Cost of Turnover

The following is a comprehensive checklist of items to include when calculating the cost of turnover in any organization. To determine the costs, have the hourly and weekly cost of fully loaded payroll costs (i.e. salary plus benefits) of the vacant position, the management staff, the recruitment staff and others as outlined below.

It should be noted that the costs of time and lost productivity are no less important or real than the costs associated with paying cash to vendors for services such as advertising or temporary staff. These are all very real costs to the employer.

These calculations will easily reach 150% of the employees' annual compensation figure. The cost will be significantly higher (200% to 250% of annual compensation) for managerial and sales positions.

To put this into perspective, let's assume the average salary of employees in a given company is $50,000 per year. Taking the cost of turnover at 150% of salary, the cost of turnover is then $75,000 per employee who leaves the company. For the mid-sized company of 1,000 employees that has a 10% annual rate of turnover, the annual cost of turnover is $7.5 million!

Do you know any CEO who would not want to add $7.5 million to their revenue? And, by the way, most of that figure would be carried over to the profit line as well. What about the company with 10,000 employees? The cost of turnover equals $75 million!

Here is the list:


Costs Due to a Person Leaving:
1. Calculate the cost of the person(s) who fills in while the position is vacant. This can be either the cost of a temporary or the cost of existing employees performing the vacant job as well as their own. Include the cost at overtime rates.
2. Calculate the cost of lost productivity at a minimum of 50% of the person's compensation and benefits cost for each week the position is vacant, even if there are people performing the work. Calculate the lost productivity at 100% if the position is completely vacant for any period of time.
3. Calculate the cost of conducting an exit interview to include the time of the person conducting the interview, the time of the person leaving, the administrative costs of stopping payroll, benefit deductions, benefit enrollments, COBRA notification and administration, and the cost of the various forms needed to process a resigning employee.
4. Calculate the cost of the manager who has to understand what work remains, and how to cover that work until a replacement is found. Calculate the cost of the manager who conducts their own version of the employee exit interview.
5. Calculate the cost of training your company has invested in this employee who is leaving. Include internal training, external programs and external academic education. Include licenses or certifications the company has helped the employee obtain to do their job effectively.
6. Calculate the impact on departmental productivity because the person is leaving. Who will pick up the work, whose work will suffer, what departmental deadlines will not be met or delivered late. Calculate the cost of department staff discussing their reactions to the vacancy.
7. Calculate the cost of severance and benefits continuation provided to employees who are leaving that are eligible for coverage under these programs.
8. Calculate the cost of lost knowledge, skills and contacts that the person who is leaving is taking with them out of your door. Use a formula of 50% of the person's annual salary for one year of service, increasing each year of service by 10%.
9. Calculate the cost impact of unemployment insurance premiums as well as the time spent to prepare for an unemployment hearing, or the cost paid to a third party to handle the unemployment claim process on your behalf.
10. Calculate the cost of losing customers that the employee is going to take with them or the amount it will cost you to retain the customers of the salesperson or customer service representative who leaves.
11. Subtract the cost of the person who is leaving for the amount of time the position is vacant.

Recruitment Costs:
1. The cost of advertisements (from a $200.00 classified to a $5,000.00 or more display advertisement); agency costs at 20 - 30% of annual compensation; employee referral costs of $500.00 - $2,000.00 or more; internet posting costs of $300.00 - $500.00 per listing.
2. The cost of the internal recruiter's time to understand the position requirements, develop and implement a sourcing strategy, review candidates' backgrounds, prepare for interviews, conduct interviews, prepare candidate assessments, conduct reference checks, make the employment offer and notify unsuccessful candidates. This can range from a minimum of 30 hours to over 100 hours per position.
3. Calculate the cost of a recruiter's assistant who will spend 20 or more hours in basic-level review of resumes, developing candidate interview schedules and making any travel arrangements for out-of-town candidates.
4. The cost of the hiring department (immediate supervisor, next level manager, peers and other people on the selection list) time to review and explain position requirements, review candidate's background, conduct interviews, discuss their assessments and select a finalist. Also include their time to do their own sourcing of candidates from networks, contacts and other referrals. This can take upwards of 100 hours of total time.
5. Calculate the administrative cost of handling, processing and responding to the average number of resumes considered for each opening at $1.50 per resume.
6. Calculate the number of hours spent by the internal recruiter interviewing internal candidates along with the cost of those internal candidates to be away from their jobs while interviewing.
7. Calculate the cost of drug screens, educational and criminal background checks and other reference checks, especially if these tasks are outsourced. Don't forget to calculate the number of times these are done per open position, as some companies conduct this process for the final 2 or 3 candidates.
8. Calculate the cost of the various candidate pre-employment tests to help assess a candidates' skills, abilities, aptitude, attitude, values and behaviors.

Training Costs:
1. Calculate the cost of orientation in terms of the new person's salary and the cost of the person who conducts the orientation. Also include the cost of orientation materials.
2. Calculate the cost of departmental training as the actual development and delivery cost plus the cost of the salary of the new employee. Note that the cost will be significantly higher for some positions such as sales representatives and call center agents who require 4 - 6 weeks or more of classroom training.
3. Calculate the cost of the person(s) who conduct the training.
4. Calculate the cost of various training materials needed including company or product manuals, computer or other technology equipment used in the delivery of training.
5. Calculate the cost of supervisory time spent in assigning, explaining and reviewing work assignments and output. This represents lost productivity of the supervisor. Consider the amount of time spent at 7 hours per week for at least 8 weeks.





Lost Productivity Costs:

As the new employee is learning the new job, the company policies and practices, etc., they are not fully productive. Use the following guidelines to calculate the cost of this lost productivity:
1. Upon completion of whatever training is provided, the employee is contributing at a 25% productivity level for the first 2 - 4 weeks. The cost therefore is 75% of the new employee's full salary during that time period.
2. During weeks 5 - 12, the employee is contributing at a 50% productivity level. The cost is therefore 50% of full salary during that time period.
3. During weeks 13 - 20, the employee is contributing at a 75% productivity level. The cost is therefore 25% of full salary during that time period.
4. Calculate the cost of coworkers and supervisory lost productivity due to their time spent on bringing the new employee "up to speed."
5. Calculate the cost of mistakes the new employee makes during this elongated indoctrination period.
6. Calculate the cost of lost department productivity caused by a departing member of management who is no longer available to guide and direct the remaining staff.
7. Calculate the impact cost on the completion or delivery of a critical project where the departing employee is a key participant.
8. Calculate the cost of reduced productivity of a manager or director who loses a key staff member, such as an assistant, who handled a great deal of routine, administrative tasks that the manager will now have to handle.

New Hire Costs:
1. Calculate the cost of bring the new person on board including the cost to put the person on the payroll, establish computer and security passwords and identification cards, business cards, internal and external publicity announcements, telephone hookups, cost of establishing email accounts, costs of establishing credit card accounts, or leasing other equipment such as cell phones, automobiles, pagers.
2. Calculate the cost of a manager's time spent developing trust and building confidence in the new employee's work.

Lost Sales Costs:
1. For sales staff, divide the budgeted revenue per sales territory into weekly amounts and multiply that amount for each week the territory is vacant, including training time. Also use the lost productivity calculations above to calculate the lost sales until the sales representative is fully productive. Can also be used for telemarketing and inside sales representatives.
2. For non-sales staff, calculate the revenue per employee by dividing total company revenue by the average number of employees in a given year. Whether an employee contributes directly or indirectly to the generation of revenue, their purpose is to provide some defined set of responsibilities that are necessary to the generation of revenue. Calculate the lost revenue by multiplying the number of weeks the position is vacant by the average weekly revenue per employee.

PREPARE NOW FOR AN UPSWING IN THE ECONOMY

If you looked into a crystal ball…what would you see?

Consumer spending—up. Government spending—up. Inventories—low. Factory orders are surging. Money is cheap. The stock and housing market is booming. And talent is available. Sound too good to be true? Well it happened in 2002 right after the big dip in the economy following the last recession. And if history repeats itself, an upswing may be just around the corner.


WHEN IT HAPPENS,
WILL YOU BE READY?
Throughout the past century, businesses have had a habit of becoming too lean during a downturn. So when the economy picks back up, they have trouble getting back on track.
Want to ensure you're ready for growth? Then keep following the lessons you've learned during the last several months:


SPEND WISELY.
During a recession, businesses scrutinize every expense. Why stop when profits increase? While you shouldn't be pennywise and pound foolish, you should continue to treat every expense as an investment. If the investment won't yield improvement in your efficiency, cost structure, or ability to service customers, don't make it! Some of the smartest places to put your money in the coming months include:

• Technology enhancements to improve productivity
• Infrastructure development to increase capacity or operational flexibility
• Product developments to better satisfy customer needs
• Process improvement to increase efficiency
• Training and employee development
• Sales and marketing

Set a goal to become the lowest cost producer of the goods and services that best satisfy your customers' needs. In manufacturing, they call this lean thinking—eliminating all waste from production processes. The goal is not to become the cheapest—it's to become the most efficient producer at the level of quality your customers want. At the same time, focusing on process helps to drive improved consistency, which is one of the most important drivers of quality.


AVOID DEBT.
Leverage can be essential for capital projects, but avoid having too much of a good thing. Did you know that five of the last seven recessions were "double dip" recessions—two periods of decline with a brief rebound in the middle. Protect yourself by borrowing no more than you can comfortably repay in three to five years assuming zero to moderate revenue growth.


MANAGE KEY INDICATORS.
Profit is no excuse for poor performance. Key indicators are those metrics that predict future performance in your industry. Unlike financial statements, which are backward looking, key indicators allow you to forecast future results. While every business is different, key indicators to watch may include:

• New Orders — the pace of orders can show the direction your business is heading
• Inquiries — the volume of inquiries is a measure of future results as well as the effectiveness of sales and marketing activities
• Conversion Rate — a measure of the market and the productivity of your sales efforts
• Days to Pay — an indication of your clients' financial health
• Quick Ratio (A/R divided by A/P) — watch for trends to see how well you're managing cash
• Service Request / Customer Complaint Volume — an indicator of product and service quality


BE AGGRESSIVE ABOUT SALES AND MARKETING.
Want to know the dumbest statement ever made by a CEO — and this is an actual quote: "We're so busy right now that we don't want any more new customers." This comment was made by a CEO in 1999, and guess what, he got his wish—he went out of business shortly thereafter.

Every day your business is headed in one of two directions: up or down. It's obvious, but it needs to be said—you always need new customers. While advertising traditionally increases during good times, sales efforts often get less aggressive as more time gets spent servicing existing clients. Avoid the temptation to turn sales people into service reps, and instead, increase quotas as the economy improves and invest the revenue into developing your capacity for service.


DEEPEN CLIENT RELATIONSHIPS.
It's funny—and sad—how many businesses had to be reminded to focus on building client relationships during the recession. Strong client relationships are a critical asset in any economy. Don't wait for business to get better to go out and look for new ways to help your customers. Get out there and find out:

• What you do well and where you can improve
• The challenges your clients face and how you can help
• The new products and services your customers are going to need
• New contacts you can work with inside existing accounts
• New applications for your products and services at each customer site
• What you can do to win a 100% share of each customer's business


STAY POSITIVE.
No question, it's tough to stay positive and optimistic during a slowdown. But it's essential. Negativity spreads and can eat away at the core of your culture. Regardless of whether business goes up, down or sideways, find occasions to celebrate. Reward people for their results. Recognize them for their efforts. And constantly give them a reason to smile and feel good about the future. Optimism is contagious—it breeds excitement, a willingness to work hard, and it gives customers more desire to work with you.