2018 was an economically good year for many organisations in the UK. The fact that the economy is doing well is also apparent in the labour market. There is an incontestable war of talent going on, and people are difficult to retain and attract.
In extreme cases, organisations have had to issue profit warnings to their shareholders because their employee churn was higher than expected. An employee leaving undesirably costs the organisation a lot of money and has a significant impact on all departments. Consider, for example, the disadvantage you have towards competitors due to someone leaving from product development. Or not finishing the budgets and annual accounts in time due to a resignation in finance or a load of unresolved technical problems because of under-capacity in IT. I could give you many more examples, but you get the picture. An unexpected resignation affects all levels of an organisation.
Why Your Organisation Is Losing Its Top-talents
Another common example is Bob. He works in the Sales department of an organisation with 300 people. He performs well, knows how to close deals and has a lot of product and sales knowledge. He is profitable for the organisation but does not feel challenged. His remarks in the annual survey are lost into the masses, and a tailor-made personal growth plan is not forthcoming.
Besides, his bonuses are being paid, so the organisation assumes that he is satisfied. In his role, bonuses are in abundance, sometimes even higher than what he gets now. Receiving a reward is not Bob's motivation, but it makes him think. With the current labour market, Bob receives many offers from both other organisations and recruiters. After 3 months of browsing through offers, he makes up his mind and decides to leave the organisation.
From then on, there are two different, unexpected costs for Bob's previous employer.
- The short term costs: a new vacancy, replacement, knowledge transfer, administration for HR and his manager, training the temporary employee, exit conversation, etc.
- The long term costs: In the long term, the pain will come from the results. The same results will not be achieved in the coming months. The new employee who will take over the role will need considerable time to obtain the same result, which will put more pressure on other employees of that department. Also, it is a well-known fact that when a leader or a well-performing employee leaves an organisation, others become restless and start to look around as well, a domino effect arises, and other employees leave too.
Additionally, during the last 3 months of someone's employment, the employee is less or no longer productive for the organisation and it has been proven that replacing an employee costs an average of 33% of its gross annual wage. If you consider someone with rare skills or a function that takes months to fill, the average costs of refilling a function can be up to 1x the gross yearly wage. In the UK, we see that 10% of new employees leave the organisation within one year. BE has made a detailed estimate of how much money gets lost into hiring a new employee.
Voluntary employee turnover is at 15% in the UK. 3 in 5 employers report an increase in employee turnover in the last three years - Robert Half UK
HR Must Create Awareness Around Talent Management
HR needs to become more proactive towards other departments. Other departments often think that worrying about employee turnover is HR's "problem". But, it affects everyone in the organisation. Creating awareness will make sure other departments are aware of the impact this has on them.
Now, let's look at the benefits of keeping an employee at a long term time, and the disadvantages of employees leaving.
of employee retention
of employee leaving
|HR||contribution to revenue||high cost for new employee|
|Finance||less budget for undesirable turnover, more budget for growth of the company||administration without ROI, cost for recruitment, freeing up budget for a new employee|
|Commerce||higher revenue = higher remuneration, less pressure||less results, revenue and rewarding|
Employee Lifetime Value
Let's take the example of Bob again. The brown line in the graph below shows you the path Bob has walked in his organisation. From his on-boarding to his resignation. Since Bob's organisation did not put much effort in people performance practices, the on-boarding process was lengthy and it took quite some time before Bob was able to perform well and generate any value for the organisation. Once he was up and running, he wasn't' able to unlock his full potential. He did contribute well, but not as much as he wished. After a while, Bob's tired of not receiving the right opportunities, so he leaves the organisation to look for a place where he would have a clear purpose.
The blue line represents what would have happened if Bob's organisation had invested in people practices. His on-boarding would have been quicker, which means he would have generated economic value almost immediately. Because Bob is actively coached and receives a lot of feedback, he is able to grow significantly within the organisation and his skills are a huge added value. He feels challenged, has a clear purpose and is getting rewarded, so his retention rate goes up. Once Bob decides it's time for another challenge, he does not leave the organisation with a bad feeling, but becomes an advocate for the organisation since he loved working there.
There is a significant difference in employee lifetime value between the two practices. The first one is short and not so sweet, while the second one is longer, generates more revenue and leaves the organisation with an increased employer branding.
Calculate The Cost Of Your Employee Turnover
You can calculate your own employee turnover cost using the next figures:
- Average yearly employee turnover
- Average yearly salary cost across the business
- Cost of replacing an employee (as a percentage of average salary cost)
It's impossible to get rid of all your unwanted employee turnover, but you can reduce it significantly. If you would reduce unwanted employee with as little as 5% you would save 247.500,- pounds only on employee turnover. Next to turnover, you can also measure HR's contribution with onboarding, engagement and performance. Image how much you could save then and how positive the impact would be on your organisation's financial results.
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