How Expensive is Staff Turnover? A Business case
A few weeks ago, I spoke with Jake, managing partner in an accounting firm. His most important problem is attracting the right employees. His second most important problem is retaining these people. It turned out that every year over 20% of the employees left his organization. I asked Jake (somewhat surprised) how expensive he thought it is to replace an accountant. After he deliberated on my question, he estimated it to be around $100,000 per accountant.
It turned out that Jake was losing money just as fast as he was losing employees. His organization’s turnover was greatly reducing his profit margins, and he wasn’t even fully aware of it.
We try to get in touch with all of you to how we can help. A lot of people mention turnover/retention analytics. That is why we decided to create a three-part series on how to predict turnover (including a step-by-step technical tutorial!). This is part 1, in which we will write an introduction to the business case for employee turnover.
Why are the costs of turnover so high and how can you prevent them?
Employee turnover is a large problem for some companies – especially when it comes to the company’s high potentials. The so-called ‘war on talent’ hits everyone. Take developers for instance: the difference in performance between the world’s best and worst developers is more than 10x! This phenomenon is, however, not unique to IT. In most industries, the top 20% of people produce about 50% of the output. This was found amongst writers, inventors, football players, policemen and other occupations (Augustine, 1979). These exceptional people just do things better than the rest of us.
We all want to hire these top 20% people. And when we hire them, we want to retain them badly. This is what the ‘war on talent’ is about. However, these talented people get offered lots of opportunities, which makes it harder for them to resist the temptation to switch jobs every so often.
When an employee leaves the organization, the organization loses money. There is an additional number of things that may happen as well:
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- Knowledge and contacts are lost.
Besides loosing specific (tacit) knowledge, the company loses connections as well. This can be especially painful for an accounting firm like Jake’s. When clients stay with the firm for multiple years, chances are that they will have a different accountant multiple times over this period of several years. The new accountant has to become familiar with the client and the company again, and thus loses valuable time for the customer. Contacts are even more vital for sales people as they can take their clients with them. In addition, turnover has a large impact on long-term tenders and projects. When key personnel leaves, they take years of (sometimes irreplaceable) knowledge with them.
- Negative impact on colleagues.
When someone leaves, his/her remaining colleagues will be faced with a (temporarily) increased workload. This can lead to a rise in errors and stress and, in turn, drives absenteeism. Additionally, when a trusted colleague leaves the organization, others are much more likely to re-evaluate their position in the firm.
- Onboarding of new hires.
Onboarding takes time and money, as new employees have to learn the ropes. On average, it takes a staggering 32 weeks before an accountant hits his/her optimum performance level. When the new hire is a recent graduate, this period can take up to more than a year.
- Hiring is expensive.
Hiring involves a lot of costs. The combined costs (recruitment, assessments, onboarding time and training) can add up to an average of 1 to 4 times the employee’s annual salary. However, when you hire the wrong person, you are in even deeper trouble. A bad hire can cost you up to 5 times of his/her annual salary.
Back to Jake. We calculated that 15% of his annual revenue went to replacing and onboarding new personnel. We are talking about more than 10 million dollars on a total revenue of 80 million dollars! If Jake could retain each employee for an additional year, his company would save over 2 million dollars annually.
LinkedIn looked into the costs of replacing employees as well. According to LinkedIn’s findings, a 1% reduction of turnover would save a U.S.’ company with 10,000 employees 7.5 million dollars a year. This means that for every month an employee stays, that organization would save $750 per employee. These are juicy numbers that provide HR with an excellent business case to implement analytics.
Fortunately, there is hope for Jake. One of the biggest misconceptions out there is that managers cannot do much about reducing turnover. Well, they can, and as always: prevention is better than cure. Here are 4 ways through which you can reduce the number of leaving employees:
- Better rewards.
Contrary to popular believe, financial rewards only have a small impact on an employee’s decision to leave an employer. The relation between the employee and the organization is much more important, just as how satisfied the employee is with his job. Improving both will benefit both the organization and its employees.
- Actively promote internally.
The most important reason for employees to leave an organization is a lack of development opportunities. Recognizing employees who are at risk of leaving is key to retain them. By asking employees for their ambitions and then actively trying to support the execution of their ambitions within your company, greatly helps to retain employees. Another option would be to rotate jobs. This helps people to remain challenged in their job.
- Better leadership.
“People quit their bosses, not their jobs”. A critical evaluation of leadership will have a direct impact on the likelihood of people leaving.
- Engage your workforce.
Engaged employees not only work harder, but generally stay longer as well. Engaging your workforce can be simple. I spoke to an HR director who asked her company’s CFO to have lunch with an expat who was about to leave the country. This expat had a crucial role in connecting people from two different continents. When the expat received the lunch invitation, he thought it was misaddressed. He felt greatly appreciated by the CFO; someone he looked up to. The CFO had to lunch anyway. Win-win!
But that’s not all: imagine if Jake would already know which employees are most likely to leave. He would be able to effectively apply these above-mentioned solutions in order to keep these employees.
This is where analytics comes in. By analyzing people data and applying predictive models, Jake will be able to predict in which department turnover is most likely to grow. Additionally, Jake gets insight into the factors that trigger quitting. Controlling and influencing these factors are essential to retain his people.
Turnover analytics is a tool to solve organizational problems. When your organization experiences high employee turnover, and you are not doing anything about it yet, we recommend you to start now.
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Even though the business case is not as clear as the one of absenteeism, the turnover business case is still very tangible.
Turnover is relatively easy to calulate. Because data is often readily available, turnover is frequently a starting point for HR analytics. Reducing unwanted turnover will save the company money and help it make more money by retaining key personnel and top performers.
This is the first blog in a three-part series on how to apply turnover analytics to your organization. In the second part we dive deeper into the factors that drive turnover. In the third part we provide you with a step-by-step tutorial which will help you to apply turnover analytics to your company using R.
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Augustine, N. R. 1979. “Augustine’s Laws and Major System Development Programs.” Defense Systems Management Review: 50-76.