The Tactical and Strategic Value of Internal Referral Programs for Recruiting

John Hackett

Over the years I have had occasion to redesign and reinvigorate run down and under done internal talent acquisition departments in more than a few large corporations and professional services firms.

Among these are big names such as SAP, Hewlett-Packard (HP), Gartner, Deloitte and Motorola. All of these has been conducted at an Asia Pacific regional or Australia and New Zealand scale. The largest was in a hiring ramp at HP that demanded 35,000 hires across Asia Pacific.

The argument in favour of referral programs is generally very compelling and well understood by most well experienced talent acquisition executives and occasionally the odd HR generalist.

The below list of referral program benefits is not as a result of scientific or statistical research (although there is plenty of this available), rather it is the distilled wisdom, observations and resulting opinions I have formed based on countless executions and trial and error. I hope what I have compiled goes beyond the standard statistical value of referral programs and speaks more deeply to organisational soul and team work as I believe referral programs have a great effect on both.

  1. When you know how, internal referrals are easy to ramp up to become your most effective channel. Often 40 to 50% of hires can be accounted for this way.

  2. Referrals are a better class and quality of hire. In my view this is because the referee knows the corporate culture, the role, the manager and has reputational “skin in the game” . They are very careful to refer someone who fits so that it reflects positively on them.

  3. It follows that high quality hires get up to speed faster and are more generally more successful.

  4. A higher “stick rate’ - flowing from point 3, more successful hires also tend to stay longer and have higher impact.

  5. Those successful hires then in turn refer other highly capable people they respect from their networks creating a virtuous cycle with a multiplier effect.

  6. An efficient channel - internal referrals generally represent a small % of total applicants but can account for up to 50% of actual hires.

  7. Cost per hire - on a balance of considerations including quality of hire, retention rate, and time to fill, at a cost of approximately $2000 (average reward) per hire referrals are highly cost effective.

  8. When faced into a company’s own population (where staff are encouraged to refer each other) internal referrals are an effective supplement to company talent programs. In my experience talent programs usually only go a few layers deep into an organisation and I have rarely seen talent programs highly integrated into the recruiting function to create a formal network and capability. Informal networks or “who you know” are still very common when it comes to career movement internally so internal referrals help bring internal talent to the fore more effectively.

  9. Engagement and culture - strategic Talent Acquisition leaders know that good organisational culture is very handy when crafting EVP (Employer Value Proposition). Referral programs are a fantastic tool to help build an engaged culture. When the program is linked with clever messaging to organisation values such as “Continually grow and Improve” which was a one of Deloitte’s “Seven Signals” the whole population can effectively be engaged in an aspect of the organisation’s mission and values. Another of the Deloitte values was “Attract and Retain the Best”. The connection here to referrals and the opportunity for effective messaging and culture building is obvious. At SAP the referral program publicised its “Heroes” which maximised the positive feelings internally.

  10. Disruptive Recruitment - we have all heard to the term “War for Talent” but it is surprising how many companies do not really have the appetite for battle. An effective referral program is an opportunity to take it to your opposition and slow them down if not stop them completely. By communicating which companies have desirable talent, referral programs are a weapon to compete not just for talent but also for business and profits. I refer you to point 5 to see how this effect takes hold. This capability was highly effective at SAP Asia Pacific and was totally disruptive to Oracle’s business across the region. If you are going to compete then compete. When coupled with an effective sourcing capability internally usually all an employee has to do is provide a name.

  11. Recruitment Function Efficiency - like all leaders in business, talent acquisition leaders are usually faced with a difficult task to fulfil with limited resources. They are also faced with the usual challenges of team development, career development, training and engagement and morale of the people in their own functions. Along with a slew of other initiatives I have always found referral programs so effective because they create time to add value to the function itself. Because they are efficient and effective and because they reduce cycle time, administrative overburden, and overall effort per result you can carve out the time to design and roll out training and development programs for recruiters and managers that mean their capability and careers are enhanced. This in turn makes them better at selecting the best.

  12. Recruitment Function Pride - in my experience a well-crafted and messaged referral program is a real morale booster for the recruitment function and for broader HR. When launched they usually have a high profile with attractive messaging attached, internally visible to all. This is tangible evidence internally of the value of the function that is overtly positive across the whole organisation. It also creates an opportunity for recruiting staff to work creatively to design and execute on an unusual task which is a great learning experience for most.

  13. Channel Mix (money well spent?) - in many instances as referrals increase, other channels feature less as a percentage of the total recruiting channel mix. One of the most impacted is agency use which is usually vastly reduced. At SAP and HP agency use was reduced to 2 or 3% respectively as referrals rose to over 40%. The money that would have been spent on agencies is rerouted (albeit a much lower figure) into the pockets of the staff who successfully participate in the program. This is a good news story and word of mouth spreads quickly. Why not generate internal goodwill while getting an important job done?

For me as a seasoned and experienced Talent Acquisition and HR executive it is not so much a question of why would you implement a referral program as to why on earth wouldn't you?

With the added dimension of social media and crowd sourcing upon us, smart organisations will work to get ahead of the curve on their current referral capability so that they are in a position to capitalise on “the new style of recruiting” in which referral programs converge across new technologies and social media sites to create a seemingly borderless transfer of talent and blurred lines between what defines internal and external referrals. A company I believe is addressing this from both a technological and strategic point of view is PeerBrief.