The True Cost of Turnover—Using Your Information

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When American Residential Services, a subsidiary of The Servicemaster Company, focused its Six Sigma efforts on lowering turnover in 2000, the first thing it did was calculate the cost of its bad hires. Robert Beckmann, the Vice President and head of the Six Sigma program discovered that every lost technician cost the company conservatively $5,500 to $7,000. Turnover among the 4,000 service technicians was 70 to 80 percent, which is average for the HVAC industry but unacceptable when the final tally revealed that the company was spending roughly $19 million a year on turnover.
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The ensuing turnover reduction program, which involved using a version of the Wonderlic Productivity Index to prescreen applicants, lowered turnover 20 percent a year later. That meant they were hiring 100 fewer service techs per month, which added up to a savings of roughly $7 million a year.
Because Beckmann did his math up front, not only was he able to win support from management to invest in more stringent recruiting efforts, he was also able to prove, just one year later, that his program saved the company millions of dollars.

Knowing the true cost of turnover is critical for HR executives who need to justify their efforts to improve hiring strategies. Turnover is one of the biggest hidden costs of doing business, yet most companies don’t have any idea what they spend to hire, train and then replace lost employees. Few bother to quantify the cost of hiring at all, and those that do usually factor in only the obvious hard costs, e.g., advertising expense and training costs.
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In reality, many of the costs and strategic impacts of recruiting go unnoticed, such as the hours HR personnel spend wading through resumés instead of focusing on programs to improve employee productivity or increase employee retention. Staff time is no less important than dollars paid for advertising or temporary workers, yet wages are rarely considered in the final cost of turnover.

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The HR department is a cost center, but building an effective recruiting and selection process definitely improves the corporate bottom line. When HR leaders can demonstrate how much the company loses when an employee needs to be replaced, and when they can provide data to back that number up, then they are much more likely to win support for new recruitment and pre-employment screening strategies. Quantifying the potential savings and presenting goals and plans to improve employee retention through better selection, 360° review systems, employee satisfaction surveys, workforce development programs and even Exit Interviews raises the strategic value of the HR department in the eyes of the executive team.

$ S0 R; H" n5 o$ IFor Robert Beckman it was the difference between telling management “we’ve lowered the cost of turnover,” and being able to say “we saved $7 million last year because of our new recruiting efforts.” The dollar value has far more impact.
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1 Q/ @& z, m# L+ pCalculating Hiring and Turnover Costs
Fortunately, with the right tools and data, you can get a clear picture of the real costs involved in recruiting, screening, hiring, and training new employees.

First, you need to know the costs associated with:

Newspaper and online job postings;
! T5 v( }, S2 H3 d" X# ~6 K, s. M" cPrescreening, including the value of the time HR personnel spend reviewing resumes;
/ i: t: Q$ r5 l0 B. C* J8 n  tScheduling and conducting phone interviews and notifying applicants of their status;
Conducting face-to-face interviews; and
Reference checks and post hire expenses.
Wonderlic Consulting has assembled an abbreviated version of its HR cost analysis system to help clients get a quick overview of their recruiting costs and the potential savings that a reduction in turnover might represent.

Wonderlic’s online Turnover Cost Calculator addresses the “hard expenses” that are easiest to quantify and defend in a presentation. It converts information about job posting costs and staff expense to identify a basic cost per hire and the value realized when turnover is reduced. The online calculator does not include costs associated with lost productivity, negative impact on morale, and deterioration in customer service. It also does not include the cost of a bad hire who doesn’t leave—the price of mediocrity and its effect on productivity. When you factor in such “soft costs” you could easily double your savings when you reduce turnover. To try the Turnover Cost Calculator, click here.

Documenting costs is the first step to setting goals for improvement. It will provide a starting point for estimating the savings that can result from even a modest decrease in turnover, and it can highlight the value of incorporating reliable pre-employment screening products and services to help you make better hiring decisions in less time. Proactively addressing turnover is a first step in demonstrating the important strategic role that human resources plays in your business.