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The High Cost Of Turnover

While in Santa Barbara last weekend for a company getaway with one of our clients I picked up the paper and found a great article by Jim Pawlak that did a fantastic job of describing what the true cost of employee turnover is. It is only by looking at numbers like these that you can truly set a budget for recruting and retention.

I wanted to provide a link to the article but could not find one - I emailed Jim and he was nice enough to send this over to republish here.

CAREER MOVES
02/17/07
Jim Pawlak

Hot off the newswire – The demand for electrical workers is skyrocketing. The US Bureau of Labor Statistics estimates demand will outstrip supply by more than 78,000 workers by 2014. The shortage is so acute that the National Association of Electrical Contractors and the International Brotherhood of Electrical Workers have pooled their efforts to promote apprenticeship programs in the industry.

You’ll need a solid background in math to get into an apprenticeship program. For more information, head for www.electrifyingcareers.com. You can browse 59 job descriptions and view video commentary of apprentices pursuing their careers. There’s information for guidance counselors and parents, too.

Temporary legal staffing is another fast growing field – especially for paralegals, legal assistants and legal secretaries. Growth is concentrated in the large metropolitan areas, with New York City and Washington D.C. accounting for about 16 percent of the jobs.

Spherion, a national recruiting and staffing company, completed its “Workplace Snapshot” survey for 2006. It showed that 21 percent of US workers voluntarily changed jobs in 2006. That’s the sign of a good economy (except for the rust belt). The top two reason for changing jobs: 1. Growth and earnings potential (30 percent); 2. Time and flexibility (23 percent).

The downside of such a large voluntary job change is the cost of turnover to employers. Spherion’s report says turnover costs $7K for an hourly worker, $30K for a mid-level salaried employee and up to $80K for technical employees and senior managers. So if a firm lost just one of each during a year, the one-year cost of finding and training replacements and covering the lost productivity of those who left (i.e. the three new employees would have a learning curve) totals $117K.

Now for the really bad news: The effect of turnover on profits. For my example, let’s assume that the three employees left January 1, 2007 and the firm has a five percent after-tax profit margin. To ensure the loss of the three employees had no impact on its bottom line, the company would have to generate INCREMENTAL sales of $2.34 million in 2007: $117K / .05.

My point: Finding three replacements is easy. Finding the incremental sales needed to offset recruiting and training costs and the productivity of three experienced workers is very difficult. HR managers can use the Spherion costs, their employee turnover data and the simple example to build a business case for retention programs.
Process improvement has long been limited to the backroom. Not anymore. Retailing giant, Wal-Mart, taking a cue from its vaunted just-in-time logistics system, will move many of its 1.3 million workers from standard shifts to customer-driven shifts. The customer-friendly shifts will ensure that stores are fully-staffed during peak shopping times. Wal-Mart says no hours will be cut and that employees will know their shifts at least three weeks in advance. It will try to make allowances for employee preferences, too.

While it may be great for customers, I guarantee the system will create problems for some employees – mostly those with latchkey kids and daycare situations. Been there/seen that: I worked for a company in San Francisco that moved its workday from 7:30- 4:30 to 8-5. The change created havoc because many workers took the Bay ferry, which departed at 4:45. The 4:30 quitting time was ideal for picking up kids at daycare, which all charged by-the-minute for after 6 pick-ups. The same problem existed for those riding the train 45 minutes to the eastern suburbs.

Resumes hit the streets in droves in a matter of days. Turnover went through the roof. Four months and 43 replacements later, management instituted flex time – 7:30-4:30 or 8-5. Too late. Employees continued bailing; they lost faith in management.

I hope Wal-Mart did its homework on its workforce. At its skinny profit margins, the incremental sales it would have to generate to offset turnover costs would be huge.

Posted by David on March 1, 2007 01:36 PM|Permalink

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