turnover is the act of replacing an employee with a new employee
Since 1983, numerious studies have looked into the detrimental effects that companies suffer from high turnover.
First and foremost, high turnover cost companies a fortune.
Popular sources including Gallup publish alarming articles like this one:
A trillion dollars.
That's what U.S. businesses are losing every year due to voluntary turnover. And the most astounding part is that most of this damage is self-inflicted.
Very highly paid jobs ... tend to have disproportionately high turnover costs as a percentage of salary (up to 213 per cent)
NB: They consider ‘very highly paid’ jobs to yield up to $200 000 per annum
This indicates that for every employee who either quits or is laid off, the overall price the company pays might be as high as twice their yearly salary.
It’s pretty easy to calculate the direct turnover costs. Consider calculating the costs your company would incur. Just factor in the following expenditures (taken from the study mentioned above):
- ‘separation’ costs: exit interviews, severance pay
- temporary cover costs
- replacement costs: advertising, agency fees, hiring (screening / interview / selection / bg-checks / signup bonus / relocation costs)
- training costs
- reduced quality, potential for increased errors and waste
You will most certainly find the last cost (associated with the quality loss) quite hard to measure. Maybe you can check the increased number of defects as folks did in this study:
Despite the manufacturer’s extensive quality control efforts, including stringent testing, each percentage point increase in the weekly rate of workers quitting from an assembly line (its weekly worker turnover) is found to increase field failures by 0.74%–0.79%.
But stats like this can be collected only for cases when there’s a clear separation between production and consumption of manufactured goods. This separation allows us to isolate the productive operations from many environmental disturbances.
I would say that the detrimental effect that high turnover causes on quality should be considered an indirect turnover cost.
Furthermore, the software development industry is an industry with a high proportion of intellectual labour, and software product quality is highly dependant on employees’ cognitive skills and emotions.
Detrimental effects on knowledge, motivation and emotions are obviously indirect turnover costs. This study suggests splitting indirect turnover costs into the following categories:
- Lost productivity for the departing employee
- Lost productivity due to the need to hire temporary employees
- Coping with a vacancy or giving additional work to other employees
- Costs incurred as the new employee learns their job, including reduced quality, errors, and waste
- Damaged employer brand
- Reduced morale
- Lost clients and lost institutional knowledge
After writing articles on how information flow efficiency, emotions, knowledge, feedback style and interest all influence quality, I find it quite evident that all of these areas suffer with every person leaving the team.
There’s no way to measure precisely how much worse the quality gets, all we know: it gets worse.
What exactly happens to a team when its member leaves?
- team communication graph is shattered, new connections are to be established and normalised
- team morale is shattered, social dynamics of fear / uncertainty emerge
When an employee leaves the team, the team is destroyed and the new one must be assembled.
In some cases, the cost of reassembling the team is low. For example, when the team expected the employee’s departure.
Sometimes, the cost is ridiculously high. For example, the informal leader of the team is fired. This could result in further employee departures.
In any case, as quality depends greatly on information flow efficiency, it seems obvious that a company focused on quality should aim to invest in retaining the team.
As Dr. Deming said:
the most important figures that one needs for management are unknown or unknowable, but successful management must nevertheless take account of them.
- There Are Significant Business Costs To Replacing Employees
- The cost of turnover: Putting a price on the learning curve
- Strategies for Managing Employee Turnover
- The Hidden Cost of Worker Turnover: Attributing Product Reliability to the Turnover of Factory Workers
- Employee Retention and Turnover in Global Software Development: Comparing In-house Offshoring and Offshore Outsourcing
- Psychological climate and individual performance in India: test of a mediated model
- Effect of employees' turnover rate on industrial firms' production efficiency: A conceptual model
- The Impact of Employees’ Turnover at the Productivity of a Software
- A review of the literature on employee turnover
- How to understand the ROI of investing in People
- How Much Does Employee Turnover Really Cost?
- Turnover and Knowledge Loss: An Examination of the Differential Impact of Production Manager and Worker Turnover in Service and Manufacturing Firms
- VOLUNTARY TURNOVER AND ORGANIZATIONAL PERFORMANCE
- Developmental sequence in small groups.
- From I to we: Social identity and the collective self.
- Acquisition Community Team Dynamics: The Tuckman Model vs. the DAU Model
- Manage what you can't measure