Reality check: the different faces of attrition costs
Let’s face it, we are not going to reveal the magic formula enabling you to tally the precise cost of attrition, because there is none. No matter how well you know the inner workings of your organization, the price tag of comers and goers is a moving target. What we can and will examine here are the influencing factors.
In an HR department wonderland, you have only natural attrition, that is people going into retirement. You know well in advance, on the day, who is leaving. The cost to replace that person can be summarized with this formula:
Yearly cost to identify and recruit replacements + applicable yearly training costs
Knowing exactly how many people leave every year - remember, we are still in HR wonderland - you can adapt your recruitment team to the precise needs of your organization and, therefore, know its cost. This cost can be partially substituted with an external recruiter’s fee should you opt for outsourcing. Add the cost of training the new hires. You can do away with most lost productivity because you have hired the replacements long in advance: the new persons hit the road running. Et voilà!
The unknown, and the real question in this oversimplified scenario, is to identify the reason why a company has only natural attrition. Possibly, it invests huge amounts every year in retention measures. In this case, retention costs must be added to the total amount. The grand total is the cost of attrition, and, divided by the number of people leaving, gives you a per-head (or cost-per-hire) evaluation.
In the real world, our world, things tend to get a bit more complex, even murky. People do leave companies before their retirement: positive economic cycles accelerate the process, the grass is always greener, people need a change, evolve, feel, and sometimes are, badly rewarded, you name it. Attrition is thus a significant cost that needs to be monitored and kept under control.
1. Tangible costs of attrition:
a. Internal recruitment staff and/or
- screening, selection,
- recruiter’s salary,
- background checks,
- time spent by employees involved.
b. External recruiter’s fee (some of the above costs are also applicable here)
c. Onboarding costs
d. Orientation Costs
e. Training costs (external and internal, i.e., costs of internal trainers, such as colleagues, managers, etc. )
f. Cost of new hires underperforming
g. Overtime by other employees
h. Lost productivity
i. Loss in output
j. Loss of revenues
2. Intangible costs:
a. Low morale of (overworked) coworkers
b. Lack of focus of managers
c. Loss of reputation with unsatisfied clients
d. Loss of clients
This list is exhaustive, but if you believe we have forgotten something, please write to us: email@example.com
A more precise cost calculation method
As it stands, we prefer using the term cost evaluation, because of the highly variable situation inherent to different organizations and industries. An example illustrates our approach. Be aware that we use tangible costs only, a more precise option in a possible template.
ACME Inc., employing 5.000 people with an attrition rate of 10% per annum.
+ The average salary amounts to €60.000 + 50% (social security, overhead, equipment, office, etc.) = €90.000 cost per employee.
+ Full cost builds up in approximately 6 months.
+ Which brings us to: 500 leavers and comers per year * €45.000 (€ 90.000/2)
+ Cost of attrition, a staggering €22,5 M per year! (thus with only 5% attrition, €12,25 M and with 20%, €45 M)
There are, of course, many more cost models, the point being that once you start identifying and adding all these tangible and intangible costs, the numbers become impressive.
The first, and correct, reaction for any company is to get that attrition rate under control, to acceptable and manageable levels. Retention measures are plentiful and the subject of another future blog.
What is essential to point out, and the central subject of this paper, is that there is a simple measure any company can and should apply to lower turnover (and decrease the cost of retention): pay better attention to whom they hire in the first place. According to recent research, hiring decisions are the most significant factor influencing later turnover. Recruitment consultants - internal or external - are the sparring partner of the line managers, helping to decide for the right candidate. But, and this is a big but, hiring decisions are only as good as the talent you have been interviewing. In other words, you can unknowingly and involuntarily be torpedoing your (acceptable) attrition rate by starting with the (half-) wrong candidates. Therefore, the solution for dealing with high turnover can be summarized in one short sentence: a serious, second to none, candidate selection process involving:
Identifying the best available talent on the market: to assess the availability of candidates, you need adequate market mapping that guarantees that no stone has been left unturned and you hold only top candidates in your pipeline. This method prevents wrong decisions, based solely on a first impression of “fit”. How do you go about exhaustive market mapping? The unique proven method is sourcing: the systematic analysis, approach, and engagement of potential professional candidates. You can read more on modern sourcing in our article here.
Stringent preselection with a focus on motivation and stability of candidates, achieved through the sourcing consultant’s resume analyses, telephone interviews, background checks, and reference checks.
Final decision-making hand-in-hand with line managers, guided by experienced onsite recruiters, true sparring partners.
The comfortable, flexible and efficient solution
One cost-effective and speedy way to achieve a close-to-ideal candidate selection process comes with collaborating with a recruitment process outsourcing (RPO) provider like Serendi. Serendi, and its peers in the RPO industry, sets-up, manages, and work with either embedded onsite recruitment consultants or your internal recruitment experts and your line managers.
Serendi offers experienced sourcing professionals that are the baseline for ensuring that only top resumes end up on your desk.
Well aware that recruitment is only one of the factors that determine attrition, we are convinced that managing the problem at its source is by far the most constructive, long-lasting, rewarding, and cost-effective option. Contact us for more information.