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 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
A high attrition reflects poorly on an organisations 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 organisations competitor appreciating
its quality of hires, and its output, post-trainingalmost a backhanded
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 companys 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 companys 10th anniversary, opines Advani.
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
Mahindra Special Services Group
It is imperative to evolve
the science of measurement
before the measure
Unfortunately, attrition is
viewed as a management flaw when in fact
it could well be a
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.
Attrition rate is an indicator to many things intrinsic
to the organisation, and revealing it may affect it negatively
Senior Manager, hr
Attrition figure has direct impact
on stock arkets, employee morale and customer confidence.
There is too much at stake
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.
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.
The cost to your business when hiring new employees includes the following
six factors plus 10 percent for incidentals such as background screening:
spent on sourcing replacement
Time spent on recruitment and selection
Travel expenses, if any
Re-location costs, if any n Training/ramp-up
Additionally, for the positions that are
billable, there is a lost opportunity cost. This can be done using the
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:
Additionally, you may want to measure the per-employee
up communication systems
employees to the HR system
up the new hires workspace
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.
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
The ideal methodology
Cost of hiring employees (hard and soft costs) + Cost of training and
developing new employees (hard and soft costs) = Total Cost of Voluntary
Source: Bristlecone India
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.
way to estimate the cost impact of turnover on companies is to look at
the total compensation costs as a proportion of a firms 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.
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,
- 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.
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.
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