How Does Turnover Impact Your Organization’s Bottom Line?
How does employee turnover impact organizations? Follow these 4 steps to calculate how turnover impacts your organization’s bottom line.
Employee turnover is a critical challenge that almost all HR managers stress over. Turnover rate is a typical measurement that many organizations use as a scorecard for HR. While many HR departments still use turnover rate as a key indicator of success (or failure), knowing this number does very little to indicate HR’s impact on business outcomes.
There are certainly some benefits to knowing your attrition rates over time: you can benchmark your current success against past years, and loosely measure the success of your retention strategies. However, the true cost of turnover can’t be analyzed by simply knowing your attrition rate and whether or not it has increased or decreased.
Reporting to leadership that your turnover rate is 2% lower than last year may sound impactful to HR—the people who spent months planning a new retention strategy, actioning on these strategies, and improving their talent pipeline to ensure new hires stay put –but it means very little to a leadership team who cannot see how this impacts their bottom line.
Changing the question from “What is our turnover rate?” to “What is the cost of our turnover?” makes it real and tangible to the business leader.
Reducing turnover is time-consuming and expensive, and has largely been based on gut-feeling and guesswork, until recent years. As HR teams generate more data, people analytics platforms have made it easier to measure the impact of retention strategies on your organization’s bottom line.
4 steps to calculate how employee turnover impacts your organization’s bottom line
1. Estimate the cost of replacing an employee
It costs money to replace your people. Every aspect of losing an employee and hiring another has a price tag; recruiting, hiring, onboarding, developing talent, and bringing them up to the same level of productivity as the previous employee all have hard costs. The time lost to recruiting and the reduction in productivity can cost months’ worth of work. In some industries, you may even be losing revenue if your best sales person takes clients with them.
Solving a critical turnover problem is one of the most impactful ways HR leaders can financially impact their organizations. While some costs are easy to calculate, such as recruiter fees, others are more difficult to calculate without crunching a lot of numbers in Excel. People analytics platforms make it easier to put together a hard cost on replacing an employee by calculating this for you.
2. Look at the intangible costs
There are invisible costs to employee turnover that may not even be seen directly on a financial report. Intangible costs include reduction in employee morale and engagement, increased burnout, and the loss of organizational knowledge when a key employee leaves suddenly. People analytics tools can help identify and predict potential burnout in understaffed departments by analyzing overtime rates, absenteeism, engagement, and more.
Employee turnover can also have a significant impact on your employer brand. If an employee has a bad experience, they might choose to share that on platforms like Glassdoor, Indeed, and LinkedIn. An employer brand is very difficult to fake. People see right through companies who use a heavy hand to push current employees to combat negative reviews with positive ones. The most effective way to repair a dent in your employer brand is to listen to your past and present employees, and create retention strategies that actually repair their concerns.
3. Determine your budget for retention strategies
It is crucial to understand turnover costs in order to create a budget to improve employee retention. A good retention strategy should save your company money. Knowing how much you are spending on turnover gives you the data for a profit-maximizing decision: how much should you be spending on retention? You can calculate the above costs by collaborating with your operations or finance teams, or by utilizing a people analytics platform.
Rather than creating a blanket retention program, which can be extremely costly, strategic HR teams are using predictive analytics to determine which employee groups are at the highest risk of leaving, then applying the most dollars to where they’ll have the best impact. This requires organizations to be fairly sophisticated in their people analytics strategy.
4. Understand that turnover can be healthy
There are many reasons for an organization’s turnover rate to fluctuate, and not all of them should be seen as negative. If your turnover costs are less than what you anticipate it would cost to improve your retention strategies, accepting your current turnover rate might be more comfortable than spending a lot of time and energy building a new strategy.
Some industries and locations have higher turnover rates than others. For example, the retail industry will always experience seasonal fluctuations that are very healthy for business. Businesses with a large percentage of entry-level employees may have built entire business strategies around higher turnover rates. To benchmark against your industry and location, a people analytics solution can help you compare your rates to your competitors.
Look beyond turnover
Focusing on the bigger picture—improved workforce planning—is a far more meaningful strategy than trying to reduce attrition rate without taking the time to understand the why. Because of all the different factors that affect turnover, it’s important to look at your resignation metrics in-depth so you can focus on the right areas and not just to see what happened, but understand why it happened, what will happen next, and how to adapt your retention strategy to align with company objectives.
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