The Power of Three
It is only in recent years that businesses have started to assess the cost of employee turnover. For many years it has not been an area of priority, simply because it wasn’t being measured and what isn’t measured isn’t valued.
So what are some of the costs associated with employee turnover?
- Lowered productivity – you will find that either the work of the individual who has left is now not being done or, if it has been allocated to one or more people, that the more important work will be done whilst other tasks will fall by the wayside.
- Overworked staff – although this is hard to assess it not unreasonable to assume that there is now more work to be done by fewer people (until someone is recruited and brought up to speed, but more on this later). As a result they are stretched thin, the quality of their work declines, and their level of engagement and satisfaction in the role falls. This makes them more likely to start looking for a new job and to leave. Those who remain will be overworked and you will lose their goodwill.
- Lose High-Performers, Keep Low-Performers – a further impact of losing staff who are overworked is that it will be your best performers who are most marketable and will find it easier to find work elsewhere. As such, you will find that this cycle of losing people and the declining levels of engagement and satisfaction will accelerate. In an extreme situation you will lose your best people and find that you are left with the low-performers who are unmotivated and unable to find work anywhere else.
- Lost knowledge – many people can do what your former employee did, but they lack the specific knowledge that person had. It’s about knowing the people, the traditions, the location of relevant information etcetera. It takes time to amass this information and you lose it when someone leaves. You also lose their insight into what the role involved, and specialized information relevant to it. Too often the actual role is rarely documented well enough for someone else to understand it and pick it up easily.
- Lost relationships – whether these are internal or external it takes time to build the right rapport, relationships and level of trust. All the previous knowledge from relationships with key people is lost and needs to be rediscovered, recaptured and developed. This can be especially costly if the individual who has left had relationships with key clients, suppliers or key individuals internally.
- Training costs – the training costs are easy to assess. But you also have to include the time it takes, especially if a colleague is training the new person ‘on the job’. Or if they attend a course then someone has to cover for them. Finally, you also need to cross-check their work until you are confident they can do it.
- Interviewing costs – this can be expensive in terms of time and effort of all the people involved from putting together the advert, reviewing the resumes, sending out invites for interviews, arranging the internal and external logistics, carrying out multiple rounds of interviews, debriefs, selecting the right candidate, and negotiating with him or her. And of course, this doesn’t take into account the further costs incurred if you recruit the wrong person.
- Recruiters – if you use them this can be helpful, but at a cost. This is often based on a percentage of the annual salary for the role being filled.
So what do all these costs add up to? Well how much? Estimates vary from 100 to 200 percent, or even greater, of annual salary. Much less for lower level positions, but still significant enough to make retention a high priority for your business.
And it gets worse!
These costs that your incur come straight off your bottom-line! This means, that you need to generate sufficient sales to recover the lost profit. Let me share an example of one client I worked with.
The client team was 30 people strong and was experiencing an employee turnover rate of 30%, not uncommon for the client’s industry. The average salary was about $100,000. Using a rule-of-thumb of the costs being a 150% the costs were:
Employee Turnover Costs
- 9 people x $100,000 x 150% – $1.35 million off the bottom-line
- The client operated on slim margins of 2.5%.
Additional sales order to recover the lost profit:
- $1.35m x (100/0.025) = $1.35m x 40 = $54 million in sales
And if you are operating in an economic downturn where markets are shrinking, there is greater competition and greater pressure on the margins, then you can begin to see how the impact of losing good people goes significantly beyond a reduced headcount – it can put your business seriously at risk!
So when looking at employee turnover make sure that you only turnover those who are not productive who you do not want to keep. For others, take the steps to counsel, coach and correct before they leave, and make sure you pay them a realistic sum. Turnover is expensive. Sometimes it cannot be avoided, but when it can, you should avoid it by doing the right things for your employees.
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