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www.expresscomputeronline.com WEEKLY INSIGHT FOR TECHNOLOGY PROFESSIONALS
22 August 2005  
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Home - Technology Life - Article

Feature

Calculating employee attrition

Sudipta Dev reasons out why the rate of employee turnover in an organisation does not always show the whole truth.

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 reaction—a 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, Emmay HR, 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-training—almost 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.
Companies do not realise that hiding their attrition rate is never a solution for reducing the same

Bijayinee Patnaik
HR Head
Mahindra Special Services Group
It is imperative to evolve the science of measurement
before the measure
itself

Harish Bhattiprolu
Director,Sales
Kenexa Technologies
Unfortunately, attrition is viewed as a management flaw when in fact
it could well be a
recruitment error

Monisha Advani
CEO

Emmay HR

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 method—the 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 prophecy—if you reveal that the attrition is high, it may actually become higher.”

Attrition rate is an indicator to many things intrinsic to the organisation, and revealing it may affect it negatively

Kranti Munje
Senior Manager, hr
Bristlecone India
Attrition figure has direct impact on stock arkets, employee morale and customer confidence.
There is too much at stake

Suhas Nerurkar
President
TVA Infotech

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 & 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.

sudipta@expresscomputeronline.com

 


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