We will explore two different overheads or costs that are present in every business but are rarely measured. As a result, your line managers never think about them. These are your direct “Recruitment & Selection Cost Calculator” per hire and the collective “Cost of Employee Turnover Calculator”. They are an excellent measure of organisational health.
Why consider these costs?
Firstly, the savings you make here will go directly to your profits. The problem with these costs is that they are hidden and fly under the radar of your accounts and budgeting; they are an unnecessary overhead. If they are not seen and known, they cannot be managed.
Another reason is that if you are honest in your analysis, the size of these costs will shock you. Most organisations that measure these overheads for the first time; act immediately and monitor the figures on an ongoing basis.
A small saving here or there can be made to cut Recruitment Costs, but the price doesn’t vary much if your hire is successful or unsuccessful. The real figure you want to see is your cost of turnover, because this is the cost of replacing people you have previously incurred the cost of hiring. Your Employee Turnover rate will often suggest that you are under-investing in your hiring activities or will highlight some underlying management concerns.
“When you’re in a start-up, the first ten people will determine whether the company succeeds or not. Each is 10 percent of the company. So why wouldn’t you take as much time as necessary to find all the A players? If three were not so great, why would you want a company where 30 percent of your people are not so great? A small company depends on great people much more than a big company does.”
Are your Turnover Costs Acceptable?
Are your turnover costs acceptable or are they a bit on the high side? Does this figure raise any questions? Are there dramatic differences between roles or between hiring managers or between different departments? These differences probably show some important issues about your business and its day-to-day management.
In general, a turnover rate of 10-15% is regarded as healthy. Below this your business may become stale and stagnant. People retire, move and change their career. These are usually outside of your direct control. However, sometimes people leave for other reasons and will push your rate over the 15% mark. If your rate is above 15%, you should investigate the causes.
Some business sectors have higher rates of turnover for very acceptable reasons; such as seasonal roles. Some sectors such as call centres as high as 120%, while some of their competitors are as low as 20%. Why do we see such differences?
Turnover costs and failure rates are related to standards of performance. You may have low turnover and low standards, therefore, resulting in low performance because the perceived hassle of dismissing and replacing underperformers is just too much bother and your line manager will put up with it. Your turnover cost is a key measure of the overall effectiveness of your managers.
Turnover is a Critical Issue.
In urban areas, the churn is higher; this is because the opportunity to change jobs is greater than in rural towns. The employee who struggles with their skills or who just doesn’t like the way you do business can only leave. Equally, employees with talent and potential will be the first to move because they are uncomfortable or unhappy in their current role.
In rural areas, the chance to move may not be there, so as a result, they will do the bare minimum to stay afloat and keep out of their manager’s line of fire. They retire on the job and become a serious drain on your business.
Several of our clients discovered upon investigation that they are actively looking for the wrong person for the role. One example is a Call Centre that hired for excellent communication skills; they picked the outgoing ones. Our investigation showed that their hiring mistakes were, in fact, their best employees; they should have looked for the best listeners. Good talkers rarely make good listeners and in this business, the employee needed to listen to the customer.
In the next post, we will look at the effect of weak recruitment on your business and how positive change can impact your business.
A reminder of the calculators you can download here:
If you would like an Excel version of the calculator, just email us at firstname.lastname@example.org and we’ll get one away to you, straight away.