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What many experts have been predicting for the last several years is now occurring at many companies: key people are jumping ship for greener pastures. We are hearing from many member organizations that turnover has been rising pretty substantially. There are obviously many causes of turnover, and many solutions. I'm not going to address any of those in this article. Instead I want to deal with what I think is a bigger problem facing companies. THAT their turnover is high is bad enough, what's worse is that for some reason appropriately addressing it isn't a priority at some companies, and I have a hunch as to why.
How many times have us HR professionals been told that we need to speak finance if we're going to be respected in the board room. So one of the best ways to get the executive team's attention around turnover is to show them how much the turnover is costing the company using your own real financial numbers. Let everyone know what's worked for you in the comments below. However, "speaking" finance and "applying" finance are two totally different things. Take a company that has 100 employees and historically had a total turnover rate of 10%. Not bad. That means they lose, on average, 10 employees per year. Now say their turnover is now at 20% per year. Sound crazy? I'm hearing rates up over 50% for some companies that were historically in the 10-20% range. At 20% turnover, now they are losing around 20 people per year. Let's say the average salary of the lost employees is $60,000 per year with a small range spread, and the company has annual revenues of $25 million with net operating earnings (also called EBITDA) of $2 million.
What is turnover really costing the company? Well, if you believe some national HR organizations, turnover costs around 20% of a person's salary. So using that model, our made up company is losing $240,000 a year at a 20% turnover rate which is around 12% of net income. That is a rather large number that should get the attention of the executive team, right?
So now our HR Manager Bob takes this number to his executive team expecting approval to invest money to fix the problem. [Now let's apply finance]. Bob presents to his executive team that turnover is costing their company over $240,000 a year and that for $50,000 they can invest in an employee survey, supervisory training, assessments, coaching, and an analysis of pay and benefits to see if they're competitive. All of those activities might improve turnover. Before Bob can get the costs out of his mouth, the CFO Nicholas asks, "what did turnover cost us historically?" Bob replies, "well, we typically averaged 10% a year, or $120,000." To which Nicholas mutters, "so the cost we are really trying to eliminate is $120,000, not $240,000." [Score one for the CFO]. He continues, "so you're asking us to spend $50,000 to save $120,000? And how much will it cost for us to give to raises to people in positions that your study deems are under the market? And are we going to have to enhance our benefits plan and if so what will that cost? Offer more vacation? More sick time. And by the way, is 20% high for our industry? I just got back from an industry association conference and turnover was definitely a topic of discussion, however most people I talked with were jealous of our 20%." [Turn out the lights, the party's over Bob...]
Where did Bob go wrong? I mean, he tried to speak the language of business. He didn't go in there with a "touch-feely" argument. He used real numbers. I believe Bob made three big mistakes. First, he used the wrong numbers and misleading conclusions. Second, I believe he TOTALLY UNDERESTIMATED their cost of turnover. Let me say that again, there is no way turnover is only costing his company 20% of someone's salary. That might be the case if all 20 people were doing the exact same job and that job was just one small part of a large process. But at $60,000 a year average salary of those departing, they were losing pretty reasonably skilled individuals. The 20% turnover cost number usually incorporates things like training costs, replacement costs, recruiting costs, HR's time, Manager's time, and stuff like that. Those are all good costs to capture. But that's not enough. What about lost productivity because we're spending so much time training new hires (using our highly skilled people) and those new hires take on average six months to get up to full speed? What about customers we've lost because of service failures? Or missed shipments and deadlines that raise the price we're charged? Or prospects we lose because our reputation is damaged. What about the knowledge we lost because half of extra 10 people that left were key people with an average of 20 years of experience. And some of that knowledge is likely going to competitors. I could go on. Then of course there are all of the soft costs like decreased morale, damaged employment brand making it harder to attract new people, and so on. All of these types of "Hidden costs" of turnover can drive our actual cost of turnover up over 2X annual salary as has been documented in many studies.
So let's replay our executive team meeting. Now Bob decides to go conservative and just say it costs them 1X salary for turnover. Well that's an extra $600,000 a year they're losing in net earnings because of the increased turnover. I suspect most executive teams would definitely be willing to listen to a proposal to make a $50,000 investment to potentially save $600,000 a year. [Score one for HR!]
What else did Bob do wrong? For starters, and perhaps most importantly, he should have met with the CFO prior to the executive team meeting to shore up the numbers. If Bob had gotten the CFO on his side before the meeting he would have had a much easier time. The last thing Bob needed was for an outspoken, skeptical CFO to discredit his calculations or assumptions. I'd even go as far as to suggest Bob go to the CFO in advance of the meeting with the question...."how can we best measure / project this cost?" Bob should bring ideas, suggestions, market data, and some rough calculations to that discussion....but getting the buy in of the CFO on the front end could be so powerful. Otherwise, the CFO might go into "audit" mode and just start arguing why the calculations don't make sense or apply to their situation, which is exactly what Nicholas did, which BTW is his job. Also, executive teams usually feel better about spending money if the person that guards the money is on board. Finally, I bet there are some areas in the company where they aren't losing many employees. How much are they already saving in those areas? Bob should factor that in to his calculations.
Call Tom Sheehan at (919) 325-4113 or Rick Washburn at (919) 713-5247 if you need help thinking through improving your turnover.
I'd love to hear success stories from you. Comment below on tactics you've used to make the case to address turnover at your company.