The Cost Factors and Business Impacts of Turnover

Why retention is so important!

Chances are if you only include these limiting factors (e.g. recruiting time, HR’s time to review resumes, training, benefits, etc.) you will underestimate turnover costs dramatically!

Here is a “long” list of factors that I have used to prove the value of Retention programs to senior managers. You, of course, wouldn’t calculate them all…but be careful about leaving too many out!

The Cost Factors and Business Impacts of Turnover

The cost of a “term” (a term” is a terminated employee, i.e., someone who quits or is fired) for a single software engineer averages $150,000 (in the companies we have worked with). It can average as much as $200,000 in some companies and, in rare cases, it can exceed a million dollars.

When it comes to team leaders the costs can escalate rapidly. One Senior VP estimated the cost of losing a single product development team leader at $29 million, due to the necessity of getting a product rapidly to market (The leader subsequently got a $1 million “stay on” bonus).

Because of their visibility, there could be tens of millions in stock value losses when a CEO “Terms”! (What would happen to Microsoft’s stock value if Bill Gates “quit”?).

There are many obvious costs related to a “term”, some are subtle and involve small dollars while others are more easily measurable in big bucks. All of them add up rapidly*. Because the cost of a “Termed” knowledge worker in the Silicon Valley can average triple their base salary it is essential that management have strong retention plans in place.

* All “term” costs significantly escalate when the “term” is a “Hi-per” (high performer), when they are in a key management position or when they leave and go directly to a competitor.

The “Long” List of Possible Cost Factors To Be Used in Turnover Cost Calculations, see the press release for the Business Costs and Impacts of Turnover Excel 97 spreadsheet.

Increased Management Time and Effort

  1. Employees that are leaving and their replacement “new hire” require “high maintenance” and more management attention and worry.
  2. Team productivity can suffer due to:
    • Lost time helping the new hire
    • Doing double duty during the time between the last day of the “term” and when a new hire starts and,
    • Time lost in “covering” for the soon to be “Termed” employee that has already “mentally” quit but is still on the payroll.
  3. Filling out termination paperwork, filling out hiring req.’s, interviewing candidates, orientation and filling out new hire paperwork.
  4. If the turnover rate in a dept. gets too high the manager might have to be replaced, compounding the TTM (Time To Market) , increasing team stress and increasing the recruiting costs.

Customer Satisfaction and Error Rates

  1. “Terms” send a message to our customers we are getting weak or we don’t care about them (they judge “a company by the people they “keep”).
  2. It is also very likely some “Terms” (like salespeople) will steal away some customers. Even if they fail to steal customers the “bad” things “Terms” “say” about us will cost us some bad P.R.
  3. New hires are likely to make errors that offend or even lose customers. Customers may use this “Oh no” another new face to deal with “opportunity” to shift to a new supplier.
  4. Dissatisfied “soon to “Termed” employees may sabotage the workplace.
  5. Dissatisfied “soon to “Termed” employees may commit violence in the workplace.

Product Development, Productivity, and Teamwork

  1. Time To Market is dramatically impacted by the disruption caused by “Terms” and the new hires.
  2. “Terms” often stop producing weeks before they leave. During the period after their new offer, their productivity may approach zero as they develop an “attitude”.
  3. If a team environment exists, the disruption of team cohesiveness results in a longer TTM (Time To Market) and a loss of focus that also impacts TTM.
  4. Soon to leave “Terms” miss work often for interviews and also tend to come in late and leave early. They are also likely to use company time to “surf the web” for jobs.
  5. “Terms” mentor less and may even discourage other workers by “whining” before they leave.
  6. Some “Terms” take others with them as (or soon after) they leave. A “break in the dike” of one leaving may cause the whole intact team to leave.
  7. If the team leader is the “term” “time to productivity” is likely to belong to the new leader.
  8. One in three replacement hires may not “work out”. Misfits would have to be monitored for weeks, then “warned” and finally replaced. The delay itself is costly and the cost of having to go through the whole hiring process again is significant.
  9. “Terms” in hard to hire jobs may not be replaceable, or there will be a long delay in finding equivalent employees.
  10. During the “gap” between the termination of the employee and the hiring of a new one there must be “fill in help” which could mean hiring temps or overtime costs.
  11. The new hire may be a low performing employee (see the “cost of a bad hire template”).
  12. The new hire has start-up costs, for example, maybe a higher salary, a “sign-on bonus” and / or relocation expenses.

Our Competitive Advantage

  1. New employees and soon to be “Terms” produce less per dollar of cost (salary).
  2. Many voluntary “Terms” are “highly employable” with high competencies and knowledge. Losing them will reduce our capabilities and might increase those of a competitor that hires them.
  3. Having one employee leave may increase “headhunter” activity and can cause others to renegotiate their salary and ask for promotions.

Our image, culture, values, and P.R.

  1. “Terms” send a message to future recruits that we have problems. Too many want ads in the newspaper and many open jobs may send a message to stockholders, analysts, and current employees that something is “wrong”. If it is a high level “term”, it may even attract press attention which might result in bad PR and it may even have an impact on the stock price.
  2. Losing long “term” employees may weaken our culture. New employees with new values may change or dilute our values and “corrupt” current employees.

Out of pocket costs

  1. New hires often cost the same but their ROI is much lower than the experienced “Terms” that preceded them.
  2. Want ads, web pages, application forms, resume “tracking” soft and hardware, etc. are significant cost factors.
  3. “Terms” and new hires often have higher “waste” rates. “Terms” may “steal” office supplies, manuals, and files.

HR time costs and image.

  1. Poor HR is seldom more visible than when a Hi-Per “term” leaves that HR should have “prevented”.
  2. Exit interviews and the administrative costs of “Terms” are significant.
  3. Administrative costs of a replacement hire might include: new files, orientation, ID, Visa applications, initial benefits sign-ups, drug tests, reference checks, screening resumes, HR interview time, applicant travel, etc.
  4. The chance of possible lawsuits (unjust termination, constructive discharge, and EEO), severance payments, outplacement, etc. must also be considered.
  5. COBRA processing and unreimbursed insurance expensed must be considered.
  6. Cashing in stock options and vacation time, processing pension documents and checking out through security adds to total costs.
  7. Non-Voluntary “Terms” are often under stress prior to termination so EAP, and health costs may escalate.

Training time and costs

  1. Training (recently) invested in “‘Terms'” is lost and may actually help the competitor “learn our training secrets” if the “term” goes to work for them.
  2. Extra time spent in training new hires slows their “time to productivity.”

Opportunity costs

  1. Time and energy spent on “Terms” and new hires could be better spent on new profit opportunities.
  2. Soon to be “Terms” occupy “space” that more motivated employees would use to come up with creative solutions. “Terms” seldom share great ideas in the days before they leave.

Miscellaneous

  1. When turnover is high, costly consultants are often hired to help resolve the problem.
  2. The costs of “not-enough turnover” (where “bad” employees are NOT “Termed”) may also be significant due to the low morale of the frustrated high performers.
  3. Telephone, computer and office changes can add to the total costs of a “term”.
  4. A high turnover rate may attract unions and increase our costs when union-free campaigns are required.
  5. A “term” might cause internal conflict and political activity as current employees vie for the open position of the “term”. Even the anticipation of a “term” may increase political activity. Employees that are not promoted into the vacancy can also “term” in frustration or be driven out by the new boss.
  6. Even lost time during the “Terms” going away party and short “good-bye’s” as they make “the rounds” before they leave decreases productivity.
  7. Even the “gold watch” adds to total costs! So even though all turnover is not automatically “bad”, the costs of turnover are significant, and a great retention program may easily pay for itself in months.

As seen on Gately Consulting

About Dr John Sullivan

Dr John Sullivan is an internationally known HR thought-leader from the Silicon Valley who specializes in providing bold and high business impact; strategic Talent Management solutions to large corporations.

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