Hiring the right people is essential to the success of any business. But for small businesses, the stakes are even higher. As a small business owner, you may face challenges like limited capital, slim profit margins, and an uphill climb toward brand recognition.
It’s hard to overstate the importance of assembling a team you can trust and rely on when facing these challenges. It’s equally hard to overstate just how much even one bad hire can compound these challenges.
We recently took a deep dive into the costs of making a bad hire. We detailed both the tangible costs, like the money wasted on recruitment, onboarding and training; and those costs that may not be as obvious, like diminished productivity, lower morale, and damaged brand reputation. Naturally, businesses of every shape and size aspire to goals like better hiring practices, reduced turnover, and improved long-term retention for these exact reasons.
But as we’ll explore in the article below, small businesses, startups, and entrepreneurial ventures faced added pressure to control these factors. Indeed, for your small business, hiring the right people may be a matter of basic survival.
Small businesses come with big risks
Survival is indeed the operative word. It is a well-known and oft-stated warning to those of entrepreneurial spirit–the short- to medium-term survival rate for new businesses is foreboding to say the least.
According to Investopedia, 20% of new businesses will fail within their first two years of operation. If that sounds high, be warned–it doesn’t get any better as time passes.
45% of business will fail before the five year mark and 65% won’t make it a decade. Based on historical averages, only 25% of the businesses that start today will still be in operation in the year 2040.
These figures are not meant to dissuade you from your startup ambitions, but to present the unvarnished reality of what every new business owner is up against. With that in mind, let’s consider some of the inherent costs of a bad hire.
The inherent risks of a bad hire
Each bad hire represents a bucket of misallocated expenses. The cost of your hiring process includes recruitment, vetting, hiring, onboarding, training, salary, and benefits. The process also implicates costs for the personnel, working hours, and administrative resources used to facilitate each of these steps.
The actual cumulative cost of these steps can vary widely, even among small businesses. According to a Career Builder survey:
- 17% of small business owners say that they spend between $1000 and $2500 per bad hire;
- 20% place the cost of each bad hire between $2500 and $5000; and
- 11% of small business employers indicate that every bad hire that walks out the door represents $5000 and $10,000 in lost capital.
Per individual employee, the numbers above are not ideal, nor are they staggering. But, in a small business setting where bad hiring reflects a pattern, these costs can indeed grow into a serious drain on the life of your business.
Even still, this only scratches the surface of what your small business is losing with each bad hire.
The Ripple Effect
The real reason bad hires are so costly is because each poor fit for your organization carries the risk of a ripple effect. One bad hire can drag down team productivity, cause process inefficiencies, disrupt company culture, and crush employee morale.
To understand exactly why bad hires cause this ripple effect, it’s important to first understand how most small business owners define a “bad hire”. According to a survey of small business owners from Career Builder, the most commonly cited characteristics of bad employees include:
- Poor quality of work
- Negative attitude
- Attendance issues
- Inability to work well with others
- Inconsistency between worker’s actual skills and those claimed at the time of hiring
Now, back to the ripple effect. Career Builder notes that:
- 36% of small business owners said that bad hires negatively impacted their productivity in the previous year;
- 30% of small business owners said that hiring mistakes compromised the quality of their work; and
- 28% indicated that their small businesses were negatively impacted by the lost time spent recruiting and training replacements.
Naturally, businesses of every size will experience some measure of this ripple effect with the wrong hire. But the smaller the pond, the bigger the ripple
In a small business, a single underperforming employee can become a major bottleneck by:
- Overburdening fellow employees as they pick up the slack;
- Delaying the timely delivery of products or services;
- Impeding the ability of others to complete their work in a timely fashion;
- Disrupting team dynamics, creating tension, and eroding company culture; and
- Causing co-workers emotional distress, resentment, burnout, and even departure.
In small businesses, where cohesion and collaboration are essential, and where the work of every individual is critical to achieving survival, one bad ripple can swell into a destructive cascade of failures.
The Outside World
These failures won’t likely be limited to your internal operation. The ripple effect can trigger service delays, diminish the quality of your output, damage consumer trust, erode brand reputation, and even make your business more vulnerable to legal liability. Your survival as a small business depends on the cultivation of strong, trust-based relationships with customers, clients, and partners.
A bad hire can damage these relationships, cause a loss of trust, trigger a decline in customer satisfaction, instigate negative online reviews, and damage your reputation in your local community. Any one of these negative trends could stifle the growth of your small business before you can even get your brand off the ground.
To reiterate an important point, it’s all about survival. And for small businesses, survival means growth. Making the wrong hiring decisions can stunt this growth and render your small business another statistic in the annual Bureau of Labor Statistics (BLS) casualty count.
So what can you do?
Let’s start with what not to do. Small business owners cite a few common hiring mistakes, in retrospect of course. According to Career Builder, small businesses ended up with bad hires because applicants failed to learn skills quickly enough, candidates lied about their qualifications, or the hiring process focused merely on skills and not on attitude.
This last item is particularly noteworthy because it underscores one of the core inefficiencies in the hiring process for companies large and small. There is only so much that you can learn about a prospective employee from an application and an interview. Even assuming that every applicant represents their resume, experience, and skill sets honestly, these standard operating procedures may offer you little to no insight into how well employees work with others, how effectively they contribute to team projects, how well they respond to leadership, and how willingly they ascend to leadership when the opportunity calls.
And these are the attitudinal characteristics that can make a true difference in a small operation, where the stakes of every new addition are so high. This is why Success Portraits designed a personality assessment that measures employee compatibility based on attitude. Employers generally rely on tools that demonstrate skill sets (qualifying exams, certifications, resumes, etc.)
These tools are valuable. But that value would be greatly enhanced with the complement of a better attitudinal assessment. The Success Portraits Personality Test (SPPT) evaluates prospective employees on 19 distinct personality traits including Business Acumen, Team Orientation, Self-Regulation, Creativity, and more.
Scoring candidates on these traits can help paint a more complete portrait of every prospective hire. And for a small business, every good hire can help bring the big picture into clearer focus.