The real cost of losing new employees

0577-blog-the-real-cost-of-losing-new-employees

The real cost of losing new employees

The real cost of losing new employees

0577-blog-the-real-cost-of-losing-new-employees
You probably know what your employee turnover or attrition rate is, but what about the rate for those who are still in their first 6 or 12 months of their employment? Is it higher or lower? And how much is the turnover of new employees (really) costing your business?

We recently worked with one of our customers to better understand the impact employee turnover was having on their business. In FY19 they experienced an annualized voluntary attrition rate for permanent employees of 34%. Of this group, 46% exited within their first 6 months.

While these figures are not uncommon, the good news is there’s a lot that can be done about it.

In this post we’ll first cover some background on understanding the nature and costs of new employee attrition, then we’ll look at how HR can go about communicating this problem to management and some specific tools you can use to understand and address turnover.

Step 1: Do we have a new employee turnover problem?

The first step of any analytical exercise is determining whether there is actually a problem to be solved. Once you do that, it’s important to bring some numbers to the table, particularly if you’re seeking approval for budget to solve the problem.

This is an excellent time to introduce the Employee Return on Investment (ROI) Curve.

This is a useful tool to visualize the different phases of the employee lifecycle. It demonstrates that during the ramp-up period (onboarding on the figure below) a business invests more in the employee through salary, training and support than the revenue the employee is actually generating.

The employee return on investment curve - employee lifecyle
The employee return on investment (ROI) curve shows the point at which a new employee becomes profitable to a business in the employee lifecycle.

Understanding the ROI Curve

In its graphic form, the Employee ROI Curve can seem a little abstract. It’s only when you input real data, that the real impact of losing employees during the investment phase is realised.

Here’s how that typically looks:

  1. In order to fill a vacant position, businesses will outlay a significant financial investment. This can be thought of in a similar way to the cost of acquisition of a new customer contract, that takes a period of time to pay itself off.
  2. This initial investment includes recruitment agency fees; advertising costs; internal HR and administration; interviews with hiring managers; induction training and; opportunity cost of a vacant position.
  3. Once a new employee is hired, they go through a lengthy training and induction phase where they may contribute zero revenue or value to the business. During this time, the employee is being paid his or her full salary, so in fact, you are going further into the ‘red’ from the initial investment. Depending on your business and the role, this period could last anything from 1 month to a year.
  4. Only when an employee begins generating more value for the organization than what is paid in their payroll expenses does the curve start to turn around and head back up (the trough). Even at this point, you still have a way to go before you pay back the initial investment and reach your employee breakeven.

RELATED: The ultimate guide to generating ROI in HR

Employee ROI in action

We analyzed the employee ROI for all employees our customer hired in FY19 who departed voluntarily within their first year. You can see the results below, but as it always helps to imagine the data in real life (the ‘H’ in HR if you will), let’s go through an example.

Let’s take the most extreme negative line – the red line right at the bottom of the chart that dips below -$40,000. This represents a senior manager entering on a six-figure salary. As you would expect, this employee had a larger initial outlay in recruitment agency fees as well as time investment by HR and hiring managers during the recruitment process. Senior employees also see a sharper negative trend during early onboarding as they are being paid more while training and learning the business. This employee voluntarily exited the business after 15 weeks, costing the business approximately $54,000.

Any line that falls below the $0 for Cumulated Return on Investment on the horizontal axis represents an employee that has ultimately cost the business money through their employment.

For our customer, <1 year turnover alone cost them approximately $830,000 in FY19.

Step 2: Tell the story

The major stumbling point of any analytics project is the failure to translate the data from a spreadsheet into a credible, engaging narrative for stakeholders. Why is this a problem? Why should they care? Be emotive and talk their language, (usually this means money).

We all understand the financial and cultural burden of high employee turnover on an organization.

Most calculators base estimates for total cost of turnover at around 1.5-2 times the exited employee’s annual salary. These figures should absolutely not be underestimated, in fact, they are likely often higher. The challenge for HR? Convincing managers of the true costs of turnover in order to drive change. Typically, the most considerable impacts are wrapped up in less quantifiable costs such as reduced morale and productivity or loss of key relationships and intellectual property.

As a result, too often businesses will focus disproportionately on preventing departures of experienced talent within their organization, because they inherently understand the impact of losing a star, despite perhaps not being able to quantify the exact cost. This concern around losing experienced talent can overshadow the costly departures of newer employees who are on probation or still ramping up to 100% productivity.

Why is this? Unlike experienced employees, new employees:

  • have not developed key relationships with clients
  • may not possess intellectual property critical to business operations
  • may not yet be delivering the same value back to the organization as experienced employees.

As such, the revolving door of voluntary turnover of employees within their first year often goes unnoticed.

But it’s the very fact that new employees aren’t yet performing at full potential, haven’t created valuable IP and don’t yet have key relationships that should make businesses pay attention to their departure.

Turnover of low-tenured employees isn’t as much about losing something that you had as it is about going backwards and never getting out of the ‘red’. Even worse, when replacing these departed employees, the ROI curve starts again, right at the bottom, compounding the total losses.

Step 3: Propose solutions

Now that you’ve got their attention, tell them what we can do about it. You might already have evidence to back your idea, or you could propose a pilot program to validate the strategy first and any further investment. Either way, knowing the problem without having a plan to fix it is about as useful as a grass-coloured golf ball.

Here’s our tips for how to tackle turnover.

1. Onboarding:

The onboarding phase is also known as the critical engagement period. It’s the first impression your business makes on an employee and when it’s not done well it can cause big problems. Just how critical this phase is can be seen in these stats on onboarding new hires:

  • employees who go through a structured onboarding process are 58% more likely to stay with a business for more than 3 years
  • inefficient or non-existent onboarding processes was cited by 15% of recent hires as their reason for leaving.

Solution: automate

Let computers do what computers do well; scheduling tasks; notifying stakeholders; collecting and storing paperwork.

An automated, online onboarding process not only reduces the admin burden on managers but also allows new starters to get set up in your organization quickly and without the inconvenience of paperwork. With intelliHR you can leverage automated email reminders inviting staff to undertake all necessary tasks to get started, from recording their qualifications, to entering their emergency contact details and even setting the first goal they want to achieve in their new position.

active employee goals in intelliHR
In intelliHR it’s easy to set and track goals for new employees.

Add some flare: What’s more, by easing the administrative burden on leaders and employees, you can free up more time for stuff that’s really makes a difference to an employee loving or loathing their first week; going for coffee, having meaningful conversations; or maybe even a ping-pong tournament to introduce them to the office culture.

Talking about culture, have a think about the message you want to send when your new employee walks through the door on their first day. Who should greet them? What should they have on their desk? Maybe they need a tour of the best coffee spots for meetings?

FREE CALCULATOR: Calculate the hidden costs of onboarding

2. Performance:

Some say that the best form of defence is a good offence. Assuming that some degree of new employee turnover is inevitable, we suggest focusing on ramping up new hires to full performance quicker, helping move them into the green side of the ROI curve faster. Funnily enough, the good work you do here to support employee performance will also help you retain those high potential employees you otherwise might have lost.

Solution: set goals

While a fresh employee is learning the ropes and getting settled in there is a risk they may feel a lack of direction or a low sense of accomplishment. This is particularly true if they were in their last role for a long time and are used to making a large impact on the organization they work in every day.

Managers can help alleviate this by cascading goals to their direct reports. This instantly provides new starters with a sense of direction and a guiding purpose showing them how they can contribute to the greater goals of the company. You can also encourage employees to set one or two of their own goals related to professional development or a relevant small project they would like to take on to help them get a small win under their belt early on.

Solution: open feedback channels

Two-way feedback gives people leaders insight into how their new staff member is settling in, what they have been able to accomplish and where they need further help. Remember that new employees will take time to adjust to your organization’s culture, and even the micro-culture within your team. Some employees might be reluctant to raise concerns when they’re new, so be proactive and ask them if they have any blockers.

It can be difficult to remember to check-in with all your team members consistently, but using intelliHR, managers can set up custom continuous feedback forms that are automatically pulsed out to employees at key intervals, so you can easily stay across how your team members are feeling, and where you may need to take action.

HR Team Check-in by intelliHR

If you onboard larger cohorts, collecting feedback data through intelliHR will also let you leverage automatic language recognition tools in the analytics to identify qualitative trends in feedback as well as sentiment. This macroscopic view can help you identify red-flags before they become bigger issues.

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3. Exit interviews:

When we lose a good employee, we are often so focused on replacing them and reducing any gap in productivity that we forget to seek feedback about their reasons for leaving. There is arguably no better time for constructive honesty than when an employee is leaving the business.

Solution: pick your source and time

Dynamics during exits can be complex and varied, particularly depending on whether the termination was business or employee-initiated. Consider who is best to receive exit feedback from, based on the situation, and when.

For employee-initiated (voluntary) turnover, we obviously want to know what the business could have done better to retain them. Considering these departures are generally regrettable, it can be useful to encourage face-to-conversations with exiting employees to get as much detail as you can about their exit reasons as well as a better response rate.

For business-initiated terminations, emotions can often be heightened and asking for exit reasons from the employee may add salt to the wound and reduce the utility of their actual responses. Instead consider seeking feedback from their manager as to why they weren’t a good fit to help shape your future recruitment decisions.

Another effective and efficient strategy is to leverage the intelliHR workflow schedule to issue an exit survey to a departed employee a few months after their termination. You can expect that the response rate will be lower, however after a few months to reflect and potentially experience a new organizational culture and onboarding experience, the responses you do receive can be invaluable for improving your business.

Solution: Categorize your data

Open-ended questions and qualitative data is hugely valuable for providing detail on personal experiences, but wherever possible it’s important to tag exit reasons into categories.

Using categorical fields in your exit survey will let you group and count responses, uncovering trends that may exist across the board, contributing to employee turnover, or experiences that may be specific to different areas of the business. This will allow you to quantify the severity of issues within your organization and roll out targeted improvement plans.

Employee exit survey feedback
Feedback can help you understand the reasons behind new employee turnover.

What next?

If you think you might have an issue with new employees leaving while they’re still ‘in the red’ or if you simply want to be able to accurately measure the cost of employee turnover, take a look at our free employee turnover cost calculator or get in touch with our team to see how better data and automation tools can help.

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