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When things go wrong, businesses fail

Succeed or fail, it comes down to the right people.

I heard an expression once; I don’t know where and I don’t know when.  But it always reminds me of why businesses fail.  It stuck in my head because it makes so much sense. “There is nowt so quare as folk.”  I’d imagine it comes from the North of England.  Maybe I heard it in that TV series, “Last of the Summer Wine.”

People are strange, unpredictable and in a world of technology and machines, people can just be downright unreliable.  But that is the beauty of the Human Being; we are magnificently diverse, irrational and almost unmanageable.

Of course, in the workplace, that can become just a bit scary for the managers.  It is that very diversity of human nature that makes the recruitment and selection of new employees such a critical activity for any organisation.

The truth is that you can’t run an above average business with below average people.  So if you want success, you try to hire the best.  You aim high.  When you don’t aim high; you are aiming for trouble.  Here is what you get if your hiring practices are weak, and your employee turnover is poor.

Productivity

This issue is a big one if you fail to tackle it.  It can be difficult to quantify, but if you ask around you will find plenty of evidence to support our case.  If, and this is a big if, a proper Induction Process is followed, your new hire should not fail.  Your new hire should be almost ready to produce results for your business.

An unsuccessful new hire will continue to draw upon management and colleagues time as they struggle to come to terms with their new role.  This constant distraction reduces their manager’s and workmate’s productive time.

Errors, omissions and poor standards of performance can have a significant impact on productivity.  Reworking, replacing and otherwise making up for bad work is a complete waste of time.  This is compounded when the new hire fails to learn from their mistakes.

Morale & Motivation

If you work alongside a poor performing colleague, you will naturally want to assist them in doing a good job.  This desire to help is particularly common in the case of a new hire, or an existing employee going through a difficult patch or struggling with a new type of assignment.  We all need the help of a supportive team from time to time.  Nobody likes to see a colleague fail if they can help it.

However, when a new hire fails to get up to speed, despite your help.  Or a colleague’s difficulties have become an ongoing issue.  Your performing team members who are carrying the workload without additional reward, recognition or benefit, may stop trying.  Worse still, if management does not take action, they may let their performance drop, either subconsciously or in planned protest.

Where an organisation has a consistently weak hiring record and a high level of staff turnover, poor performance can become the norm, costing a business dearly.

Reputation

If a customer is repeatedly on the receiving end of poor service or product quality, they will complain.  Complaints invariably end up on the shoulders of the under performing team.  The team already know the cause.  They may pick up the slack for a short time, but the problem will eventually resurface if management fails to tackle the underlying causes.

It is a well-established fact that bad news travels faster and further than good news.  When your customer makes a complaint, consider yourself lucky. Usually, they will only complain about your business to their friends and your competition as they move their business.

In some business sectors, these complaints can travel far and wide and may stop higher calibre candidates from applying to work in your organisation, adding to your problems.  Additionally, you may discover to your cost, that your better employees will readily move to a competitor with a stronger reputation.

Financial

If productivity, morale, motivation and reputation don’t particularly bother you, perhaps the financial implications might.  We have yet to see a report or research from any reputable source that suggests that there is any positive correlation between employee churn and profitability.

On the other hand, there is overwhelming evidence that excellence in recruiting correlates strongly with all the indicators of a top organisation, from productivity through creativity and innovation to market leadership and profitability.

However, there is one exception to that rule.  If you are in business selling generic low margin products to a consumer base who buy on price alone, then you can boost your margins with a high staff turnover rate.  However, you still need to hire the right people in the first place.

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Do you measure these hiring costs in your business?

costs

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.”

Steve Jobs

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:

“Recruitment & Selection Cost Calculator”

“Cost of Employee Turnover Calculator”

If you would like an Excel version of the calculator, just email us at james@sagitas.com and we’ll get one away to you, straight away.