In the last few weeks I talked to two entrepreneurs who both recently made a hire that didn't work out. In both cases I asked how the reference calls went, and in both cases the answer was that they hadn't done any before hiring the candidate. This made me almost angry, especially because the two entrepreneurs are fantastic founders who could have saved themselves from this costly mistake by following a simple rule: Don't hire people without taking references.
Bad hiring decisions are among the most expensive mistakes that you as a founder can make. According to this CareerBuilder survey, bad hires typically cost companies as much as $25,000-$50,000, but the true costs go much beyond cash. The (harder to calculate) opportunity costs – the fact that you've wasted time getting the wrong person up-to-speed and that your recruitment of the right candidate got delayed – usually weigh much stronger, not to mention the negative impact which a bad hire can have on your team, customers and partners.
Most people read test reports and customer reviews before buying a digital camera or an office printer, so how come they don't use the same level of diligence for a decision that is 100x more important? I can think of a few possible reasons:
"Based on the candidate's CV and my interviews I'm so confident that he/she is the right one, reference calls aren't necessary."
Assessing candidates in an interview is hard. Coming across as a great candidate in an interview process is one thing, being able to do the job is sometimes something different. Talking to people who have closely worked with the candidate for years gives you valuable additional data points for your decision. Even if you're a fantastic interviewer and you're right most of the time – if reference calls help you reduce the number of times you're wrong, they are worth it.
"I won't learn anything new, and the references provided by the candidate will only say great things anyway."
Even if people provided by the candidate will usually (but not always!) give a glowing reference, by asking the right questions you'll often find out, usually between the lines, if the reference-giver wants to be polite or if he really thinks that your candidate is awesome. Even more importantly, you should always try to get backdoor references, too.
"It costs so much time!"
Yes, it does. But think about the difference which the right hire vs. the wrong hire can make.
"It's awkward to ask people for references or to sniff around to get backdoor references."
Don't be afraid to ask even if it makes you feel awkward. Senior candidates expect you to ask for references anyway, and junior candidates will quickly learn that it's a standard practice. People will also understand that you need to take backdoor references. The only really problematic situation is if references from the candidate's current company are crucial for your decision and the candidate didn't give notice to his current employer yet. In that case you obviously can't simply call the candidate's boss and you need to find out carefully how you can get your references without doing harm to the candidate.
If I was able to convince you of the "why", check out this great post by Mark Suster about the "how": "How to make better reference calls"