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Why Employee Turnover Is More Expensive Than You Think

The costs associated with hiring a new employee are far greater than many managers and business owners realize. But there are ways to keep those expenses down.

Image of a business owner learning first hand how expensive employee turnover is

I once worked for a company that became notorious for having a high turnover rate. Out of respect for people I still care about, I won’t mention the company by name, but if you looked at reviews from employees who used to work there, you would find headlines like, “You’ll find less turnovers in the NBA.

Eventually, it became obvious that management had become so hyper-focused on keeping the overhead of employee wages down that it ended up costing the business their investment in the more experienced employees who caught on and decided to take their talents elsewhere. In a matter of just a couple of years, that company went from being an industry leader and innovator with constant national attention, to being a brand that people in the industry stopped hearing about and now can be heard asking each other, “Hey, are those guys still around?”

Image of three business managers working on the expense budgetThis story is a fairly common one in the business world. Management in command of a company’s budget has to weigh where to invest funds and where to save money so the business can survive. However, if you are the one making these calculated decisions, it is critically important to make sure you take into account more than just the fixed costs you are paying each employee when you’re looking for places to trim the fat.  If you have clearly identified roles within the company that need to be filled, constantly hiring a new person to fill one of those rolls because you didn’t do more to retain quality employees can quickly become a productivity drag on the company. That will also have a negative financial impact on your business.

To try to pin a value on the cost of turnover, one article by Josh Bersin, Founder of Research and Advisory Service company, Bersin by Deloitte, suggests, “…the total cost of losing an employee can range from tens of thousands of dollars to 1.5-2X annual salary.” To put that into perspective, if we were merely talking the lower range of this estimate against an employee that earns an annual salary of just $25K (around $12/hr) you would be looking at $37.5K in costs to replace this employee. These numbers are even more conservative than some other studies suggest for more technical industries, or for senior management level employees that can even range up to 300% of their annual salary to replace.

All of the sudden that raise they’ve been asking for, letting them leave early on Fridays every once in a while, and giving them a solid 2 weeks of paid vacation doesn’t sound so bad.

Putting together retention strategies to reduce employee turnover costs may be a direction you decide you want to take your business. After all, these strategies tend to have a positive impact on company morale, which can in turn positively impact your company’s performance. Whether you decide to implement employee retention strategies or not, turnover is still going to be a reality you need to fully understand. Knowing where the costs exist as well as what other areas of your business will be affected is imperative.

Here is a short list of some of the costs and impacts to expect when facing turnover:

Prospecting New Employees

So you’ve lost an employee and now you’re needing to hire a replacement. The first thing you’ll need to do is start collecting a list of candidates. Posting to job sites like ZipRecruiter, Monster.com and of course, Craigslist can start to add up. You can easily drop a few hundred dollars or more on advertising your job listings on these sites. The longer the position doesn’t get filled, the more money you’ll need to fork out to keep listings active. Or if you choose the go the route of using job recruiters, you can expect to pay a fairly hefty finder’s fee once you hire a candidate.

Interviewing

Image of an job prospect shaking hands and starting an interviewIf you have already lost an employee for one reason or another, you want to do your best to pick someone to replace them that has some staying power and try to keep from having to suffer these costs again anytime soon. However, doing this will take considerable time and energy from management, which will end up taking a toll on their ability to handle other responsibilities. Most interview processes involve several departments and multiple levels of management. The human resource cost alone just during the interview phase can be substantial.

Training

Training is easily one of the most expensive areas of onboarding new employees. This is because the loss in productivity you experience from losing your previous employee is compounded. Consider that it will take a new employee longer to complete tasks effectively as they get up to speed. Plus, you encounter the loss of productivity your team will suffer due to having to allocate internal resources like a fellow employee or manager to conduct the training. Additionally, there is a good chance that your existing team won’t be as effective during the hiring and training periods because they are also having to cover the gaps until the new employee is fully competent.

Ineffective Customer Service

If the position you are hiring for is a customer service team member, your customers will also feel the costs of your turn over through less effective service. General knowledge of the business and products that have been learned by your past employee over time will be lost, and just the process of getting up to speed in this area means customers may lose patience with your company. Unfortunately, that’s when some customers decide to take their business elsewhere.

So how does a business protect itself from turnover?

The truth is, turnover can’t always be avoided. However, you can reduce your risk of losing experienced employees (who appreciate in value over time) by implementing strategies to improve employee retention. Traditional means like raising salaries, adding employee benefits and creating opportunities that allow your employees grow within the company are all great. But there are plenty nontraditional means as well that encourage employees to stick with your company.

Image of a woman and a team of professional answering service agentsIt’s important to know that there are certain positions and responsibilities that can be protected from the costs of turnover while actually reducing costs. By partnering with a professional phone answering service provider like Sound Telecom, you can not only substantially reduce the high expense of hiring a receptionist, but you can also benefit from an increase of reliability since tasks like answering your phones and relaying important messages will be managed by a team of highly trained phone agents. You also are able to rely on us to ensure that the customer service training be solidified within your service so each customer that calls is met with a competent source of information that can dependably serve your customer with the same level of care and knowledge that you would.

Even though there are a significant number of costs and impacts related to high employee turnover, there are many ways you can position your business to reduce this risk. Hiring a professional call answering service provider to handle frontline tasks and responsibilities instead of hiring an internal employee is the most cost effective, and arguably most effective way in general to protect your business from turnover. However, when you do decide it is time to hire employees, you’ll probably want to have strategies in place to increase retention and maintain morale. If you manage things well enough, maybe one day you’ll build a company with a culture so contagious that instead of people wondering if you’re still around, you will hear them say, “Now THAT’S the place I want to work!”

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This entry was posted in Business, Human Resources, Management and tagged , , , by David Kent. Bookmark the permalink.

About David Kent

A writer at heart and entrepreneur by trade, David started his first company at the young age of 22; providing marketing services for a variety of events and businesses before being recognized and picked up by a National sport clothing manufacturer. After putting a few successful years of marketing and brand management under his belt, he ventured out seeking new challenges building and running eCommerce businesses. Having spent nearly his entire adult life at the company helm, David now enjoys writing articles to help other business owners by sharing some of the hard lessons he has learned along the way. When he doesn’t have his nose to the grindstone, you can probably find him cooking up something strange and healthy in the kitchen or training for the next obstacle course race.