Employee Attrition - The Silent Profit Killer!

A CASE STUDY:   Calculating Employee Attrition – The Silent Profit Killer!


In times of economic restraint, many of our clients are constantly reviewing line by line expense items, efficiency drivers or strategies to enhance top line revenue growth.

In my discussions with CEO’s and Human Resource leaders, it’s surprising how many of these talented people are focused on cutting expenses "to prosperity" on a range of traditional cost containment strategies (overtime, training, hiring freezes, etc) while not having a grasp on some obvious hidden costs that negatively impact an organization’s bottom line results: employee attrition.  
While many of our clients are facing forced turnover due to the current economy, this type is generally not as frequent and can be typically managed in a controlled manner.
However, traditional turnover (commonly referred as the revolving door syndrome) continues to be a challenge. In fact, in spite of 10% unemployment in most metropolitan centers in North America, high turnover continues to exist and is usually symptomatic of deeper, organizational problems.
Case Study – Major Retailer:
A client in the technology sector oversees a well known and respected national chain of retail stores. He needed our help to dive deeper into some key operational issues in his business.
Attrition in the retail sector has reduced in the past 18 months due to the general state of the economy in the US and Canada. However, my client’s “negative attrition” for frontline store sales associates (specific to those that resign or are fired from the organization) was trending up from 20% to 30% while positive attrition (turnover created due to internal promotions) was down from 25% to 15%.
In spite of this client having elaborate metrics to monitor everything from shrink, inventory management and sales per square foot, they could not provide specific information on:
·         The average cost of hiring one sales associate
·         The cost of turning one sales associate

Our Review



While the Executive Team was focused on ways to drive incremental revenue generation and store efficiency, we suggested efforts be focused to reduce employee attrition by 15% in 3 months and create an ROI that would self fund the cost of process enhancements to further drive significant savings for this organization.

This discussion was obviously well received, and the work commenced.

 Human Resources – The need to think outside of the Box


Our first discussion started with the Human Resources Leader. She provided her “ball park” estimate for their current cost of hiring one associate and the cost of losing an associate. She assured us their attrition costs were quite low compared to the traditional retail sector. However, a closer examination concluded they did not have any material benchmark data, while her two comparators paid their associates 20% less.
It was also interesting to note that Store Managers had no accountability for employee attrition. While the Store Manager’s performance scorecard was quite robust  measuring key performance metrics, employee attrition was noticeably absent. Several Store Managers we interviewed commented it was not fair to be judged on attrition because they did not "control" employee variables ranging from compensation to career development. The HR leader commented her recruiters could not be accountable for attrition because they simply screened & short listed associates, while the Store Managers made all the hiring decisions.  
These sorts of internal competitive "dynamics" are common in many Companies. Fortunately, the new leader of this organization recognized the need to create a culture change where accountability across the organization was required.  One of his first of many changes included the need to "silo bust" the organization. 

Cost of Hire



One of our first reviews included the cost of hiring one sales associate. Our client's data confirmed it was $450. Our review indicated little resources were invested to modernize the Talent Acquisition process and we spent considerable time creating process flow maps and an activity based costing (ABC) approach that measured time and motion of all the various activities involved in hiring one sales associate.

If you are not familiar with calculating the cost of hire, review a number of “cost per hire calculator” tools available online for free. Segregate the hiring activities into categories such as sourcing and recruitment costs (money spent advertising, brochures, career fairs, agency use, applicant tracking system, recruiter salaries & benefits etc), then proceed to processing costs (activity &time spent focusing on reviewing resumes, phone screens, scoring applicants, communicating, arranging interviews), and time spent conducting interviews by both HR and the hiring Manager.
Once a hiring decision is made, additional softer costs including background and criminal checks, skill assessments, offer letter generation along with the supporting infrastructure costs such as identification card production, payroll set up were conducted.
Once we completed our analysis, we confirmed the cost of hiring one sales associate was actually 115% greater at $967 per hire. Based on 150 hires a year, the costs were $145,050 greater than their calculation of $67,500 – a difference of $77,550.
The key to this difference is a number of productivity enhancements were never implemented because the ROI originally presented by Human Resources was not significant to warrant new investments such as an  Applicant Tracking System or an outsourced hiring model.

Client Cost per Associate Hire                       $450.00 x 150 hires per year = $67,500



Actual Cost per Associate Hire                      $967.00x150 hires per year =$145,050


Cost of Turnover


This is where the fun began. Go online for any “cost of turnover calculator” and you will see why. Areas commonly not factored into the cost of turnover include:
  • Cost of training, including materials and associated overhead costs,
  • Learning & inefficiency - an associate typically takes 90 days to be at the maximum degree of productivity,
  • Productivity loss – additional costs incurred while covering the vacant role include overtime. This review resulted in us creating a new metric called Time to Fill ratio.
  • Revenue Loss – In a Sales role, attrition analysis revealed a number of high performing sales associate’s took up to a year to reach the sales generation of the previous employee that turned.
  • Salary Savings – One of the only benefits of turnover is to ensure you don’t forget to deduct the salary savings you achieved while the position was vacant!
We focused exclusively on the hard costs of turning one sales associate and decided to focus on the reasons driving this cost later.
The reality is this company consistently underestimated the costs of employee attrition. Based on 150 turns per year, they positioned attrition as a $322,500 problem. Our review concluded it was a $1.8 million dollar problem.  

Further, when I suggested to my client we could easily reduce this problem by 15% in the first year leveraging enhancements & technology to drive efficiencies with better informed hiring decisions, I was literally promising him a contribution savings of approximately $270,000.00! 



Client Cost per Associate Turn                    $2,150 x 150 turns per year = $322,500



Actual Cost per Associate Turn                     $11,974. X 150 turns per year =$1,796,100


The bottom line for any company is employee attrition is a profit killer, and unfortunately it’s also a silent killer too. Why? Many companies do not measure it, nor do they have any idea why it’s taking place.
In our next article, we will explain how we successfully worked with this client to reduce employee attrition by 23% in the first 6 months!

Warren Collier is President of Trinity Human Resources Inc. – a Human Capital Consulting Company .



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