The high price of turnover

So you lost another employee. She found a better job offer somewhere else and you couldn’t hang onto her. Oh well, no one’s irreplaceable and there are plenty of other people looking for a job—right?

This attitude is easy to adopt when people are looked at as a commodity or a replaceable resource. In fact, this attitude is fostered by the name we give to the department that usually takes care of people issues. You know, the “human resource” department. If people are not valued for their worth, productivity, creativity, or other contribution they make to the organization, they will leave to work for a place that does value them.

In the eight years Rik has been at the college, he has seen a 160-percent turnover in his department; which averages about 20 percent per year. The positions are not easy to fill, even though the starting salary is higher than average. Most of them did find higher paying jobs; however, Rik’s informal exit interview revealed that the increased pay was rarely the issue for wanting to leave. In fact, it’s possible that the turnover rate could have been less than 10 percent per year if certain elements would have been in place.

Give yourself this quick test: How many of the following five questions would you give a “yes” response?

Is your turnover greater than 20 percent per year? Have you had a large number of terminations for just cause in the last twelve months? Are employees complaining about having to train new employees? Do you experience excessive accuracy, quality, or customer service problems? Did you exceed your recruiting advertising budget?

If you answered “yes” to more than two of the questions, you may be suffering from employee retention problems, which manifests itself through low productivity, low morale, high tardiness, and high turnover of both employees and customers. Customer loyalty expert Frederick Reichheld concludes: “[The] fact is that employee retention is key to customer retention.” So, when employee turnover increases, a company’s customer defection rate will likely rise.

Towers Perrin, a human resources research and consulting firm, states: “Companies that have practices that create or maintain a highly loyal workforce have superior customer retention.”

High-quality employees that remain with the company tend to produce high-quality products and services that attract high-quality customers. This becomes a value cycle where the relationship between the three elements continues to create greater value. If any one of these fails, the other two will suffer as well.

In the early 90s, Marriott Hotel Corp. attempted to measure the correlation between employee turnover and customer retention. They used conservative numbers, and calculated that if they avoided a 10-percent reduction in staff turnover in two of its divisions, the savings from just rehiring costs would yield profits greater than the operating profits of both of the divisions they considered.

How can you calculate turnover costs? J. Douglas Phillips did some research and he believes that all the costs associated with turnover are rarely considered. Besides the typical costs associated with turnover, such as advertising, hiring, and training; the other costs include things like inefficiency of incoming personnel, inefficiency of coworkers closely associated with incoming employees, relocation costs, and costs associated with processing the human and non-human resources.

In one of Phillips’ studies, costs averaged 150 percent of the annual wages for the position being filled, and in another study about eight years later, costs were 75 percent of the annual wages for the position. Phillips estimates that costs may run as low as 50 percent of wages for less skilled, hourly workers, and as high as 200 percent of annual wages at the other extreme.

These costs completely ignore the cost of poor customer service delivered to the customer because the new or inexperienced employees are generally not as good at serving customers as those with years of experience. Poor service may translate into lower satisfaction and return visits. Taco Bell discovered that its stores with the lowest turnover rates have sales that are 100 percent higher and profits 50 percent greater than Taco Bells with higher turnover rates.

The emotional and financial costs of turnover are high. Service is interrupted, training costs are lost, projects are put on hold, competitive information may walk out the door, and customers may switch their patronage to where former employees are now working. Whatever your actual cost of turnover, the bottom line is that turnover is significantly more expensive than you may realize. Any effort to reduce turnover, and keep good employees will be money well spent.

Eliminating turnover completely is not possible, but keeping it as low as possible is achievable and important. Southwest Airlines has one of the lowest turnover rates in the airline industry, about 4.5 percent per year. They are also the only U.S. airline that has shown a profit every year since 1973. In addition, they do not have a human resource department. Instead, they call it their People Department.

(Rik is a business instructor at NMC and Janel is the owner of Positively Outrageous Results. They can be contacted at: biz_results@yahoo.com)