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Why are employee referrals the best source of hire for Startups?

Is employee referral the best hiring strategy for startups to build a strong team? Employee referrals continue to be a reliable source of qualified candidates. According to LinkedIn research, 35% of employees refer to supporting friends who are right for the role, 32% refer to assisting their company, 26% refer to being perceived as a reliable employee, and 6% do it for rewards and recognition. Startups are now interested in finding exceptional talent within their employee network.

The quality of hiring has a direct impact on employee retention. As a startup, a business must build an effective team in a short period, and employee retention is exceptionally crucial. In India, an employee attrition rate is rising, with 61% more job transitions in March 2021 than in pre-pandemic March 2019, according to LinkedIn data. If employees continuously exit the company, it will be difficult for startups to establish a solid core team.

Employee referral programs are incredibly productive because referred employees are more likely to stay longer and perform better. Every startup should establish referral programs as a hiring strategy in its early stages in the same way marketing strategies are valued.

Before entering the recruitment process, new hires are pre-screened through employee references. Existing employees refer to a candidate who is a better fit for the company’s position, culture, and vision to retain their reputation within the organization. They take less time to train and onboard. When they already know people in the organization, they will quickly get along with other employees, strengthening employee bonding. Referrals reflect employee satisfaction, as employees dissatisfied with their jobs are reluctant to recommend the company to their friends.

Work-force-related expenses account for 50-60% of total operating costs. The hiring, training, and equipping new employees cost more than half of that expenditure. Employee referrals cut down on the cost and time of hiring. Referrals have the highest rate of retention (almost 46%), followed by career sites (33%) and job boards (22%). Internal expenditures like referral bonuses, recruiter wages, interview expenses, and external costs such as advertising, recruiting software and events, agency charges are all part of the recruiting costs.

According to data obtained in 2020 by Employee Referral Invitation Network (ERIN), the United States’ premier referral software provider, traditional recruitment procedures take 45 to 60 days to fill a vacancy, whereas employee referrals take 30 to 45 days. Employee referrals have a 5x better chance of being hired, and 82% of employees placed employee referrals top among all sourcing options.

A Bangalore-based startup, Whistletalk, is a social hiring application that allows employees and hiring managers to find the right talent at the earliest. It offers a monthly subscription-based program to companies, with fees based on the number of employees and job vacancies at the organization. 

Zomato just made all of their hiring processes based entirely on referrals. It demands the presence of a reliable and productive team at all times. Employee referral technique was used by the tech startup Zomato to create a streamlined hiring approach and to focus more on business performance with a strong team. 

Both the employer and the referring employee benefit from employee referral programs. A startup’s HR framework must be stable to regulate referrals successfully. This referral should not be forced on employees as it will not work. It’s best to keep your referral program up to date with evolving business standards. Human resources must be recognized as a profitability center by every startup to make employee referrals viable.

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Amala Sree Murali
Amala Sree Murali
Features writer at Business Review Live and a certified content writer from IIM Skills. She completed her post-graduation in Business Administration with a Bachelor's degree in Computer Science.