Attrition - Is a good or bad for the organizations
Attrition - Is a good or bad for the organizations
What is Meant by Attrition Rate?
The term 'attrition rate' can be defined as "A reduction in the number of employees through retirement, resignation or death." It denotes the percentage change in the labour force of an organization. High percentage of labour turnover is not desirable for the organization because new workers are engaged in place of the workers who left the organization.
The high attrition rate in the IT industry has always been its greatest concern and a subject of much analysis and debate. Organisations use different methodologies for calculating their turnover rate. It is a known fact that turnover calculation is a grey area which does not always depict the true picture. While a few techniques are common, there are no proven theories. Further, the approach to this calculation might vary from organisation to organisation. Disclosure of the figure not only has a direct impact on the business but also affects employee morale and productivity. Significantly, it might also trigger a chain reactiona high attrition rate will lead to more people leaving the organisation, while a lower rate will act as a retention strategy. It is therefore not surprising that most industry observers are sceptical when organisations disclose' their employee turnover.
A high attrition reflects poorly on an organisation's ability to hold on to its people. Monisha Advani, CEO, EmmayHR, says that attrition is unfortunately viewed as a management flaw when in fact it could well be a recruitment error. In some cases it can be simply seen as an organisation's competitor appreciating its quality of hires, and its output, post-trainingalmost a backhanded compliment.
"Ideally, attrition should be calculated on a monthly basis for companies that have over 50 employees for the first five years of its business. Subsequently, a quarterly index should be applied till a company's 10th anniversary. After this, annual attrition figures should be measured and accounted for. This is the optimum within the services industry as companies tend to have different challenges at different stages of their business lifecycle; also, maturity achieves stability around a company's 10th anniversary," opines Advani.
Different Theories
The attrition rate remains a debatable area as there is no standard formula to calculate it. This can be ascribed to many factors. Suhas Nerurkar, President, TVA Infotech, lists a few of them:
The employee base changes each month. So if a company has 1,000 employees in April 2004 and 2,000 in March 2005, then they may take their base as 2,000 or as 1,500 (average for the year). If the number of employees who left is 300, then the attrition figure could be 15 percent or 20 percent depending on what base you take.
Many firms may not include attrition of freshers who leave because of higher studies or within three months of joining.
In some cases, attrition of poor performers may also not be treated as attrition.
Essentially, the attrition number is also a PR or stock/analyst statement and is prone to dressing up.
Varied theories are also applied as organisations like to brand themselves differently as far as their HR and recruitment strategies are concerned. Explains Advani, "Each company positions itself uniquely in a common market place by claiming to have exceptional HR policies, procedures and management styles that directly impact retention or attrition; hence the absence of a homogenous system. Also, in situations where a common attrition measurement formula is applied, companies find a way to justify their results to position their statistics differently from their peers on account of having different' operating practices."
However, Anil Noronha, Director, HR, Indian Subcontinent, Onward Novell Software (I) states that most companies use a fairly standard methodthe number of employees who left during the year divided by the average number employed for that year.
The True Picture
The attrition rate that is generally disclosed by most organisations does not always show the correct picture. Nerurkar acknowledges this to be true. "I agree that the figure has a direct impact on stock markets, employee morale and customer confidence. There is too much at stake, and neither the US GAAP (Generally Accepted Acounting Principles) or SEBI requires that this be calculated in a particular way."
The attrition rate has always been a sensitive issue for all organisations as it can have a major fallout on the bottomline. Kranti Munje, Senior Manager, HR, Bristlecone India furthers, "This is because the attrition rate is an indicator of many things intrinsic to the organisation, and revealing it may affect it negatively. In fact at times disclosing this data can be like a self-fulfilling prophecyif you reveal that the attrition is high, it may actually become higher."
It is also not uncommon to find companies proclaiming an attrition rate that is much less than that of others in the industry. Remarks Bijayinee Patnaik, HR Head at Mahindra Special Services Group (MSSG), "Companies must be projecting their attrition rate incorrectly because it tends to affect their brand image both internally and externally. Internally, it sends a wrong signal to their employees and the board of members; externally, it can affect the company in various ways such as developing a bad image or dissuading fresh talent from joining." She regrets that companies do not realise that hiding their attrition rate is never a solution for reducing the same.
Turnover Cost
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:
Time spent on sourcing replacement
Time spent on recruitment and selection
Travel expenses, if any
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:
Training materials
Technology
Employee benefits
Trainers' time.
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
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:
Cost of hiring employees (hard and soft costs) + Cost of training and developing new employees (hard and soft costs) = Total Cost of Voluntary Turnover
Source: Bristlecone India
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, corporates 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.
Source: Mahindra Special Services Group
Cause and Analysis
Calculating employee turnover is not a matter of simple mathematical methods. It is necessary to take into account the root of the problem by going back to the hiring stage. Harish Bhattiprolu, Director, Sales, Kenexa Technologies, points out that 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," he asserts.
Attrition Rate
Attrition: Number of employees who left in the year / average employees in the year x 100. Thus, if the company had 1,000 employees in April 2004, 2,000 in March 2005, and 300 quit in the year, then the average employee strength is 1,500 and attrition is 100 x (300/1500) = 20 percent. A graded system can probably depict the true picture.
Fresher attrition: the number of freshers who left within one year. It tells you how many are using the company as a springboard.
Infant mortality: percentage of people who left within one year. This indicates the ease with which people adapt to the company.
Critical resource attrition: key men exit.
Low performance attrition: those who left due to poor performance.
Source: TVA Infotech
Using these formulae, organisations will learn what their real attrition figures are believes Noronha. "Like with most data, attrition too can be interpreted in different ways and it is up to each organisation to decide how and what they wish to share. Companies are generally more concerned about regretted voluntary attrition. These are people who leave on their own will and those whom the organisation would have loved to retain. Similarly, organisations measure managed attrition. These are people made redundant, laid-off or exited. Though managed attrition is non-regretted by the organisation, the trend of managed attrition, if on the higher side, may show the company in poor light, and does have an impact on its health."
Attrition does not only reflect the hiring policies of an organisation, but also induction/retention strategies, training methodologies, work culture and many other factors. Munje reminds that it costs the company valuable time, money and often credibility (especially where employees develop relationships with customers). "Some companies just look at the employee turnover in terms of the cost (based on the PwC Saratoga Institute theory) involved in the hiring and training of individuals. Others look at the opportunity lost and its cost. Sometimes, companies also use the figure between 50 percent and 200 percent of the annualised salary."
Organisations aim to reduce voluntary attrition of productive employees and encourage unproductive staff to leave its fold. "It makes way for career progression, new thinking and innovation. However, what that number should be again differs from industry to industry and from country to country as economies vary. The demand vs supply of talent/resources plays a critical role too. What is considered a healthy attrition number in an industry in India may not be so in a more stagnant economy where no new jobs are being created," explains Noronha. Nevertheless, zero attrition is unimaginable and unhealthy for any organisation.
REASON FOR EMPLOYEE ATTRITION:
There are plenty of reasons for attrition
1) Job satisfaction
2) Salary & Perks
3) Work environment
4) Co-workers relation/treatment
5) Pressure of work
6) Family situation
7) Health condition
8) Geographical location
9) competency
Employee retention would require a lot of efforts, energy, and resources but the results are worth it. Employees do not leave an organization without any significant reason. There are certain circumstances that lead to their leaving the organization. The most common reasons can be:
Job is not what the employee expected to be: Sometimes the job responsibilities don't come out to be same as expected by the candidates. Unexpected job responsibilities lead to job dissatisfaction.
Job and person mismatch: A candidate may be fit to do a certain type of job which matches his personality. If he is given a job which mismatches his personality, then he won't be able to perform it well and will try to find out reasons to leave the job.
No growth opportunities: No or less learning and growth opportunities in the current job will make candidate's job and career stagnant.
Lack of appreciation: If the work is not appreciated by the supervisor, the employee feels de-motivated and loses interest in job.
Lack of trust and support in coworkers, seniors and management: Trust is the most important factor that is required for an individual to stay in the job. Non-supportive coworkers, seniors and management can make office environment unfriendly and difficult to work in.
Stress from overwork and work life imbalance: Job stress can lead to work life imbalance which ultimately many times lead to employee leaving the organization.
Compensation: Better compensation packages being offered by other companies may attract employees towards themselves.
New job offer: An attractive job offer which an employee thinks is good for him with respect to job responsibility, compensation, growth and learning etc. can lead an employee to leave the organization.
Why do Employees Leave the Organization?
There are a number of reasons for employees leaving the organization. Well, the most obvious reason for employees leaving any organization is higher pay. The main problem here is that employees are moved from one location to another location along with their family. But this problem is taken care of by a salary hike which may be around 20%-35% per annum.
Another factor is work timings. In some organizations, work timings are such that they are making employees leave the organization.
Another factor is career growth. In many organizations, only 20% of employees are able to go to senior levels. This means that the remaining 80% of employees look for other organization where they can get opportunities for growth.
One more reason for leaving the organization is higher education. These days, in many organizations, employees are joining at very young age because of lucrative salaries being offered. But with time, they apply for higher education and try to move on to other organizations or sectors to occupy top management positions.
The percentage of women workers is also responsible for higher attrition rate. These days, the percentage of women workers is around 30%. Generally, women workers leave the organization after marriage to take up their house-hold duties, irregular work hours et al.
80% of employee turnover can also be attributed to the mistakes during hiring process (Harvard Business Review).
Other factors include accident making the worker permanently incapable of doing work, dislike for the job or place, unsatisfactory work conditions leading to strained work relationships with the employer; lack of security of employment et al also contribute for higher attrition rate.
Attrition Rates in Different Sectors in India During 2007
The attrition rates in different sectors for the year ended 2007 are shown in the following graph: -
Source: Times of New York
All the sectors are facing attrition. But the reasons and effects of attrition in every sector are different.
From the above table, we can deduce that for the year ended 2007, the attrition rate in some sectors is grim. It is 50% in Retail Sector and Voice-based BPOs. On an average, the attrition rate in Indian economy is around 20% where as global average is around 24%.
Role of HR Department
Attrition Rate is good for the organization as long as the rate is at normal level. This will help the organization to get new blood into the organization and for the organization to develop. But it becomes a problem when the attrition rate is abnormal. Therefore, HR Department has the most crucial role to play in any organization. At the time of conducting interviews, the HR personnel try to bring right candidate to the right job. Similar is true even when the attrition rate is abnormal, so they have a very crucial role to play.
Following are some of the tips to reduce attrition rate: -
Hiring individuals who are truly fit to succeed in the position for hire will dramatically increase the chances of that employee being satisfied with his or her work, and remaining with the company for an extended period of time. Employees should not only be selected on the basis of communication skills and educational qualifications.
Communication of employee's roles, job description and the responsibilities within the organization, new policies will help to retain employees.
Participative Decision Making - It is incredibly important to include employees in the decision making process, especially when decisions are related to employees. This can help to generate new ideas and perspectives that top management might never have thought of.
Sharing of Knowledge with Others - Allow the members to share their knowledge with others. This helps in retention of information. This also lets a team member know that he is a valuable member of the organization. Similarly, facilitating knowledge sharing through an employee mentoring program can be equally beneficial.
Shorten the Feedback Loop - This helps the employees to know the feedback to their work within a short period. This also helps to keep performance levels high and reinforce positive behavior among employees.
Pay Package - Any employee wants to be appropriately paid and fairly for the work he or she does. For this, conduct a research to find out the pay package in other similar type of organizations at regional as well as at national levels.
Balance Work & Personal Life - No doubt family is exceptionally important to employees. When work begins to put pressure on one family, no pay package will keep an employee in the organization. Therefore, there should be a balance between work and personal life. Small gestures like allowing an employee to take an extended lunch once a week to watch his son's cricket game will result in loyalty and helps to retain the employee.
Organizational Culture - Try to select the candidates who believe in the organization culture and adopt with ease to organization culture.
Exit Interview with the employees who are leaving the organization will help the organization to find out the reasons why the employees are leaving the organization. This will also help to find out any drawbacks in the organization.
Another method to reduce attrition rate is that they should find out why employees are leaving the organization from the employees who are working for the past so many years.
Motivational Training - It is sure that motivational training helps to retain the employees. One of the crucial aspects to motivate employees is to ensure that they have ample growth opportunities which can be provided through training.
Multi-Tasking - One of the ways to retain the employees in the organization is try to get people with different qualities like smart, adaptable, and capable of multi-tasking.
Referrals - Another technique is to try to get the employees hired through referrals. This makes them stick with the organization.
No Favoritism - One of the surest ways to create animosity and resentment in an organization is to allow favoritism and preferential treatment towards an employee. Be sure to treat all employees equally and avoid favoritism at all costs.
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