HUMAN RESOURCES: Tackling Turnover

As the economy continues to improve, discouraged and disgruntled employees – the “survivors” who have hung on through the last wave of downsizing, rightsizing, and outsourcing – have begun to dust off their resumes in search of a better opportunity. And many are finding it. Over the past year, I’ve listened to stories from employers who lament about the loss of key talent and rising turnover costs. From small businesses to Fortune 500 companies, employees everywhere are feeling more confident about change and are exploring new opportunities.

With a labor shortage of nearly ten million people in 2010 predicted by the Bureau of Labor Statistics, along with a significant skills gap, the vacancy problem is likely to get worse. Wise employers realize the shift in power that is occurring and are taking a hard look at their retention report cards. Relying upon results from employee opinion surveys and exit interviews, employers are considering new ways to hang on to their stars. Traditional perks and benefits are increasingly diminishing in favor of new retention strategies that focus on challenging and meaningful work, programs that recognize the importance of life after work, and cultures that are less bureaucratic and more flexible and supportive.

Many companies are sitting on a gold mine of opportunity to reduce turnover costs. Turnover is particularly expensive in the service industry with its heavy reliance on people for its success and, although turnover can never be eliminated entirely, it can and should be controlled. Before an organization can begin to fix a turnover problem, it must start by measuring turnover and determining the costs associated with turnover.

The most common formula for computing net monthly turnover is S/M * 100 = T, with each element defined as follows: S is the total number of separations occurring during the month, including both voluntary and involuntary separations. M is the average number of employees on the payroll during the month (usually taken from the pay period that falls on the 15th of the month). T is the net turnover rate per 100 employees.

Turnover should be measured by position, department, and location. For turnover reports to be useful, they should include the precise reason for the separation, the date of hire and length of service for the individual, and the manager to whom the individual reported. Turnover should be measured monthly and annually, and should be compared on a year-to-date basis to identify trends. Of course, measuring turnover rates is only the first step toward boosting retention. Next, you’ll need to determine the total cost of turnover to your organization and, most importantly, the root causes of the turnover.

The Department of Labor estimates that turnover costs can range between one and one-half to three times an employee’s first year earnings. Turnover costs associated with positions that have a high cost of replacement, a strong link to customers and revenues, and that are critical to sources of competitive advantage can cost even more.

Generally speaking, there are three elements of turnover costs that should be measured; direct costs, opportunity costs, and indirect costs. Direct costs are the costs of replacing the departing employee and include such things as recruiting costs (ads, temporary agencies, etc.), training costs, and overtime from employees who must fill the void. Opportunity costs are those costs associated with lost opportunities including lost revenue due to lower productivity because of more inexperienced incumbents, loss of accounts because of customer dissatisfaction, and the temporary need to operate below capacity because of vacancies. Indirect costs are those costs associated with the loss of organizational knowledge, decreased bench strength, and diverted management time spent addressing people problems rather than focusing on business growth and development. Indirect costs are difficult to measure and are typically not included in calculating turnover costs. They should, however, be considered when determining the extent of the investment a company is willing to make to boost retention.

Armed with a realistic picture of what it costs to lose an employee, coupled with the precise rate of turnover, an organization can begin to identify the root causes of the problem. Perhaps the root cause is poor recruiting or hiring, lagging compensation rates or, worse yet, poor management and leadership. Sometimes jobs need to be redesigned to reduce turnover and sometimes companies must dig deep to their core and overhaul the culture; eliminating cancerous practices or outdated programs.

Whatever the cause, employers would do well to begin addressing the problem now, before the impending labor shortage hits. When it comes to retaining talent, there’s no question – the best way to predict the future of your business is to invent it.