IDear Workforce-I Indirect Cost of Turnover

January 26, 2000

Dear Workforce:

What is the average cost, direct and indirect, of turnover? I can figure my direct costs, such as advertising and recruiting. The hard part is nailing down a cost factor for indirect costs such as interview cost, lost client relationship cost, customer service cost, training costs, etc.


Dear Turned Over:

We solicited the advice of Karen Wallace, a Human Resources Innovation consultant for The Segal Company. Wallace also used The Saratoga Institute and the book "How to Measure Human Resources Management" by Jac Fitz-Enz.

Wallace suggested that to calculate indirect turnover costs, one must examine indirect costs of employee separations (e.g., time spent on processing terminations, conducting exit interviews and extending failed counteroffers) and the indirect costs of new hires (e.g., time spent on interviewing and negotiating with candidates, time spent orienting and providing internal training for new hires).

One method of estimating these indirect costs is to take the average 'hourly' equivalent of salary for all those who are involved in such activities (HR professionals, managers, the new hires) and multiply that amount by the number of hours they spend per year conducting these activities.

Some organizations establish a cost assumption for the 'learning curve', i.e., that period of time before new hires reach full productivity. The percentage of hours assumed to be 'lost' (which presumably decreases as time passes) can be multiplied by the new hire's 'hourly' equivalent of salary. A logical assumption must be determined, based on the type of position and the organization (for example, 50% productivity for 2 months, 75% for 2 months, 100% thereafter).

There also can be costs related to customer turnover that are linked to employee turnover (particularly turnover of client managers and sales professionals), such as loss of customer revenue and the associated costs of winning new customers.

There is no single general formula to use. Often the finance or marketing departments can be helpful in reaching logical assumptions for such costs, examining data such as number of customers lost, average revenue per customer, hours and hard costs spent winning new customers, etc. Again, this varies greatly by industry.

We also talked to David Sholkoff of Deloitte and Touche in Los Angeles. Sholkoff noted that a "back of the envelope" method to calculate turnover is to take salary, plus benefit costs and multiply by 1.5 to 2.0, depending upon industry and positions. He also reminds you how important it is to measure which employee group is experiencing the highest turnover, and to analyze why there is turnover in the first place.

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