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Analyzing the Business Impact of Staff Turnover

A preliminary study of employment trends for one small Telecom Company illustrates the impact of staff turnover on business performance. Over a three-month period, the company experienced overall turnover of 32.5%, a rate 77% higher than the mean of other telecommunications companies. The highest defection rate was among sales employees and averaged 50.3%.

Not only were these key employees leaving, but company records also revealed that more than 50% of the company's total staff turnover occurred within the first year in other important areas, such as management information services (MIS), marketing, and business development. Some 75% of turnover occurred within two years. With the learning curve for entry-level sales and customer relations positions at this company spanning four to six months, the high turnover rate was causing low morale and lower productivity levels for remaining employees as they tried to compensate for departed workers. In addition, the company incurred higher costs associated with replacement and an increased strain on the company's recruiting abilities. The most conservative direct-cost estimate of replacing each employee, which includes costs associated with recruitment, orientation, training, and ramp-up speed, was 50% of the average salary. Some companies have reported replacement costs as high as 125% of salary. Table 1 depicts this company's replacement costs for direct sales reps and telemarketing reps.

The impact of high MIS turnover at this telecommunications company, 32.8% versus 15% to 20% for typical IT organizations, directly affected the company's bottom line. It was forcing the company to rely more heavily on a contractor workforce, at costs averaging 35% higher than those for salaried in-house staff. In addition, the loss in business continuity within and across departmental boundaries was resulting in lower productivity levels. For example, work on the company's billing system suffered as a result of high turnover in the MIS and customer systems areas.

Other significant business issues linked to the company's unfilled positions included the following:

  • Excess overtime budgets, which were used to offset the vacancy rate
  • Missed customer service commitments
  • Difficulty in meeting access targets for directory assistance
Table 1: High turnover rates not only affect replacement costs, but also employee morale and productivity.
Direct Sales Rep Telemarketing Rep
Total FTEs 92 45
Open FTEs 30 10
Turnover rate 32.6% 22.2%
Average salary/commission $54,512 $25,499
Replacement cost for open FTEs $817,680 $127,495
Churn rate 1.25 1.25
Total annualized replacement cost $1,022,100 $159,369
How Does Turnover Impact Your Profitability? What Turnover Costs Can Be Measured?
High employee turnover is a major contributor to lagging US productivity and the failure of US industries to compete effectively. Turnover costs are high and devastating on pretax income.

A high turnover rate makes it almost impossible to achieve superior performance. These losses cannot be measured:

  • Products delayed in research and development
  • Decrease in optimum manufacturing efficiencies
  • Slower market penetration
  • Decline in customer satisfaction
  • Loss of company values and history as veterans leave
  • The benefits to your competition as they hire your veterans
You'll also see a decrease in motivation, commitment, quality and quantity; poor morale among co-workers; tense work relations; lack of communication; and a "who cares?" attitude -- just for starters.

There are four obvious ways to reduce costs of turnover:

  • Have appropriate hiring processes and orientation programs in place.
  • Be proactive in addressing the factors causing turnover.
  • Reduce the length of time a position is vacant.
  • Reduce the learning curve and lost productivity through intensive training and development in the early months when productivity is at its lowest.
 There are nine major categories. Five are hidden and relate to some sort of inefficiency:
  • incoming employee
  • co-workers closely associated with the incoming employee
  • departing employees
  • co-workers closely associated with the departing employee
  • the position being filled by someone else until some new is hired
The remaining variables are visible:
  • costs of outsourcing
  • HR department processing costs
  • non-HR employee processing costs
  • relocation costs
If you assume the cost of turnover to be 1.5 times annual salary for exempt positions averaging $60,000, you could justify a $100,000 investment with a 12-month payback by avoiding the loss of two employees.


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