Calculating the Return on Investment (ROI) is vital in ensuring that your technology investments are paying off. This is especially true for Applicant Tracking Systems (ATS), which are crucial in streamlining your hiring process.
Understanding your ATS’s ROI helps you make informed decisions about your HR technology strategy. It allows you to quantify its benefits and justify its costs to stakeholders.
In this guide, we’ll explain how to calculate your ATS’s ROI so you can assess its true value to your business.
How to Calculate the ROI of an ATS
There’s a lot more to calculating the ROI of an ATS than just comparing the cost of your system to all of your hiring expenses before you start using it.
First, you need to know that to calculate ROI accurately, we use the formula:
ROI = (Net Gain / Total Costs) x 100
Where:
Net Gain = Measurable Benefits – Total Costs
Total Costs are pretty straightforward and don’t need much explanation. But in the next section, we’ll break down various measurable benefits of an ATS and how each translates into value for your business.
Key Points to Consider When Calculating the ROI of an ATS
1. Time to Hire
With ATS’s resume screening features, identifying qualified candidates for a position and moving them through the recruitment funnel is faster. This translates into reduced time to hire or time to fill.
Formula:
Annual cost of time to hire = (average daily revenue per employee) x (difference in days to fill position) x (estimated number of hires per year)
Example:
A company’s average daily revenue per employee is $200, and the time to fill a position went from 42 days to 30 days. If they expect to hire 10 employees each year, the annual savings on hiring time would be $200 x (42 – 30) x 10 = $24,000.
2. Recruiter Productivity
As mentioned, your recruitment team can be more productive with an ATS, thanks to the automated features. Some examples of the tasks it can streamline include:
- Writing and posting job listings
- Reviewing resumes
- Scheduling and conducting interviews
Formula:
Annual value of increased recruiter productivity = (hours saved per recruiter per day x hourly wage per recruiter) x working days in a year x number of recruiters
Example:
The average number of working days in a year is 220. So, if an ATS system saves each recruiter 2.5 hours per day, and the average hourly wage for recruiters is $45, then the annual value of increased recruiter productivity for a team of 5 recruiters would be $123,750.
3. Employee Turnover Rates
An effective ATS can contribute to lower employee turnover rates by helping companies hire the right candidates for a role. This can reduce future recruitment and training costs, as well as the disruption caused by employee turnover.
Formulas:
- Employee churn: (Employees who left) / (Average employees over a period) x 100
- Average cost per turnover: (Hiring cost) + (Training cost) + (Reduced productivity cost)t + (Cost of vacant role)
- Savings from reduced employee churn: (Previous employee churn rate – New employee churn rate) x average employees x average cost per turnover
Example:
A company with an average of 100 employees reduces its employee churn rate from 15% to 10% after implementing an ATS. The average cost per turnover is $10,000. This would mean that your reduced employee churn saves you $50,000 per year.
4. Quality of Hire
Employees who are well-suited for their roles are more likely to be productive, engaged, and satisfied with their jobs. This is important because a bad hire can potentially cost you up to 30% of a new employee’s annual salary.
Formula:
Annual cost of bad hires = ((Avg. employee salary) x (30%)) x ((estimated hires in the next 12 months) x (% of hires that leave within 12 months))
Example:
A company has an average employee salary of $50,000 and expects to hire 10 employees in the next 12 months. If 20% of new hires leave within the first year, the annual cost of bad hires would be $30,000.
5. Cost Per Hire
An ATS can significantly reduce the cost per hire by potentially reducing both the external and internal costs of the recruitment process.
Examples of External Costs:
- Job boards and candidate sourcing platforms
- Job marketing efforts
- Recruitment agency fees
- Third-party tools (e-signature, video interview, etc.)
Examples of Internal Costs:
- Low morale and productivity due to increased workload
- Training and/or onboarding costs for new employee
- Overtime to accommodate increased workloads
- Lost revenue due to less time being available for other business tasks
Formula:
- Annual cost per hire savings = [(Old internal costs – new internal costs) + (Old external costs – new internal costs)] / Annual hires
Example:
A company’s external recruitment costs went from $20,000 to $10,000 per year, and its internal recruitment-related costs went from $27,500 to $15,000 for the year. During this period, the company hired 10 new employees. Each hire cost them $2,250 less, so their total savings were $22,500.
6. Compliance and Risk Reduction
While legal fines and penalties are not a regular cost for most businesses, they can be significant if a company is found to be in violation. By automating tasks and ensuring fair hiring practices, an ATS can help protect the company’s reputation and avoid costly legal battles.
Step-by-Step Guide to Calculating the ROI of an ATS
Now that you know how to calculate the savings and costs related to an ATS’s benefits, let’s calculate your ROI.
Step 1: Identify ATS Costs
First, we start with all the costs associated with your ATS. This step is simple because you just add the costs together. These will vary from business to business but may include the following:
- Annual subscription/purchase
- Implementation
- Maintenance and support
- Paid integrations or add-ons
For the sake of this example, let’s say your total costs are equal to $50,000.
Step 2: Identify and Calculate Measurable Benefits
Now, we’ve already told you what the measurable benefits are and how to calculate them. So, all you have to do is combine them.
Measurable benefits = (Time to hire savings) + (value of increased recruiter productivity) + (employee churn savings) – (annual bad hires cost) + ( cost per hire savings)
Based on our example calculations above, your total measurable benefits would be $190,250.
Step 3: Calculate the Net Gain
Now, we deduct our Total Costs ($50,000) from the Measurable Benefits ($190,250) to get our Net Gain.
Net Gain = $190,250 – $50,000 = $140,250
Step 4: Calculate the ROI
And now we can finally work out the ROI. As a reminder, the formula is ROI = (Net Gain / Total Costs) x 100. That means:
ROI = ($140,250 / $50,000) x 100 = 280.5%
What is the ROI of Your Applicant Tracking System?
By following the steps outlined in this guide, you can accurately calculate your ATS’s ROI and determine its true value to your business. Remember that the key to a successful ROI calculation lies in identifying and quantifying the specific benefits your ATS provides.
So, while we’ve focused on the most common metrics, other factors unique to your organization should be considered. By understanding the ROI of your ATS, you can make data-driven decisions about your HR technology strategy and ensure that your investment is paying off.