Quantify the ROI from pre-employment testing

As accountants we love to measure everything. We measure ourselves in terms of productivity, recovery, and time to close. We measure our firms and clients in terms of margins, investment analysis, forecasts, variances, etc. We know that analyzing these numbers will help us make better decisions. But when it comes to our most expensive investment — our people — why are we so casual? When we find a candidate who seems like a good fit, we tend to do very little analysis. A couple of interviews. A review of the resume. A reference check (if we're lucky). And then we hope they work out. But as the old saying goes: "Hope is not a strategy."

I know there's a lot of competition for good people, but you wouldn't advise your clients or your firm's leadership to make important business decisions without hard data to back up those decisions. The same goes for hiring. 

That's where pre-employment tests come in. There are three important types of pre-employment tests that can help bridge the gap between hiring hope and hiring success: 

1. Skills testing: This helps you assess the degree to which a candidate has the technical skills and knowledge for the role. Skills tests are particularly important for midlevel roles such as controller or senior associate in which you need candidates to hit the ground running, and where lack of technical capability can be a huge drag on your firm.
2. Critical thinking testing: This type of test helps you measure a candidate's numerical and verbal literacy. A candidate's ability to learn fast is important in all roles, but it's especially important for recent college graduates and those coming to accounting from another career. You don't expect them to have deep technical knowledge coming in, but you do expect them to build those skills quickly.
3. Personality testing: We all try to assess a candidate's personality in different ways when hiring. There's no magic formula, but a thorough, accounting-specific personality profile can uncover a lot about a candidate's working preferences. The profile that's derived from the test gives you a starting point to explore in an interview. It allows you to assess how well a candidate's work style and preferences will fit into your culture and work environment.

So, why wouldn't every accounting firm and corporate finance department want to utilize pre-employment testing? For starters, many firms are slow to adopt it because they don't think hiring success can be quantified or don't know how to do it. Until now.

A recent LinkedIn post by Steve Blinkhorn, an occupational psychologist and psychometrician, unpacks this opportunity and highlights five important elements to measure when determining the return on investment from pre-employment testing:

1. The starting salary of the position: The higher the salary, the more likely the benefit of testing will be high.
2. The variability of the applicant pool: It can vary in terms of how well candidates fit the job description. 
3. The validity of the test: The more likely the test can correctly identify the attributes of a candidate, the more useful it is.
4. The cost of the test: In other words, what's your investment?
5. The number of tests you administer vs. the number of successful offers you make: What's the "testing-to-offer" ratio? If you generally test many candidates before making an offer, the cost of testing will be higher than if you make offers to many of the candidates you test.

Our company's experience is that the variability of applicants is quite high for accounting firms. The shortage of applicants means the testing-to-offer ratio is usually low. It's generally higher for more selective senior positions, less so for bookkeepers and entry level roles, although this ratio seems to be improving.
Here's another way of looking at it. Let's consider a hypothetical example of a senior tax associate position with a starting salary of $90,000. Let's say you interview two viable candidates and give them both a technical knowledge test and a personality profile — costing $1,100 in total. Even with similar resumes, the variability between candidates with three years of tax experience can easily be 25%, which can amount to over a $100,000 a year difference in the revenue they generate for your firm. Spending a little over $1,000 to ensure you have the better candidate is a pretty good ROI, wouldn't you say?

If you're interested in diving deeper into this area, this study from the Journal of Occupational and Organizational Psychology has more data about the correlation between well-built tests and a candidate's actual performance in the role.

It seems logical that choosing the best candidate will save significant amounts of money in terms of "bad hire" costs. Now there is a way to quantify it. Of course, the ROI will be less if candidates are very similar; it will be more if they are more diverse. But even with similar candidates, the testing will help you assess how far along through the professional development journey they are, and how smooth (or rough) their on-boarding journey will be. 

The other way to look at this metric is to think about the impact of a bad hire. The drag on your organization can range from moderately annoying to a complete trainwreck. If we're talking about hiring the wrong senior tax associate from the example above, the cost to your firm or company could easily match their $90,000 base salary. Consider:

1. Extended training and onboarding time trying to get the new hire up to speed;
2. Manager and "buddy" time reviewing and reworking to meet client deadlines;
3. Staff resentment as they watch the associate's poor performance not being addressed by management;
4. Team stress and management time wasted by dealing with conflict for which they are often not trained;
5. The cost of starting the hiring process again;
6. Projects not getting priority during this period while core work is prioritized; and,
7. Perhaps the cost of a staff "celebration" on the day they depart.

For more about the cost of making a bad hire, see this free calculator and other resources.

Kayla Schaller-Greenwood, vice president of operations at Workforce Solutions, which helps accounting firms hire candidates ranging from bookkeepers to senior tax associates and controllers, told me that pre-employment testing improves retention rates for her clients because the candidates they end up hiring "fit in better and are more likely stay." 

Luke Gheen, founder of Gheen & Co. CPA, uses pre-employment testing to vet qualified candidates and to "ensure that their skills match their resume and what they've told me in the interview." He said he appreciates being able to compare the performance of candidates on similar groups of tests over time and to use that data to inform his hiring decisions. "I can hire with much greater confidence now," he added. As Blinkhorn noted in his aforementioned post, a cognitive test is probably the best investment you can make to improve the productivity of your workforce. His research found returns of up to 5,000% annually per recruit for cognitively demanding jobs — even when candidates were preselected on academic achievement.

The old adage, "measure what matters" has never been truer. Better data leads to better decisions. It also lowers your stress level and allows you to get on with the tasks in hand. Pre-employment testing is not all about reducing risks — it's also about building a stable, productive and highly performing accounting team.

Happy hiring!