Employee turnover: The costs are staggering

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ITworld.com –

Any IT recruiter or hiring manager who's half on the ball probably has a plan for reducing turnover. You don't have to be a management expert or an economist to understand that if you're spending thousands of dollars and hours of your time to replace employees who have left, preventing the brain drain in the first place might have saved some of those resources.

What you might not know is how serious the problem is in the IT industry, and how pernicious its effects can be throughout an organization. There are plenty of consultants who stand ready, for a fee, to prove how bad turnover can be, and to show you ways to reduce it.

One such management consultant, Sibson & Co., a subsidiary of Nextera Enterprises based in Princeton, N.J., specializes in improving return on human capital, and last month released a study showing a 25 percent average turnover rate in the IT industry at large in 1999. The American Management Association (AMA; New York, N.Y.) confirms that rate in its mid-2000 annual job survey, according to Eric Rolfe Greenberg, the AMA's director of management studies. The AMA, which includes IT in the broader category of business and professional services, found a 21.8 percent turnover -- the highest rate outside wholesale and retail, at 32.6 percent. The rate for all industries was 16.9 percent in the survey, which polled 1,192 respondents.

Why is IT turnover so high? It's that old bugbear, the insanely tight labor market. Besides emboldening job seekers, it's driving companies to step up their recruiting efforts, providing still more incentive for people to leave their current employers, says Jim Kochanski, a Sibson principal involved in the turnover study.

If you think, as I did, that the springtime crash of the NASDAQ took a lot of wind out of job-hoppers' sails, think again. Though it probably took some corporate players off the talent market, the catastrophic drop in many companies' stock prices did at least as much to encourage turnover. "When your options are underwater, they aren't worth as much to you right now, so they don't have any retention value," says Sibson principal Seymour Burchman. While he couldn't cite hard evidence, Burchman says he has "a sense that there's been a little less movement."

Turnover costs: They're everywhere

The scariest Sibson number is this: $44 billion. That's how much the company says turnover directly costs the IT industry on an annual basis. Sibson takes the number of front-line employees, those most affecting customer satisfaction, which in IT means systems analysts, programmers, and computer engineers -- 5.2 million all told -- and multiplies their salaries by an estimated turnover cost of 55 percent ($34,100 per employee). If you factor those costs into the industry's operating expenses, and assume it reduces corporate earnings (and consequently stock prices) by that much, the result is a $3.1 billion drop in the industry's market capitalization.

Sibson builds three kinds of costs into its model. Direct costs include things like help-wanted advertising, interviewing, and overtime for employees who take on the departing workers' tasks. Opportunity costs are "situations where you're not able to work at capacity," Burchman says, "where you can't hire enough people to handle the business you have." Sibson includes several problems in this group, such as lost customer relationships due to poor service from partially trained replacement employees, or valuable client lists that leave with employees. Productivity suffers as the new hires tackle learning curves.

Indirect costs include things you can't easily quantify, but clearly have negative impacts on organizational productivity and know-how. Burchman mentions lower growth rates, loss of organizational knowledge, and reduced staff size and effectiveness. Management is hobbled, too. "When you get in these real high-turnover situations, managers can spend a lot of time figuring out how they're going to staff the organization rather than doing the strategic planning they were hired to do," Burchman says.

Sibson offers an online calculator so you can plug in your own variables and see what turnover might be costing your company (see Resources below for a link). A simple Web search on "turnover" yields similar calculators from other firms. An example in the Sibson study makes the industry numbers all the more tangible. Kochanski says the turnover costs shown for a 24,000-employee PC manufacturer (he can't name the company, a Sibson client) are realistic. Plugging in the averages, this company stands to lose $205 million to turnover.

Paying attention to retention

When turnover hits hard, a hiring manager's focus should turn to retaining the employees already onboard. But first managers need to understand why people leave their company, and they should be careful not to extrapolate from industry norms, Kochanski advises. Sibson found that "work content" -- not having an interesting, varied, and responsible job, or getting enough feedback from supervisors and coworkers -- is by far the biggest "exit driver" from companies. In a March 1999 fax survey by the AMA, however, people identified miscommunication as the main reason they left their companies.

Pay, benefits, and perks play important roles, as do career opportunities and training; poor relationships with supervisors can drive people away. Less obvious are what Sibson calls affiliation issues, "intangible things that bind you to a company," such as belief in its mission, pride in its reputation, or a positive corporate culture. But Greenberg says an AMA study of employees found skills-enhancement programs to be best for reducing turnover. "They're more effective retention tools than any other, up to and including stock options," he says.

To illustrate the importance of understanding your company's own retention issues rather than simplistically applying generalities, Kochanski cites two well-known IT clients (again unnamed) in North Carolina's Research Triangle Park area which have reduced turnover. One company targets most of Sibson's exit drivers, offering family-friendly policies, satisfying work content, and lots of monetary and other benefits. The other company sticks with wealth creation: stock options and other programs that can make employees rich. "They're totally different formulas, but they both work," Kochanski says.

Some of the Sibson analysts' other tips for retaining employees:

  • Consider paying retention bonuses and tying them to project completion. More companies are doing this to avoid losing people at particularly bad times. "In IT particularly, team continuity is important," Kochanski says.
  • Do exit surveys of people who have given their notice, but be sure to do it before they leave the company. You'll get a better response rate.
  • Interview (or survey) current employees on job satisfaction, even asking whether they intend to leave. Kochanski says a large percentage of high-tech workers say they would have stayed at their last job if someone had tried to keep them there.

Additional resources:

American Management Association: http://www.amanet.org

Sibson & Co.: http://www.sibson.com

Sibson's total cost of turnover calculator: http:// www.sibson.com/solution/retention/cot_calculator/index_cotcalc.htm

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