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Let’s face it, we are not going to reveal the magic formula enabling you to tally the precise attrition cost, 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.
Attrition Cost: Key Takeaways
• The Complexity of Attrition Costs: Due to organizations' varying dynamics, there is no universal formula for calculating attrition costs.
• Tangible and Intangible Costs: Tangible costs include recruitment expenses, onboarding, training, productivity loss, and underperformance of new hires. Intangible costs, such as low morale, managerial distractions, and reputation damage, can have lasting impacts on the organization.
• Retention Starts with Hiring: The most impactful way to reduce turnover is to focus on hiring the right candidates from the start, emphasizing their motivation, stability, and long-term fit.
Cost of Attrition: Formulas and Factors
In an HR department wonderland, you have only natural attrition - 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
Total leavers
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 the cost.
This cost can be partially substituted with an external recruiter’s fee should you opt for recruitment 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 cost-per-hire evaluation.
In the real world, our world, things tend to get a bit more complex, even murky.
Causes of Employee Attrition
Reasons for employee attrition are many - 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.
Tangible and Intangible Attrition Costs
Both types of costs influence the final result.
Tangible costs of attrition:
a. Internal recruitment staff and/or
- advertising,
- screening, selection,
- recruiter’s salary,
- assessments,
- testing,
- 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:
A More Precise Attrition 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.
Simplified attrition cost formula
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 reduce the attrition rate to acceptable and manageable levels.
Find out more about retention measures: 5 Recruitment Tips for Better Retention in 2024.
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 talent 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 the 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 to Control Attrition Costs
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.
Attrition Cost: Frequently Asked Questions
What does attrition mean in business?
Attrition in business refers to the gradual reduction of the workforce due to natural reasons like retirements, resignations, or voluntary attrition, where employees leave without their roles being replaced. This process can have direct and indirect costs.