Tuesday, April 14, 2009

How and why do referrals work?

In my previous post, I asked why online referral based job sites are failing. In this post, let's go back to the basics and try and understand why referrals work.

Referrals work when a person (say, your employee) brings two parties she knows reasonably well, namely your company and a potential candidate, together because she believes that the two of you are compatible.

The operative phrase here is "she knows reasonably well". This knowledge of both the parties is what allows her to decide who to refer. Typically, before referring a candidate, she answers the following few questions to herself:
  • Will referring him adversely affect my reputation within my organization?
  • Is this guy good enough?
  • Are his credentials genuine?
  • Will he be thankful of getting this opportunity in the long run, or will he curse me? and
  • Are there roles for him here that match his talent and capabilities?
If you notice, questions 1 and 4 are not so much about the company or the candidate and more about the repercussions of making this referral on her own career/friendship. Obviously then, the decision to refer is well thought through and hence the chances of compatibility between the two parties is very high.

It's how most arranged marriages happen in India (or anywhere else in the world where arranged marriages are prevalent). A relative of the bride/groom knows somebody very well who knows somebody who knows the family of a potential groom/bride. The credibility and strength of each of the connection help in bringing two families together. At every stage, the people doing the connecting know that they will face a lot of flak if the marriage does not work. And if the marriage works, the result is the reward!

In the case of employee referrals, over and above the result being the reward, is the monetary incentive promised by the company. However, if you really analyze this, the incentive that the company promises is not so much a reward for success as a mechanism to make their employees think of and evaluate each of their close friends (and their friends' friends) as potential candidates. The real reward continues to be the good feeling of helping two parties.

A disproportionately large reward would backfire because your employees may throw caution to the winds and start referring even strangers in the hope of hitting the jackpot. Similarly, if there are no disincentives to making bad referrals, the referral success ratio would seriously plummet.

Ah-a! Now we are getting a hint of why some online referral based sites have not worked very well. Let's explore this further in the next post.

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