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Keeping the People Who Keep You in Business – Part 2 of 3

Paintbrush digging up a one hundred dollar billThis is the second in a three-part blog series exploring voluntary turnover in small and medium sized businesses – its causes, its effects, and tips on how to keep the employees you want to retain.  The first part described the causes of turnover in small and medium businesses (SMBs). Part 2 describes the effects of turnover on both SMB operations and bottom line success.

Invisible Expenditures: The Cost of Turnover and Hiring

Losing a good employee leaves me with a sinking feeling.  As soon as I know that he is on his way to a “better opportunity” I start worrying about how to cover the work until someone else is hired.  And trained.  And becomes part of the team. And becomes really productive.

Some managers act as though that process is free and employees are really fungible goods, which leads them to treat employees and the furniture about the same.  They figure they can always find another employee or office chair to fill the open spot.  I happen to think those managers are misguided and at the very least are not watching their budgets.  It goes without saying that they do not practice evidence-based management.

Maybe it would help if they understood the impact of losing a good employee: the cost, the knowledge problem, the productivity problem, and the ripple effect.

Everyone knows that turnover of good employees is costly, but do you know the cost in dollars and cents?  There are two kinds of costs of hiring: direct and indirect.

Examples of direct costs include:

  • separation costs when an employee leaves
  • advertising and other recruiting costs
  • referral fees
  • manager and HR time to review application materials
  • interview time and costs (like travel costs)
  • background checks and drug testing
  • initial on-boarding and training time

Examples of indirect costs include:

  • lower business productivity while recruiting and hiring
  • overtime to cover the work
  • productivity ramp-up time after the new employee starts
  • lower customer satisfaction and loyalty

So how much does turnover cost exactly? Calculations consistently find that the cost to hire one employee ranges from 25 percent of the position’s annual salary for lower paid jobs to over 100 percent of the position’s annual salary for higher paid positions.[i] That means replacing an entry-level employee could cost nearly $5,000!  When you lose an experienced employee or a seasoned manager, it easily costs over $25,000 to hire a replacement.

The costs continue after the new employee starts, too.  Even the best new employees need time to learn how you want the job done and how to fit in the new work culture.  After about two months, good entry-level new hires usually know the job pretty well. For higher-level positions (especially those requiring specialized knowledge or management skill) it will take 12  months or longer to adapt to a new job and company.

The biggest problem is that the cost of hiring is money spent invisibly – the costs are not on any financial statement and no one cuts a check to cover them. Hiring costs affect your bottom line – whether or not you track costs, you still pay.

Loss of Knowledge

Employee knowledge = company success.  SMB employees come to deeply understand the business.  Because of their size, SMBs rely heavily on the knowledge of every single employee.  And when that knowledge starts walking toward the exit sign, it is too late to retain either the employee or her knowledge.

Knowledge is an advantage that is difficult and expensive for competitors to imitate or duplicate.[ii]  The longer an employee stays with a company, the more she learns about how the company likes to do business and what works (and doesn’t).  She develops specific business-related skills, understands what customers expect and want, and she may have developed a personal relationship with customers.  This kind of understanding, called tacit knowledge, is important both for customer-facing roles and production work where employee knowledge can be used to improve work processes and deliver higher quality, lower cost business results.

While employee knowledge is a key factor in SMB success, most owners and managers do not think much about what their employees know.  You won’t be surprised that the research shows that organizations perform better when employees know their jobs well, when they understand how company business roles and activities combine to create success, and when they know their customers’ needs.  It takes time to develop that kind of knowledge and losing it can slow business growth or result in lost business, lower productivity, and reduced market share.[iii]

Turnover and Lower Business Performance

No surprise here: organizational performance generally goes down as voluntary turnover goes up.  When a position is vacant, some work can’t get done and that work has a price tag.

A simple way to calculate the cost of this lost productivity is to multiply the daily salary by the number of days the position is vacant.  (Some managers believe they “save money” if they delay filling a vacancy. If that is true, then the manager should consider eliminating rather than filling the position.)

Open positions lead to production and service delays, which, in turn, compromise customer service. Not only do productivity rates go down when voluntary turnover goes up, the rate of

innovation and growth slows as good talent leaves. A survey completed in early 2012 asked executives if a lack of the right talent led them to postpone or abandon any business actions in the past two years – 73% responded yes![iv]  So a two-year growth plan could easily become a three-year growth plan if an organization is struggling to keep the right employees (and their knowledge).

The Ripple Effect of Turnover

When good employees leave an SMB, there is a ripple effect – as they exit, their colleagues look at each other and begin to wonder whether they, too, should be looking for a new job as the economy grows.

Managers themselves can greatly influence turnover.  Like it or not, the way managers treat employees influences their decisions to stay or leave, maybe going to a competitor.  One

manager I spoke to recently left a company because he was tired of his manager throwing things… at people.  I’ll bet other employees are looking, too.

When good employees leave, managers can lose credibility.  After all, they are responsible for creating an environment where employees can succeed and produce good work results.  With turnover, employees become frustrated with extra work they take on to fill gaps left by the departing employee. If turnover continues, employees become demoralized and lose confidence that the manager can maintain a manageable, sustainable workload. So ongoing turnover can lead to even more turnover in a costly cycle.

The Bottom Line

Employee talent and knowledge are key success factors for SMBs, yet too often owners and managers do not calculate the time and dollar investment in employees, especially in top

performers.  A strategy to retain good employees pays off at the bottom line, but whether or not they invest in keeping employees, SMBs will pay.

Do you know how much your company spends on hiring new employees? If so, please leave a comment with your estimate.  If you can, include the industry and the size of the company… no need to identify the company.

Watch for Part 3 of the Keeping the People Who Keep You in Business series – you will learn four low cost retention strategies for SMBs so you can keep more of the people who keep you in business.

[i] Blatter, Marc et al.  2009. The Costs of Hiring Skilled Workers.  Working Paper No. 15. Bern, Switzerland: Institute fur Strategie und Unternehmensokonomik.

[ii] Barney, J. 1995. Looking inside for competitive advantage. Academy of Management Executive 9: 49-61.

[iii] Doan, Quang Minh, Camille Rosenthal-Sabroux and Michel Grundstein.  A Reference Model For Knowledge Retention Within Small And Medium-Sized Enterprises: 1-87.  (March 18, 2013)

[iv]Executive Survey, Spring 2012, Korn/Ferry Institute.

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