Over the last 15 years, we've helped hundreds of companies shape their businesses through people. We’ve seen firms with amazing cultures that keep people for the long term and those with high attrition rates.
Some business owners put inflated turnover down to the market and write off the cost as the price of doing business. But our experience shows that attrition is a monumental waste of time and money.... It doesn't need to be this way.
If business leaders take time to understand why people are leaving, more could be done to prevent turnover. However, before change can happen, firms need to create urgency around the issue. And the best way to do this is to highlight the true cost of attrition and the enormous long-term impact it has on the bottom line.
How Do You Compare?
According to XpertHR’s annual turnover survey, in 2018 14.6% of the UK’s workforce chose to leave their employer. Almost six in 10 (58.8%) respondents believe that labour turnover within their organisation is too high. And just over one in three (37.4%) believe it’s about right.
As recruiters, we’re only too aware that new blood and fresh ideas are as important as retaining knowledge, skills and experience. So, determining the right level of turnover for your business and achieving it is an essential part of good people management. Get it wrong and the costs can really mount up.
A High Price to Pay
When many business owners try to work out the cost of turnover they start and stop with hiring fees including recruitment costs, salary, national insurance, pension, training, office space, equipment and HR costs. Some might go as far as to write off a portion of the salary if the employee has not been a good performer.
However, experts have also looked into the cost of staff turnover and they’re coming up with much higher figures. Despite being a little out of date, Oxford Economics’ research shows that: “the loss of an employee earning £25,000 a year or more carries an average financial impact of £30,614, ranging from £20,113 for retailers to £39,887 for legal firms.” Worse still, losing higher paid workers will financially damage your firm much more than this.
Dive into the report and you’ll find that the figures take into account two major sources of costs:
a. Advertising the role - including marketing
b. Recruitment - time and fees
c. The cost of internal processes - like HR procedures to manage an employee out
d. Interviewing time for managers - including preparation and reviewing CVs
Introduce a new member of staff and you’ll expend significant additional amounts of managerial time and effort plus other costs like salary, NI, training, new equipment and possibly even new desk space if a new hire is going to be located in a different office to the person they’re replacing. All in all, the logistical side of attrition costs on average £27,000.
2. Lost productivity:
a. Wages for a new hire who’s working below optimal productivity
b. Loss of additional revenue in the form of profit that would be generated by a more experienced member of staff
On average these costs amount to £8,000 to £18,000 (depending on sector) when replacing an established worker with someone from the same industry. This rises to between £18,000 and £40,000 when recruiting someone from outside the sector.
These figures tend to be even worse when an employee leaves during their first twelve months with a company. That’s because this is when a new hire’s productivity will be lowest and you’ll have spent the most in terms of training, hiring and onboarding.
Many businesses don’t get this far when working out the cost of turnover.
But these numbers are just the tip of the iceberg.
There’s a whole lot more you need to consider to understand the true cost of attrition to your business.
A Real-Life Example of the Cost of Attrition
When one of our clients – a fast growth SME - asked us to recruit their tenth replacement in two years, we sat down with them to put a price on their turnover problem. We looked at a range of costs including hiring, onboarding, training, lost productivity, management time and client loss due to staff shortage.
Having lost ten people in two years, we worked out that the true cost of attrition was over £700,000!
Clearly, this is an enormous sum of money. Cash that could have boosted the bottom line, hired additional headcount to grow the business, or been invested in new technology and training to improve productivity. So, although the sum itself is absolutely enormous, the lost opportunity caused by turnover was even more significant.
There’s More Bad News...
Attrition doesn’t only cause financial problems. Some people will leave on good terms. Others, not so much.
Bad mouthing, creating an atmosphere, even persuading other colleagues to leave. We’ve experienced all of this in our own business with one individual influencing half a dozen others to resign.
I’m not too proud to admit that this cost us an arm and a leg. On the positive side, it prompted us to take steps to address our culture to avoid a repeat.
How to understand the true cost of attrition
In addition to the costs discussed above, there are four fundamental areas you need to explore when seeking to understand the wider impact of staff attrition your business.
Do you measure the productivity of a team when a person leaves? Losing someone can hit team performance heavily. It can distract them people their objectives, damage morale and reduce productivity, whilst increasing the workload of the remaining team members.
2. The impact of ‘bad leavers’
One bad egg in your business can do an incredible amount of damage, dragging others down with them. There may be some people in your business who are on the edge of leaving, but you may still value them and want to hang on to them so they can develop. A ‘bad leaver’ often stimulates a mass exodus that can cause you a major headache. Are you measuring the impact of this scenario? You should be.
3. The impact of ‘good leavers’
People will always move on, find a better opportunity, faster progression, more money, or maybe even start their own business. They may leave on amicable terms. You may consider ‘it was the right decision for them after all’. You never consider this ‘attrition’. But it is. If people are leaving your business in any way you should be measuring it and the impact it has on your costs.
Worse still, their leaving could result in further lost staff, whether they leave on their own accord, are poached or just have their head turned elsewhere.
4. Opportunity cost
Are you measuring how the loss of a key individual affects the success of a project? Have they lost you a key client? Did an opportunity slip from your grasp because of their poor performance or your lack of resource? Simply put, a project or client lost is an opportunity cost, and should be considered so when evaluating the cost of attrition.
How Can You Evade These Costs in Your Business?
Knowing that turnover can be eye-wateringly expensive, it’s time for leaders to start thinking about attrition differently. To see it as an unacceptable cost to the business that not only impacts the bottom line but restricts growth and business improvement.
Which begs the question, what causes attrition and how can you stop it? Find out in the second part of this series - coming soon.