As the majority of talent pools continue to shrink*, a growing number of organizations are starting to focus on the management of turnover as a strategic business issue, both in terms of controlling bottom-line costs and driving top-line results.
Before an organization tries to address turnover, an important first step is to understand where turnover has the greatest impact on its ability to deliver core business services and products in addition to driving long-term strategic success. The organization also should consider factors that are relevant to the individual incumbents in various roles. These include whether the organization wants to retain these people and the reasons they might want to leave. Is it compensation? Prospects for advancement? Problems with their boss? Some other reason? Only by knowing the underlying causes can the organization begin taking steps to stem the tide of undesirable turnover.
What Are the Hidden Costs of Turnover?
Turnover's greatest impact is often caused by a talent gap in roles that are critical to executing the business's strategy and the erosion of revenue that results from the open positions. For example, turnover in roles that are critical to developing innovations and bringing them to market has a great impact on the top-line results in innovation-based companies, because they forego revenue as a result of the lack of new products.
What Is Undesirable Turnover?
To determine whether an organization is experiencing undesirable turnover, it must first identify its critical roles and then determine whether it is losing good talent in those roles. For example, two traditional "up-or-out" law firms have equivalent overall turnover rates, yet one is happy with the results and one is not. The firm that is losing key associates whom it expected to make partner is experiencing undesirable turnover because it traditionally develops partner talent from within and views the associate role as a critical pathway to partnership. The other firm, however, which is losing non-partner-track associates to clients or potential future clients, is experiencing good turnover. Not only is it shedding associates who were not expected to make partner, but it also leverages its relationships with former associates as valuable liaisons for the firm.
In some cases such as where a role is no longer important it may not matter if good people are leaving. If the organization expects to contract, turnover will be a less critical issue. However, a red flag should go up if turnover is occurring in roles that are strategic to executing the organization's current and future strategy.
Sibson's Human Capital Planning© segmentation framework provides a methodology to help organizations understand what roles are most critical and where undesirable turnover may have the greatest impact. Specifically, undesirable turnover in roles that it deems "strategic" and "core" will have more impact on an organization's abilities to execute its strategy. Therefore, greater focus and investment in terms of time, money and resources should be focused on determining what is causing the turnover in these roles and what specific retention strategies and investments the organization should use to reduce undesirable turnover (see Figure 1 below.)
What, Me Quantify?
Once an organization has determined whether it is experiencing undesirable turnover, it needs to quantify both the direct and the indirect costs. The direct costs are fairly well known and easy to measure. They include recruiting fees and hiring costs, as well as the expenses generated by hiring temporary workers, training replacements and paying overtime to the remaining staff. The indirect costs, which are not as well understood, can be much harder to quantify and greater. They include loss of productivity and capacity, misallocation of resources, reduced bench strength, lost customers, increased training time and lost work hours.
To quantify its indirect costs of turnover, an organization first must consider what type of business it is and what kind of indirect costs it is experiencing. Here are four examples of how the indirect costs of turnover can manifest themselves in lost revenue and productivity:
- An electronics company that has a government contract to provide a certain kind of communications product needs engineers to develop software for that device. If the company cannot attract and retain the right engineers, it will not be able to deliver the product on time, which will have a negative effect on its income.
- A pharmaceutical company has received approval to market a new compound that may deliver significant revenue for the next 10 years. However, it has experienced significant turnover in its marketing staff. As a result, the company must quickly determine what to do, or risk losing significant income.
- In CPA firms, much of the work is performed by recent college graduates whose output is then reviewed by more experienced managers. If the firm cannot get those young graduates, the managers will have to do the work and the partners will have to review it, meaning that they will have less time to perform the higher level tasks that they are paid to do, such as attracting new clients and developing new services. In addition, the firm will lose money because it cannot bill the work at the manager's or the partner's normal hourly rate.
- If the production line in a manufacturing business is fully staffed with experienced workers, the plant manager may spend 10 minutes a day making sure that operations are running efficiently and as planned. However, if the company is having staffing problems and the line is being run by workers who have been sent over by a temporary agency, the plant manager may have to spend much of the day ensuring that operations are running smoothly. Not only is a relatively expensive employee doing low-level work, but also the manager will not have the time to do his or her own job.
Another approach involves identifying which employees are key to delivering products and services, have a high replacement cost or exert a strong impact on revenue or profitability. Some organizations then use a more exact technique to determine the cost of turnover for these employees and use broad approximations for less critical employees.
Turnover and the EVP
Whatever is causing undesirable turnover, the organization can usually tie it to its employee value proposition (EVP). The EVP which explains why employees should want to work for the organization and why it should want them to work there consists of five components: compensation, work content, affiliation, career and benefits (see Figure 2 below.)
Organizations looking for the real reason they are losing top talent in critical roles usually can find it by exploring what is occurring inside these five EVP components. One way to do so is to conduct an employee attitude survey followed by linkage analyses to identify the relationship between elements of the EVP, turnover drivers and actual turnover in the business at the aggregate level.
What is it that makes an organization's top talent wonder if they might be happier somewhere else? It could be:
- Compensation An organization that pays its salespeople the median going rate will not retain high achievers who expect top rewards for their accomplishments.
- Work Content An organization that expects its mechanics to turn the same nut on the same aircraft day in and day out will not retain highly skilled mechanics who want variety.
- Affiliation A team-oriented organization will not retain lone-ranger entrepreneurial types who prefer to work on their own.
- Career A high-tech organization that does not offer regular opportunities for training will not retain employees who need ongoing instruction to keep up with rapidly changing technology.
- Benefits A hospital that requires employees to use its own facilities for treatment will not retain talented but highly reserved employees who want to maintain their privacy.
Figure 3 below shows how elements of the EVP can function as exit drivers, causing talented employees to leave.
Solutions for turnover are likely to have a much better return if they are targeted to specific high-cost-of-turnover areas and the real causes of turnover in those areas.
What Can Be Done to Reduce Bad Turnover?
Once the organization has identified the root causes of undesirable turnover in critical roles, it must decide what actions to take and investments to make to address the problem. This will require careful review of the information that was gathered in the cost and causes analyses to decide which problems to address first and how to solve them. Figure 4 below is a graphic case study of one such exercise.
The next step is to determine how much time, energy and money it will take to fix the problems and the potential return on investment for each potential solution. Some problems are relatively easy and inexpensive to fix. For instance, if an organization determines that it is losing talented employees because they do not fully understand the pay process and resulting compensation decisions, improved communication may be able to cure the problem relatively inexpensively. On the other hand, an alternative solution, like rolling out an in-house training program, might be more effective, but it would also be more expensive and intrusive. The organization needs to compare the cost of the undesirable turnover to the cost of the solution to determine what to do.
As another example, take the case of an organization that is trying to attract top-flight talent with a philosophy that focuses on paying only median compensation. Assuming that compensation is a key element of the EVP for hires in this role, if the organization improves its compensation, what is that going to cost and how is the organization going to finance it? Is the market going to be willing to pay more for the product? How will the proposed changes affect the organization in the future? Will the increase in compensation help generate more sales?
The final step is to develop a business case for increased investment in retention initiatives. Working out the potential return on investment will help convince the financial side of the organization that a proposed solution is worth the expense.
Every organization experiences turnover. Although many know their overall turnover rate, or even their overall cost of turnover, many do not know whether they are experiencing good turnover or undesirable turnover, which can hurt both the bottom and the top line.
Organizations need to identify their critical roles and the performance of individuals in those positions to determine whether and why they are losing top talent. They then need to quantify the effects and take steps to make any necessary corrections. While this is not an easy process, the returns can be significant, especially in today's tightening labor market.
* Some 41 percent of 2,407 U.S. employers polled in January 2007 reported having difficulty filling positions due to the lack of suitable talent available in their markets, according to the Talent Shortage Survey conducted by Manpower, Inc. The hardest-hit positions were sales reps, teachers, mechanics, technicians and management.