In recent years, especially with the introduction of millennials to the job market, companies have had to deal with the challenge of managing an increasingly transient workforce. The market has seen a shift in employees’ mentality, from ‘job for life’, to viewing different jobs as building blocks which enhance one’s own professional ‘portfolio’. Companies have come to recognize this cultural shift, and terms such as ‘Employee Engagement’ and ‘Employee Value Proposition’ have become part of everyday discourse and are heard in every boardroom.
But to what end? Should we not just accept employee turnover as the norm, and admit that a small reduction in attrition is simply not worth the investment in programs and initiatives that focus on enhancing employees’ experience within a company? In my view, the answer is a resounding ‘NO!’
Now, to be clear, some level of attrition is natural and indeed beneficial to a company; new people bring new ideas and there are not always the necessary career options to cater for all. This is called ‘Healthy Attrition’. A rule of thumb figure for this is approximately 10% per annum, varying by industry.However, attrition can be extremely harmful to a company if:- The costs outweigh the benefits- ‘Critical’ or ‘Top Talent’ employees exit
But what is the cost of attrition? The answer to this requires us to approach the answer from both quantitative and qualitative perspectives.
The quantitative answer can be explained easily through evaluating ‘opportunity cost’, which is the cost to a company of NOT actively working on reducing attrition. An example best illustrates this:Company A has 1,000 employees with an average salary bill of £30,000 per employee and employee turnover is running at 20%.SHRM (Society for Human Resource Management) estimate that it costs a company the equivalent of 6-9 months’ salary to recruit and train a new employee so they reach an acceptable operating level for the role. For this example, we will assume 7.5 months as this is the average cost estimated.In Company A’s case, the attrition they are experiencing would be costing them £3,750,000 (£30,000 x 7.5/12 x 200) each year.Removing the ‘healthy’ attrition of 10% still comes in at almost £2,000,000. Certainly more than the budget that would be put aside for an engagement strategy for 1,000 employees.
Any company can, therefore, reasonably estimate the cost of an employee leaving by simply evaluating the leaver as a ‘good’ or ‘bad’ leaver and then applying the simple formula. The qualitative answer is more complicated but, arguably, more important than the simple base cost to the company. It concerns how attrition erodes the strength of the company’s unique culture and capability.
A company’s cultural strength could be defined as the level to which employees share a set of attitudes, assumptions, values, beliefs, and behaviors. As turnover increases, it is logical to assume that the effect would be to dilute the existing culture as new people bring with them different attitudes, assumptions etc. As commitment and achievement are often correlated, the effort which a company puts into creating its culture also determines the potential detrimental impact attrition will have.
Furthermore, within the workforce you will also have different levels of talent, something the above formula does not capture. When considering attrition, one of the first questions should be ‘Who is leaving?’, not simply ‘How many?’ Retention of a company’s critical talent can make the difference between success and failure and in every organization there will be employees on which the company relies and are fundamental to the future success of the organization. So ‘quality’ is just as important as ‘quantity’ when assessing attrition.
Whilst this blog only scrapes the surface of the topic, hopefully it does illustrate how costly attrition can be to companies, not only in terms of direct financial cost but also when maintaining a differential advantage, whether this is gained through company culture or intellectual capital.
The costs are there, not always obvious, but clear enough that companies must maintain their advantage by looking hard at what they can offer employees that others cannot.
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