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The Cost of a Wrong Hire

Jim Honefenger, Consulting Assets

A wrong hire is not just costly but can be devastating.  In the Oil and Gas Industry, we work on relationships; relationships between members of internal project teams and also relationships with external partners and vendors.  What happens when those important relationship dynamics are disrupted, and what is the impact on your credibility with your employer when you were the one responsible for hiring the employee who is doing the damage?

So how do we measure and understand the cost of a wrong hire, both direct and indirect?  Many have attempted to quantify the direct cost.  The U.S. Department of Labor has reported the direct cost to be at least 30 percent of that employee’s first year’s annual salary.  According to the SPE’s 2017 Annual Salary survey, the average base salary is $151,122 per year.  Therefore, the direct cost based on the source mentioned is at least $45,337.  Sounds expensive, but it doesn’t stop there.  Let’s look at the indirect costs.

Indirect costs can be numerous and varied:

1. Reduction of productivity

The most obvious indirect cost is the reduction of productivity from not only the lack of productivity for the person hired but also the reduction of productivity in the team the new hire is working with. This reduction of productivity can easily and rapidly spread throughout the organization.Performance expectations are lowered, and bad habits are contagious, feeding other indirect costs.


2. Loss of reputation

In the oil and gas industry, reputation is a meaningful metric, both with regards to company brand and individual standing, within and without the organization. Inside the organization staff and management perceptions exist which affect confidence and performance.Board perceptions impact the scope and reach of specific goals and shareholder perceptions go directly to the bottom line.All interrelate and any loss of reputation that hurts the performance of the company will trace directly back to the person who made the errant hiring decision. As for reputation perception external to the company, the harm to relationships with partners, vendors, potential new hires and potential investors are self-evident and can be devastating to the company.


3. Staff morale

If productivity wains and the reputation is damaged, loss of staff morale is not far behind.Oil and Gas professionals want to be proud of their jobs, work product and the company they work for.When that pride stagnates, and enthusiasm is lost, morale drops.When morale drops, those prized employees that companies have invested significant time and dollars in will be vulnerable to poaching. How costly is it to lose 2 or 3 key employees?


4. Threat to Heath, Safety and Environment

The Oil and Gas industry has learned many costly lessons on how important HS&E is to the bottom line.Substantial time and money are spent nurturing a culture of safety.Professionals want to protect the environment, their health and the health of others, and they want to prove that hydrocarbons are produced safely.When the indirect impacts described above occur, mistakes can happen.As recent history demonstrates, such costs can be unimaginably catastrophic.


5. Loss of hiring confidence

Managers in our industry must have confidence in their hiring decisions.If a manager has made an embarrassing mistake in the past, and what manager in all candor hasn’t, fear of repeating that costly mistake can be paralyzing, taking over a manager’s psyche and impeding smooth operations with unnecessary delays caused by hyper-caution; the delay simply adding unnecessary costs.

The good news is that this hiring risk can be mitigated.  Here’s how:

1. Use outside resources

Using outside resources to screen, check references and flag issues can be a good way to avoid costly errors.Sometimes managers are too close to the need and will attribute capabilities to the potential of a candidate that simply are not there.Available outside resources could include professional staffing resources or even professionals from different departments within the company.


2. Check references

The oil and gas community is relatively small.Check the reference given and ask for additional references from past work history.


3. Set clear expectations

Set clear expectations with the candidate.This is more than a job description.Paint a detailed picture of the work environment, describe the team culture, set forth expectations of required hours, inform the candidate of the amount or lack of support staff, and explain how performance will be measured.Don’t hold back on these issues.It is better for the candidate to fully understand what he or she can expect from the start.


4. Consider a conditional relationship

You will never know if you have a good fit until you have worked together for a period of time so consider a contract-to-hire relationship.Having a professional resource to manage this relationship will give you the best indication of whether the relationship is actually working.In the early stages of a work relationship, the new team member will be more candid with the agent bringing them to the company than it will for that person to share directly with the manager.Remember a relationship is a two way street and most people date before they get married.


We all want to see as many people as possible returned to work in this industry as quickly as possible, but this should happen in a cost-effective manner that mitigates against error.That may mean accepting different approaches than those customary hiring protocols of the past.


We should recognize the costs associated with a wrong hire and the potential devastating effects.We then should do everything we can to mitigate the risk.


Jim Honefenger is one of the founders of Consulting Assets, a clearing house for the energy industry, providing technical and management professionals available for contract-to-hire.

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