The importance of Employee Attrition in an Organization

Employee attrition is the rate at which organizations and/or company’s hiring and fire employees to either represent their firm or leave their firms. It is also referred to the employee turnover rate.

Employee attrition rate is also known as employee turnover. This rate shows how often the employees at a place of business change over the course of a month. Usually companies prefer a low attrition rate, but the rates differ based on the industry. For example, a fast food restaurant will have a higher employee turnover compared to a law firm. A lower employee turnover rate allows a company to keep coherence over the year.

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The attrition rate has always been a sensitive issue for all organizations. Calculating employee turnover rate is not that simple as it seems to be. No common formula can be used by all the organizations. A formula had to be devised keeping in view the nature of the business and different job functions. Moreover, calculating attrition rate is not only about devising a mathematical formula. It also has to take into account the root of the problem by going back to the hiring stage. Most organisations do not evolve robust measurements for calculating the cost of labour turnover or a bad hire. The details of information required and the measurement metrics are not common formulae, but have to be designed in keeping with the nature of the business and different job functions. As a result, most organisations do not intend to mislead by disclosing statistics which may not be true; it is just that perhaps they believe those to be true. It is imperative to evolve the science of measurement before the measure itself.

The following are the three common methods companies use in calculating employee attrition:

Method 1:

While there are many techniques for calculating the cost of turnover, the following is one of the best. It takes into account expenses involved to replace an employee leaving an organisation.

A. Recruitment cost

The cost to your business when hiring new employees includes the following six factors plus 10 percent for incidentals such as background screening:

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Time spent on sourcing replacement

Time spent on recruitment and selection

Travel expenses, if any

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Re-location costs, if any n Training/ramp-up time

Background/reference screening.

Additionally, for the positions that are billable, there is a lost opportunity cost. This can be done using the revenue factor.

B. Training and development cost

To estimate the cost of training and developing new employees, start off by looking at the cost of new hire orientation. This will mean direct and indirect costs, and can be largely classified under the following heads:

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Training materials

Technology

Employee benefits

Trainers’ time.

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C. Administration cost

Additionally, you may want to measure the per-employee cost to:

Set up communication systems

Add employees to the HR system

Set up the new hire’s workspace

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Set up ID-cards, access cards, etc.

On the softer side, to estimate the learning curve or productivity cost, estimate the average amount of time it takes an employee in a new position to get up to speed and produce at the average rate for the organisation. If it takes a new employee six months to reach average productivity, the average productivity loss is 50 percent. Use your annual revenue factor result and multiply it by the productivity loss.

The result of these costs (and an additional 10 percent to cover other hiring costs such as background checks, credit checks, drug screening, and other administrative costs) can give you fairly accurate calculation of turnover cost.

The ideal methodology is:

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Cost of hiring employees (hard and soft costs) + Cost of training and developing new employees (hard and soft costs) = Total Cost of Voluntary Turnover

Method 2:

Some organisations calculate it at 150 percent of the yearly salary of the exiting employee. For managerial and sales positions, the cost can go up to 200-250 percent of the yearly salary of the employee.

Method 3:

Another way to estimate the cost impact of turnover on companies is to look at the total compensation costs as a proportion of a firm’s revenue. According to one study, corporate on an average spend 36 percent of their revenue on human capital expenses.

Again, using conservative estimates, for a company with the total compensation costs at this average, an average rate of employee turnover of 25 percent and the cost associated with turnover equivalent to one-time salary.

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INDIAN IT INDUSTRY:

Globalization, customization of services for the clients, timely delivery of services, rapid innovation and embracing of technology to keep cutting costs in order to remain competitive in the global market are some of the challenges faced by the Indian IT industry. All these tasks have one thing in common- a resource which when not managed well, would lead to the derailment of the fast moving IT express. The resource is nothing but the manpower employed in the IT firms.

The IT industry is not all about fat pay packages, foreign tours, prestigious training programs and coding on computers. It is also about working long hours, sleepless nights, monotonous work, stressing deadlines and of course attrition. The young programmers and managers, who join the hallowed portals of the most prestigious IT companies in India, are often disgruntled and leave.

Attrition is taken as a measure of the maturity of an industry and it helps avoid the unpleasantness of laying off people, but the figure should be around 4-5 percent. However, in the Indian IT industry, the attrition has far overshot the mark.

The retention policies employed by the companies leave a lot to be desired and a proper grievance handling and suggestion system is often found lacking in many companies.

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The concept of knowledge workers is fast catching up in the Indian IT industry. The employers are realizing that there are many variables that determine an employee’s stay at a company. They are not just motivated by hygiene factors like salary alone but also look for softer rewards like a challenging job, clarity of work, catering to training needs etc.

In the recent decades the whole industry has changed its outlook. The employment scene has changed its appearance. The factors like skill sets, job satisfaction drive the employment and not just the money. The employer hence faces the heat of continuous employee turnover. Continuous efforts are made by organisations to control the employee turnover rate as it directly affects the performance of the organisation as many key people leave the organisations for various reasons at crucial points.

Attrition rate in Indian IT industry had gone down in the past few years. This dip in attrition rate was not sudden. It had happened to recent slowdown in world market. However, the main reasons of the downfall of attrition rate were lesser number of new jobs in industry and companies preferring cheaper freshers over experienced employees. Looking at the current attrition rate of the big 3 of Indian IT industry in 2009, we find that, for the last quarter, attrition rate for TCS, Wipro and Infosys were 11.9%, 11.9% and 11.8 % respectively. One year back, the rate was 11.5%, 20.10% and 13.7 % respectively for the three IT majors.

But high attrition rates return to plague Indian IT industry in the year 2010. The attrition rate is growing alarmingly at the rate of 18-25% at present.

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The requirement for manpower has increased manifold with the growing demand for IT and ITeS services worldwide. This has virtually created a big challenge for the HR managers in the IT industry. It is suggested that in such a situation the IT and ITeS firms ought to take on fresher graduates from technical institutes and train them to fulfill the void due to attrition. Such an approach will help the tech firms in meeting their manpower requirements in the long run.

Now the IT professionals do not have much choice. Earlier IT companies were fighting for people who were good in different IT technologies. Now the scenario has changed, now they are fighting for their survival and new businesses. However the attrition rate is still in double digit as IT companies have been quietly laying off employees due to performance issues, back ground checks and not clearing the tests after training.