An organization spends time and money trying to hire the people who best “fit” the job and who enjoy putting in the effort required to accomplish its mission and goals. Further time and effort is spent on training them. However, what happens when someone decides to leave, whatever the reason might be? The company spends time and resources on the departing employee’s compensation package, on conducting exit interviews, looking for a replacement, training the replacement and so on. The company also incurs indirect costs such as lost productivity, loss of morale, loss of knowledge and experience and lost opportunities that a seasoned employee would have followed up on, but that a new one may not identify. All told, the total cost of turnover can take a heavy toll on a company’s finances. HR researchers are currently conducting significant research around the hidden costs of turnover and how they affect the company’s finances.
The factors that are likely to affect a company’s finances can be classified under the following four areas: separation costs, vacancy costs, replacement costs and training costs. Separation costs include aspects such as exit interviews, cost of administrative functions related to termination and separation pay. Vacancy costs include factors like overtime that other employees may have to put in to cover for the employee who leaves and the cost of temporary help the company may need to hire to deal with lost productivity.
Some costs, like the cost of hiring, are finite and clear-cut. However, there are others that companies often overlook, such as the cost to deployment and the cost of having an unintended bench. The former is the cost of paying the replacement employee even though he or she is not immediately as productive as the former employee. The cost of productivity is the cost to the company of lowered productivity between the time the departed worker leaves and the replacement worker reaches full deployment and the time taken for him or her to attain full productivity.
However, it is the bench cost that most companies fail to understand in terms of its financial impact on the organization. For instance, a company that wants to effectively service its customer base needs to consciously or otherwise create a bench of people to fill vacancies that occur as a result of turnover. Organizations subconsciously hire extra people, expecting some degree of turnover. Smart managers know that they will need to do this in order to meet their customers’ needs. For example, let us consider a call center that receives 10,000 calls per hour. If each employee can take an average of 100 calls per hour, you need 100 employees. However, a smart manager will take into account the likelihood of turnover and the fact that not all employees will be equally productive. For new employees, a certain amount of time will elapse before they reach full productivity. Thus, the smart manager hires about 107 108 people so he can take into account the time needed to reach full deployment. And that’s not allevery time someone leaves, the bench has to be augmented once more.
During the time to deployment of a new employee, suppose we assume that in the first two months, the employee is only taking about 25 calls per hour (i.e., he is functioning at 25% efficiency), and then the next month he is taking 50 calls per hour (50%), and only after another month is he working at full productivity. That means he has spent three months at less than optimal productivity, and this has cost the company to the tune of 75% and then 50% of his compensation. And this is for just one employee.
In the United States, the average duration of training is three months, the average turnover rate is 15%, and the average cost of compensation is about $ 6.7 trillion. Thus, the real cost of turnover is 0.25 X 0.15 X $ 6.7 trillion, which works out to approximately $ 25 billion. However, if turnover is reduced by only 1%, the cost of turnover decreases by 1/15th of the total, or $ 1.7 billiona sizeable sum by any standard.
In an organization with sales of $ 100 million, the people-related costs generally amount to $ 56 million. If the average term to deployment is three months, then using the formula above, we would see a net cost of $ 2.1 million over and above the other costs outlined in the opening paragraph. Thus, reducing your turnover by 25% would add an extra $ 500,000 to your bottom line. As an HR manager, you could have tremendous impact on your company if you could achieve such a reduction in turnover.
Thus, the cost of all these components should be taken into consideration when calculating the total cost of turnover: cost of hiring + cost of training + cost of productivity + cost of bench. The total cost and impact associated with an employee who leaves the company can be quite high, and development of a good hiring-retention program can be significantly more important than most companies realize.
The high rate of turnover that many organizations experience is a cause for serious concern and it will increase the cost of a company’s HR outsourcing. Part of your retention strategy should be a strong leadership development strategy. It is better to grow your leaders that buy them in. They should aim to further explore the four areas of costs and other aspects such as which of the categories associated with turnover costs have the greatest impact financially, which are the hardest to measure, which ones Human Resources can impact, and where there is room for improvement. This type of research will give pointers to enable the improvement of existing hiring-retention programs in organizations.
Andrea Watkins writes articles for Kenexa, an award winning human resources solutions provider. Kenexa develops a range of Employee Assessment solutions and an effective Recruitment Outsourcing tool to ensure you get the best candidate for the job.