Tuesday, April 13, 2010

Prediction: Unsustainable Employee Turnover Crisis

There is a lot of talk these days about sustainability. The general concept is simply about having the ability to endure.

I'm predicting a business sustainability crisis in corporate America that is going to require the finesse of some genius Human Resources professionals to prevent.

The crisis relates to unprecedented employee turnover rates that companies will not be able to financially endure.

I'm not referring to the turnover bump that we are going to face as we come out of the recession and jobs become more plentiful. I'll save that post for another day. I'm referring to the turnover that is coming based on the new mindset of the American worker.

Let me explain.

I think we all agree that it is becoming acceptable in the minds of employees to stay with their companies for 6 months to 2 years. The derogatory term of "job hopper" is fading fast. Yes? This is not a crisis at this time as there are still enough employees who choose to say with their companies long term to balance things out.

At some point, though, the balance is going to shift. Long service employees are going to retire. New employees are not going to consider staying a full career at one company. That is when the crisis begins.

Let's do the math.

Suppose that we are an executive at a company of 5000 employees. At this company the norm for all of our employees is to stay with the company for somewhere between 6 months and 2 years. This equates to voluntary turnover rates of between 50% (for those who stay 2 years) and 200% (for those who stay 6 months). This scenario leaves us with roughly 100% turnover per year.

What is the financial impact? Let's say that voluntary turnover has traditionally been at 15% per year. At 15%, our company of 5000 is losing and replacing 750 employees per year. If we are conservative and say that the cost per lost employee is $5000, that would make our traditional costs of turnover $3,750,000. ($5000 x 750 EEs).

What happens when our turnover rises to 100%? At this rate, we'd be losing 5000 employees per year. If we use the same cost per lost employee of $5000, our new cost of turnover would be $5000 x 5000 EEs = $25,000,000. per year.

Would you say that a company that is used to and budgeted for turnover costs of $3,750,000 per year would be able to handle turnover costs of $25,000,000?

The cost of turnover becomes unsustainable.

This is both highly frightening and incredibly exciting. Frightening for obvious reasons. Exciting because it's the first time in a long time (ever?) where Human Resources executives are going to be the most important business people in the organization.

There are two possibilities in how Human Resources will drive the changes needed for their organizations to become sustainable in this climate.

Companies will need to create work environments that will drive employees back to longevity. Corporate cultures will change, incentives will change, benefits will change, environments will change. The very nature of how we manage human resources will transform in order re-build the old concepts of employees staying with an organization until retirement.


Human Resources will re-think staffing and workforce management in completely new ways that will no longer create costs associated with employee turnover. Imagine if the ways of doing business change so uniquely that new employees came onboard at no cost, employees are productive from day one and employees terminate without leaving any gap in customer service or productivity.

If Human Resources Management and business in general evolve to the latter scenario, then we could have a world where all employees work at each company for 6-months to 2 years that would be sustainable. If we are not that creative or that is not realistic, then we'll need to sustain through some of the old tried and true employee retention methods. Either way, HR has a big job ahead of us. Are you ready?


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