You have done just about everything you and your team can think of to reduce costs further. You have squeezed your current suppliers, changed to new suppliers, offshored part of your manufacturing, and stripped the workforce to its bare bones. You absolutely don’t know where you are going to find anything else to cut.

Have you looked at your turnover?

Turnover impacts your bottom line in a lot of sneaky ways. It is usually the last place that companies look to improve their returns because there is no line item on a P&L marked “turnover”. The costs are soft, hidden. Labor costs may even show a decline in times of high turnover, providing misleading information.

Depending on the source of the information it is estimated that turnover costs 3 to 5 times the annual salary of the position that turns over. Those numbers may be high, so let’s put some meat on those bones. What are the conservative costs of turnover? Let’s assume that the position that turns over has an annual salary of $25,000. Here are the costs that are incurred:

• While the position is vacant, co-workers are asked to fill in. Productivity drops as others cover the tasks of the open position. Morale suffers—which leads to more turnover. Stress levels increase due to longer hours leading to mistakes, accidents, injuries, illness and reduced quality.
  Estimated Costs: $6,300
• Recruiting costs include lost productivity of the managers that have to recruit. Additional costs may include a recruiter or temp agency. Advertising a position, going through résumé’s, travel arrangements for meetings, etc. all add up. In a tight labor market, relocation fees, signing bonuses or referral fees need to be factored in.
  Estimated Costs: $7,800
• Once you have hired a new employee the costs continue. You most likely end up paying the new worker more than you were paying before. To eliminate problems, you give raises to close co-workers. Productivity issues arise because the new employee is not up to speed and other employees are filling in. You are paying the new employee fully even though their productivity is low. To get them up to speed, you have to train them. That means that managers, supervisors and other employees are pulled away from their jobs lowering productivity again.
  Estimated Costs: $36,400

By losing that one employee, the bottom line is affected by $50,500.

Drop in the bucket? Maybe, but consider the multiplier effect. If you have 100 employees that average $25,000 in salary per year and your turnover rate is 30% (not unheard of), turnover just cost you $1,515,000. Is that significant? Even if you have 20 employees, and you turn over 20% a year, it cost you $202,000.

So NOW are you looking at your turnover?

Next month: Turnover, Part 2, Reducing it!