Churning Employees, Burning Profits

While preparing revenue projections for the upcoming fiscal year, Les pushes back from his original 12 percent goal proposed just a few months ago to a more realistic 8 percent, based on industry and government forecasts.

Les and his management team have exceeded projections in each of the past seven years. The business has nearly doubled in size during that time and increased profitability - until this past year. They contributed the break-even year to a general economic slowdown and increasing turnover in their hourly labor force.

While stopping short of a recruitment and retention overhaul, they did offer signing bonuses and more competitive wages in an attempt to stop no-shows, change bad attitudes, and boost morale. These changes met with moderate success and helped retain a few more employees for nearly a year.

Employee churn for new hires nevertheless increased by 33 percent for the third straight year. At a cost of nearly $6,000 for recruiting, hiring and training every new employee, Les was watching his profits go up min smoke. Likewise he was puzzled and frustrated by the attitudes and ethics of the new workers.

Unfortunately Les and his team have fallen prey to the "industry-average syndrome". By virtue of the latest industry survey, they deemed their turnover rate acceptable compared to their industry cohorts.

That thinking may be acceptable as long if you believe it is okay to be the last ship to sink, but it's unacceptable if you want to stay afloat in today's competitive markets.

A fatal flaw in Les' team strategies is ignoring the hard cold facts that every churned employee is a loss right off the bottom line. Without controlling churnover, (turnover of twelve months or less - six months may be acceptable in some industries) most if not all of the revenue projections will be offset by rising costs to recruit and replace workers without any increase in productivity.

Churn-over, not turnover, is grinding up the profits of businesses unwilling to stop the turnstile of employees who come and go. Turnover is inevitable. Churn-over is unacceptable. The costs of mis-hiring are staggering. The effort and sales needed to pay for these costs and still make a profit are crushing.

Case Study:The High Cost of Churnover

Les's business generated revenues of $6.6 million in 2003. Profit margins were 14%. His 2004 projected increase in revenues (an eight percent increase) is $528,000.

Last year, Les's company produced sixty-four W- 2's for 35 positions. Essentially they hired 64 new employees for twenty positions; 15 employees were employed more than 12 months.

On the surface, turnover appears to be 83 percent, less than the 92 percent industry average. Churn-over, the number of employees hired and gone in less than one-year, was a whopping 320 percent (64 attempts at hiring for 20 positions)!

At the cost of $6,000 per employee, these 64 employees cost the company $384,000. Even at the same clip this year, churn-over will eat up nearly seventy-two percent of the projected revenue gains.

What's worse - much worse - is how much revenue has to increase to sustain the 14 percent profit margin. At fourteen percent profit margin, nearly $2,743,000 in additional revenues need to be brought in just to keep pace with the lost costs of churn-over.

Increasing revenues shouldn't be Les' primary focus unless he likes to just work harder and harder with not a lot to show for it. If Les and his team would only put a plan in motion to reduce annual hourly turnover to 25%, they would find it much less painful to grow the business at the top line and the bottom line.

The cost of 16 churned employees would be $96,000, a savings of $288,000 in the human resource line item. Re-funneling a portion of the savings for wages, benefits and training back to the remaining employees would certainly be a good idea too as the return on retaining employees is clearly much greater than recruiting new ones.

Of even greater importance will be the increased profit margin from revenue growth. Although the revenues required to foot the bill for even 25 percent turnover is still over $600,000, Les's company will increase profits due to increased productivity and quality from a more experienced workforce, lower administrative and training costs for new hires, and less stress on supervisors, managers and co-workers.

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