The Real Cost of Hiring the Wrong Team

Starting a business is an exciting endeavor. You finally have something you can call your own, and grow it from infancy to a money-making machine. But once you’ll filed all the paperwork, chosen the right business entity, and are confident about your product or service, it’s time to start thinking about putting together the perfect team. Unfortunately, the third most common reason that businesses fail is because they don’t have the right team.

Offshore Team

A common mistake among businesses is that, once they’ve received funding, they make rash decisions about where the money will go. For example, refinancing your house with a bank statement loan offers the benefit of receiving money even if you do not have the necessary documents for a traditional business loan. However, once you’ve received the money that will aid your startup efforts, the next few moves can make or break the business quickly.

When it comes to determining the cost of hiring the wrong team, it’s important to consider the monetary losses. Many people don’t realize exactly how costly making a bad hiring decision can actually be. According to CEO of Zappos, Tony Hsieh, bad hiring decisions costed his company an estimated $100 million. Here’s what you need to know about the real cost of hiring the wrong team members:

Why Bad Hiring Decisions Are Made

One of the most common reasons why people make bad hiring decisions is because they hire too quickly. There are several costs associated with bad hires. In addition to the compensation you have to pay for the hire, you also have to consider hiring costs, the cost of maintaining an employing, severance, benefits, and the cost of failures, mistakes, and missed opportunities. For example, if you hired a management-level employee with a salary of $68,000, after 2.5 years, the termination of that bad employee would cost a company around $800,000.

Low Company Morale & Culture

Hiring the wrong person can have a significant impact on your overall company morale and culture. And though it’s hard to pinpoint the monetary equivalent in losses when a company culture is affected, it’s important to recognize that a bad hire spreads. It can create enough disruption to bring down productivity for other team members, creating an all around bad atmosphere and making it difficult and uncomfortable.

Stunt in Company Growth

Bad hires can definitely stunt company growth. There are many reasons why. For example, if they aren’t productive on a day to day basis, you’ll find your businesses failing to meet crucial milestones. For example, perhaps you hired a professional to work on your website design. However, if they don’t have the right know-how—such as if they don’t have experience with with your hosting platform or are terrible at project management—then you’ll quickly find yourself falling behind schedule. Suddenly, your website is unable to meet the promised and anticipated launch date, and you have to explain to customers (and even possible investors) why you failed to deliver.

Ruined Reputation

Warren Buffett once famously said, “It takes 20 years to build a reputation and five minutes to ruin it.”As a business, your reputation is everything. In today’s business world, consumers’ opinion and buyer preferences will certainly change when bad news is revealed about a company. And when you make a bad hiring decision, it reflects your business. For example, when sexual harassments news began circulating around the company culture over at Uber, many customers turned to their competitors out of protest.

Bad employees also make it difficult for you to re-hire good employees, which could make it nearly impossible to rebuild your company culture after you’ve publicly failed. According to Harvard Business Review, a bad hire could cost a company 10% more per hire. When Uber was under scrutiny, imagine the amount of great employees that they lost out on because those potential hires would hate to be in a culture where staff was treated with such disrespect.

You Could Lose Your Company

Monetary losses are one thing, but losing your company altogether is entirely another. And unfortunately, a bad hire could make this possible. Sometimes, it could happen indirectly. For example, if your employee is making bad decisions that hurt the company’s bottom line—like offering poor customer service that result in the loss of major key contracts—those mistakes could ultimately result in flat lining. On the other hand, sometimes bad employees can have a more direct impact on the future of your business.

Kathleen King is a great example of the former. When she opened Kathleen’s Bakery, she saw explosive growth after nearly two decades. However, because she wasn’t business or operations minded, she brought on a pair of brothers to handle the business end of things while she focused on customers and the product. However, because she split equity in the business equally, they teamed together to kick her out of her very own business. With every hire that you make, you should be listening to your gut—and never relinquishing too much control. In Kathleen’s case, although she lost her very first business, she ultimately came up on top when she created the now multi-million dollar company, Tate’s cookies. But not everyone would be so lucky.

About Mohit Tater

Mohit is the co-founder and editor of Entrepreneurship Life, a place where entrepreneurs, start-ups, and business owners can find wide ranging information, advice, resources, and tools for starting, running, and growing their businesses.

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