Analyzing ROI on Your Background Screening Program

Some organizations conduct pre-employment background checks as a contractual or regulatory obligation. Other corporations judge pre-employment screening as a collateral expense. Executive leadership may acknowledge their legal responsibility to mitigate risk, but they’re quick to point out it represents a significant investment in time and money.

Any company can quickly start to question if background screening is really worth it. How much actual dollar value does a background screening program deliver?

• The typical organization loses 5% of revenue each year to fraud. It takes time and effort to recover the money stolen by perpetrators, and many organizations are never able to fully do so. 58% of victim organizations never recover any of their losses due to fraud, and only 14% make a full recovery.¹
• The cost of replacing an experienced worker who doesn’t work out can cost 50% or more of that individual’s salary, and these costs go up if the employee has specialized skills.²
• Employers lose 72% of negligent hiring cases, with an average settlement of $1.6 million.3

Traditionally, the Human Resources department has been primarily administrative, and HR experts have worked as employee advocates. HR’s role in today’s corporate supply chain has shifted significantly, moving away from providing services and support on a reactive basis, toward offering intrinsic value as a strategic business partner. Executive leaders have opened their eyes and minds to the importance HR plays in driving productivity and improving business performance.

In these changing times, HR teams are finding they must step up their game. Understanding Return on Investment (ROI) as the ratio typically used when companies are considering or evaluating a capital expenditure, can help. HR needs the knowledge and tools to interpret the benefits and gains from pre-employment checks, post-hire screening, drug testing, and a host of other assessments. Unfortunately, while other areas of the business have been embracing ROI analytics for decades, 42% of organizational HR teams are struggling to offer coherent insight that supports a screening program.

This is where your background screening provider can make a healthy contribution to your bottom line. There are many tools and solutions available to help you interpret and advocate for a comprehensive screening investment. On the top of your list should be the selection of a provider who can support you in demonstrating a seamless HR integration with corporate objectives, and prove significant efficiencies and effectiveness on your behalf.

The challenge of calculating ROI comes from properly estimating the potential return and the likely required investment. The list of possible gains, savings, and preventions of expenditure reasonably anticipated from the use of background screening services is surprisingly long.

Gains of a Good Hire

• Productivity
• High Morale: Stronger performance and longer tenure
• Value: Happy customers and referrals

Losses from a Bad Hire

• Catastrophic Events: Accidents, violence, harassment, theft, legal expense
• Occupational Fraud: Absenteeism, morale, training, disciplinary action
• Turnover: Termination, management time, replacement recruiting, severance, retraining

A Sample Background Check ROI Calculation

The ROI model we recommend is based upon the work and formulae derived by global experts, Dean Drysdale, Carole Bonannie, and Phil Shuttlewood. Their November 2010 abstract4 assigns a theoretical value for each cost to a business and examines the return on investment for background screening. They assert that the cost of pre-employment screening for an employee is similar to the cost of employing the same individual for a single day.

P + M + C + Th + A + Ac + MT + Te + R + Tr + OC = Return

P = Productivity of a Good Hire, minus the Productivity of a Bad Hire.

M = Effect on Morale from a Good Hire, minus the Effect on Morale from a Bad Hire.

C = Value of Customers Gained by a Good Hire plus the Value of Customers Lost by a Bad Hire.

Th = Cost of Theft caused by a Bad Hire.

A = Cost of Absenteeism of a Bad Hire minus the Cost of Absenteeism of a Good Hire.

Ac = Cost of Accidents caused by a Bad Hire minus the Cost of Accidents caused by a Good Hire.

MT = Value of Management Time spent on a Bad Hire minus the Value of Management Time Spent on a Good Hire.

Te = Cost of Terminating a Bad Hire.

R = Cost of Recruiting the Replacement of a Bad Hire.

Tr = Cost of Training the Replacement of a Bad Hire.

OC = Other Costs of a Bad Hire minus Other Benefits of a Good Hire.

Based on average costs identified from research and supported by educated estimations, they concur with the assertion that the cost of pre-employment screening for an employee is similar to the cost of employing the same individual for a single day.

HR professionals can use this model, with the help of a provider like Aurico, to correlate and analyze datum to strengthen the case for a comprehensive background screening program. In addition, a robust tracking platform like WebACE™, provides synthesized information that flows from HR performance, and productivity to make projections, accurately forecast trends, and mitigate risk. We put you in a strong position to translate your background screening investment into metrics that leaders in the boardroom will understand.

1 http://www.acfe.com/rttn/docs/2014-report-to-nations.pdf
2 http://www.aarp.org/work/employee-benefits/info-04-2011/what-are-the-costs-associated-with-employee-turnover.html
3 http://www.washingtonpolicy.org/blog/post/seattle-city-council-voting-criminal-background-check-bill-today
⁴ http://cluteonline.com/journals/index.php/IBER/article/viewFile/31/29