings - Cost of Background Screening) = £2,226,391
RETURN ON INVESTMENT = 1,294.41%
Make Sure the Shoe Fits
While every business is structured differently and has its own metrics that it will want to monitor, these formulae, based on industry averages, can be applied to any company to determine the accurate return on investment from a consistent, high quality background screening programme. Doing this will enable HR professionals to visibly demonstrate value to the C-Suite, and ensure that they can continue to enjoy the advantages of background screening.
For more information, on how to demonstrate the return of investment from background screening programs, please check out our whitepaper – How to Calculate Your ROI on Background Screening