When turnover happens, money goes out the door. For whatever reason, people eventually leave companies; new employees are recruited to replace those who have left. That’s turnover. But what is it really costing you, why does it have to happen in the first place, and is there anything you can do to minimize it? Our perception is that a positive hire can actually do a lot for a company. But the cost of a bad hire can be detrimental.
Different Factors That Affect Turnover
- Turnover cost per employee
- Separation costs
- Replacement costs
- Training costs
- Outlay costs
- Time to fill
- Loss of performance
- Loss of morale/confidence
- Loss of credibility in your office
- Loss of revenue
Questions to Think About
Hiring is an intricate monster to tame. There are so many factors to consider when you need to hire someone. After the fact, consider these questions.
- How do you hire someone?
- Do you hire by yourself or do you use a committee?
- Was it a bad hire?
- Was it a poor decision?
- Was the decision by committee faulty?
- Does the hiring authority show a constant history of hiring bad people?
- Are the managers who have been hired unsuccessful?
- Is there nepotism involved?
- Is there a lack of talent pool?
- Is that why the new hires are not successful?
- Is there a fundamental reason that the hiring authority isn’t able to hire the right people?
- Do you have the resources or the right interview skills?
- Should you outsource?
When it comes to turnover, or replacing valued employees, these are a few questions that may arise.
If you do nothing about your turnover problems, then your company will hit a plateau and it will not grow. If the reason is because you don’t have the resources to deal with turnover, such as the time or energy, outsourcing might be a good idea. Outsourcing certain functions of the HR department proves to be successful when the HR department is completely overwhelmed, or if the company is not large enough to justify an HR department, typically under 100 employees. Most hiring authorities measure hiring efficiencies with Outlay Costs (cost of recruiting + cost of hiring + cost of training). This is a great tool to adopt if you’re not already doing so.
On the other hand, if the reason you are doing nothing about your turnover problem is money, then investing time in learning better hiring practices might be helpful. If the people you hire continue to fail in their roles, then consider taking a closer look at your hiring procedures and try to figure out which point in your process is the weakest.
Good Hire, No Hire, Bad Hire
The cost of a hire is really about the value of retention. You’re still going to have costs with or without turnover. There are three levels of cost: the regular costs of a good hire, the cost of doing nothing, and the cost of a bad hire.
Good Hire
The cost of a good hire is still going to cost you. You still have to bring that person in. There are costs associated with sourcing, recruiting, staffing, training, benefits, and health care. There are three formulas that go along with a regular hire.
- Cost per Hire = (external costs + internal costs) / number of hires
- raining Investment Factor = total training costs / headcount
- Health Care Costs per Employee = total cost of health care / total employees
- Time to Fill = number of days to fill position / number of employees hired
These are all the regular costs, regardless of turnover.
No Hire
The cost of doing nothing is the midlevel cost, but you lose revenue, morale, and internal credibility. The cost of not being able to bring somebody new into your organization might seem somewhat minimal compared to the cost of a bad hire, but it can still affect a company adversely.
Bad Hire
And finally, the cost of a bad hire includes the regular costs of a good hire plus all the negative costs of a bad hire. You lose morale. You lose that excitement with the other employees. You lose credibility in the marketplace. And you lose a greater sense of credibility within your office. Oftentimes, you lose real money, because the bad hire is not going to be able to make money. Not only is there a loss of revenue, but also you may not get any new business. In addition, you may be losing money on the business that you’re currently receiving. You lose all sense of momentum.
- Turnover Costs per Employee: (Separation Costs + Replacement Costs + Training Costs + Lost Performance) / Number of Replacements.
You have to build everything back up all over again. Quite possibly, the cost of a bad hire also costs retention, because you lose people. Your good people might leave.
For instance, if a company just hired their third manager in three years and placed him in the same role, employees become frustrated. If it’s a third manager, they can’t seem to retain the person. The manager who is over the managers being hired may be the one who is failing. It may be that no one is doing anything about it because that person has already made it up the ladder for whatever reason. He’s likely not going to get fired. If he continues to make these poor decisions, then it will continue to trickle down. Retaining this type of employee could pollute the rest of the organization very quickly. The loss of confidence, morale, and all those other different things may eventually lead to more employees leaving.
Leading and Lagging Indicators
Here are some tools to help you take a closer look at how you’re doing things. Leading and lagging indicators are factors that predict or measure your performance. Leading indicators anticipate future performance, and lagging indicators measure the results of a process.
Leading indicators anticipate the future performance of X, which X is a positive hire, a negative hire, or doing nothing. You can come up with the factors related to this. What are your expectations? What do you anticipate happening as a result of each of these options?
Lagging indicators measure the results of that, whatever it is that you choose. Previous statistics can help show an actual pattern. “This is the third GM that we’ve had in here. What are we doing wrong?” You need to do a self-audit of your department. I talked to someone the other day who just hired their sixth GM in six years. They’re not promoting the GMs, they’re just leaving - getting burned out and leaving.
These lagging indicators are more concrete, such as:
- Shallow talent pool
- Fluctuating market
- Location
- Not having the right interview tools
- Dysfunctional manager
- Faulty interview process
The BRAN Strategy
People say, “We’re missing something: the strategy.” If you’re just trusting one person to make a decision, bringing on four or five key people could help narrow it down, depending on your internal structure. It would be helpful to think strategically up to this point by asking yourself:
- How are we getting here?
- Why is this happening?
- What can we do to prevent this from happening again?
Consider the acronym, BRAN: Benefit, Risk, Advantages, do Nothing. If you ask yourself about a process or about hiring a certain person, ask yourself these questions.
- B: What are the Benefits?
- R: What are the Risks?
- A: What are the Advantages?
- N: What happens if you do Nothing?
Asking these simple questions about your processes will in essence help you audit your own hiring practices to help you start thinking more strategically. By doing so, you can step away from personal attachments or unrealistic expectations created for the position. I find this acronym useful - not only in the hiring process - but also with other important business and life decisions.
A Sample Case Study
What are the repercussions of hiring the wrong person aka “a bad hire”? Go ahead and calculate your cost per hire. External cost plus internal cost, divided by the number of hires. There’s an actual value to it. Let’s say that number comes out to be $8,000. When someone leaves, your attitude shouldn’t be, “Oh, that guy already left. Well, let’s just put an ad out in the paper.” Really think about all the repercussions. You have to be careful who you hire, because it costs $8,000 to hire somebody. Then there’s the turnover costs for a hire, then the training investment, and then the healthcare cost per employee. You have to add those in, as well.
Let’s just take a particular position that makes you, say, $100,000 per year. Then there’s another $100,000 for the amount of time that person stayed there, let’s say a year. So that’s the profit lost. And instead of that person actually making you 100k, he lost you 50k. So, now you have lost business, and maybe even bad operations. So not only did you not make the 100k, you lost an additional 50k. And then, because of that person, another person left. That’s an additional 100k. You have all these costs, but you can plug in your own numbers. You can equate this to anything. These are good factors. The loss of business, unfortunately, is huge when it comes to dealing with a bad hire. Potentially $350k or more.
Take a particular company in the south, for example. The owner sold his company to another larger company. About a year later, they couldn’t make up their mind about certain business factors and they kept bringing people in. Well, the former owner left. He just walked out the door and started another company. All the employees he hired, which the new company purchased, are all going to his new company. That’s six sales reps, a general manager, a maintenance manager, and an operations manager. This was a huge portion of the infrastructure. The larger company had to start all over again and build their entire infrastructure back up. In this case, they also lost all the time it takes to find people to fill all those positions. What is turnover really costing you? Remember the Replacement Cost Formula? That’s going to equate to possibly upwards of $2M in lost revenue. And low morale for those left behind - if they continue to stay, as well as low credibility within the company and in the market.
Let’s face it, attrition happens. For some, it is an enormous factor, a spiral that will burn up time, money and resources. Consider creating a strong employee retention program, which can help reduce the chances of employees leaving. Counter to what most decision makers believe, monetary rewards are not what the majority of employees value. Of course, staying competitive in regards to salary and hourly pay is in the best interest of a company, especially in a dynamic industry where the talent pool is shallow. Creating systems of rewards, acknowledgements, advancements and ideal working environments add to the overall retention of your key employees, thus reducing turnover and ultimately giving you the time to do what you do best: grow your company. Focus on hiring the right person. Focus on your retention efforts. Then turnover will essentially be a thing of the past. It will only cost you what it costs to hire the next right person.
