Skills-based hiring: what talent leaders need to know

Skills-based hiring is becoming an increasingly popular recruitment strategy in US organizations. This approach can be a great way to expand and diversify your workforce and address the talent shortages faced by many organizations since The Great Resignation. In fact, research into state and local government workers suggests that skills-based hiring could result in more qualified candidates, more equitable hiring, higher performance, and better retention.

But what is skills-based hiring? And what are the benefits of skills-based hiring?

Read on to find out.

What is skills-based hiring? 

In the early 2000s, the employment market experienced something referred to as “degree inflation”. This term describes the increasing focus that was placed on qualifications and credentials in the recruitment process. Companies all around the world would base their hiring decisions on college affiliations and many would only consider candidates with a degree. Thankfully, this trend is now reversing and skill-based hiring is on the rise. 

Skills-based hiring is where a company prioritizes a candidate’s skills and abilities over their credentials and educational background. They take into account their soft skills and hard skills when they screed candidates, instead of focusing inclusively on qualifications. It’s all about what a candidate can offer a company; the skills they have learned through work experience rather than what they studied and where.

So, what does this mean for recruiters? How can you shift to a skills-based approach to hiring?

The easiest way to implement skill-based hiring is by including an initial skills assessment at the start of the candidate screening process. With the right questions, you can get an unbiased evaluation of the hard and soft skills that an employee has, such as communication or leadership skills and emotional intelligence. You can also use work sample tests to evaluate hard skills. These are mini simulations where you ask a candidate to perform small tasks that they would be responsible for if they got the job. This can be a great way to see what a candidate is capable of rather than relying on their CV. 

Benefits of skills-based hiring 

Let’s take a look at some of the benefits of skills-based hiring vs degree-based hiring. 

• Close skills gaps. Skills-based hiring enables you to access a larger talent pool instead of focusing exclusively on candidates with specific qualifications.
• More accurate assessments. With traditional hiring strategies, such as those commonly used during the degree inflation period, most talent acquisition platforms screened candidates by filtering specific CV keywords. These keywords typically focused on qualifications and universities. However, this was very misleading. Just because someone has studied for a specific degree at a certain university, it doesn’t mean that they have the experience or profile required for a job. Skill-based hiring, in turn, gives you more insight into a candidate’s ability to meet performance expectations.
• Equal opportunities. Skills assessments can help you overcome unconscious hiring bias and promote equality as you are hiring based on skill level rather than education or job titles. This can help you develop a more diverse workforce, boosting innovation, performance, and productivity. 
• Reduced retention. Because you evaluate the specific skills that an employee can bring to your company, skills-based hiring makes it easier to find the right fit for the job. This is especially true if you also assess a candidate’s soft skills and values. As a result, retention increases and turnover drops.
• Reduced hiring costs. To the same effect, by reducing your turnover you also spend less on acquisition and hiring costs.
• Increased speed to hire. Skills-based assessments can help you identify suitable candidates earlier on in the recruitment funnel. You can determine whether someone would be suitable for a role in practice, not just on paper. As a result, you can streamline your recruitment process and boost your speed to hire.

Potential obstacles with this hiring approach 

Although there are many benefits of skills-based hiring, you might encounter certain obstacles when you shift to this recruitment strategy. 

Some companies that have made the jump cite reasons including:

• Operational difficulties related to adding an extra stage to the hiring process.
• Questions about the reliability of skills-assessment tests.
• Budgetary considerations.
• Time management concerns as a result of receiving more applications, especially if you are hiring for and managing global teams.

For example, according to TestGorilla’s 2022 State of Skills-Based Hiring survey, 38.2% of hiring managers are concerned that adding this extra step will slow down the recruitment process. However, 55% of surveyed candidates claim that skills-based hiring has enabled them to access career opportunities that would otherwise have been out of their reach. The key to overcoming this obstacle is understanding that skills-based hiring is not an additional step in the traditional recruitment funnel. Instead, it is a replacement for time-consuming and ineffective resume-based screening.

Moreover, some employers are worried about the quality and integrity of skills-based assessments. Assessment processes can also be time-consuming if you don’t have the right tools and systems in place. However, standardized testing actually makes it easier to sort through your applications, saving you time in the long term. 

Finally, 28% of participants in TestGorilla’s survey claimed that they are worried about the cost of administering and reviewing additional assessments. However, it’s important to remember that skills-based hiring helps you find more suitable candidates for your organization. Not just in terms of hard skills but also soft skills like communication, collaboration, critical thinking, interpersonal skills, proactivity and executive function. This means that you are likely to retain employees and recover these additional costs in the long run.

Why the shift? 

A number of factors have influenced this shift to skill-based hiring. For one thing, the Covid-19 pandemic disrupted supply chains and demand curves and created a more competitive environment. This was further fueled by The Great Resignation, economic uncertainty, and increasing inflation rates. Plus, employees are demanding fairer working practices and a better work-life balance; they have become more selective about the companies where they work. As a result, there is more demand than supply. 

All this has led to talent shortages and skills gaps in a range of industries. 

To overcome this issue, employers have been forced to rethink their approach to talent management and acquisition. They need to widen the net they throw into the talent pool and consider candidates based on their merits, not just their formal qualifications. In other words, they need to define the skills required for each role and evaluate the active skills that each candidate could potentially bring to the business. 

In fact, this shift in employment supply and demand has been growing for some time now, the pandemic just sped up the process. The employment market has been shifting since the 2008 recession, and by 2019, employers had already reduced degree requirements for their middle-skill positions by 46%. 

Ultimately, hiring processes are facing a structural reset and businesses need to adapt their strategies in order to attract talent and fill essential skills gaps.

Skills-based approach to hiring: research 

Here are a few examples of recent studies into skills-based hiring practices:

• Research shows that selecting candidates based on skills and performance rather than formal degrees can lead to increased productivity.
• McKinsey conducted a recent survey on skills-based practices. The survey suggests that the need to address skill gaps is more urgent than ever. As a result, companies have made a significant shift toward skill-building and skill-based hiring. The three biggest reported challenges associated with this shift are sourcing, validating skills, and scaling skills-based practices across the organization.
• A Grads of Life report highlights that skills-based hiring is a key driver of equity in employment. The report also claims that employers are recognizing that an overreliance on college degrees has created unnecessary barriers and prevented companies from recruiting candidate profiles that could potentially benefit them the most. 

Real-life examples of skills-based hiring 

Increasing numbers of employers are now embracing the benefits of changing to a skills-based hiring mindset. In fact, even major players are now favoring skills and practical experience over formal qualifications. 

Here are a few real-life examples of skills-based hiring:

• Major companies including Boeing, Walmart, and IBM have signed up to the Rework America Alliance, the Business Roundtable’s Multiple Pathways program, and the campaign to Tear the Paper Ceiling. All three initiatives promote the use of skills-based practices in business. As a result of this pledge, all three companies have removed degree requirements from certain job postings. They are also working with other organizations to help employees progress to higher-wage jobs. For example, IBM has partnered with 29 other organizations to launch an initiative known as SkillsBuild. The program aims to reskill 500,000 people for new in-demand roles.
• The City of Philadelphia has launched a Tech Industry Partnership based on skills-based hiring.
• The State of Maryland has announced that it will no longer require degrees for up to 50% of positions. This is opening up roles in healthcare, corrections, policing, skilled trades, and engineering to larger applicant pools.

All these organizations recognize that skills-based hiring practices can help them overcome recent challenges in the employment market. This approach can be a cost-effective way to fill skills gaps and retain talent in a competitive market. It is also benefiting local communities by creating job opportunities for a more diverse pool of workers.