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Some tips for quantifying the cost of losing key employees and stopping critical departures. A consultancy sees CFOs as central to the process.
Roy Harris, CFO.com | US
December 18, 2007
When key employees in critical roles begin to leave a company, the consequences can be devastating. And action has to be taken fast to find out why it's happening and how to stop it. But might there be a way to prevent it in the first place?
According to one recent report, prevention starts with identifying just what roles at a company are critical — something too few managements do in advance. Even fewer become adept at quantifying the value of a critical job position, and especially determining the indirect, hidden costs of this toxic turnover. They settle for the obvious price of recruiting, hiring, and training, along with the amount to be paid in the interim, for overtime and for employing temporary workers.
"Increasingly, finance is asking for the numbers beyond those direct, straight-line costs," says Aaron Sorensen, who with Joel Rich co-authored a report called "How to Manage Undesirable Turnover" for Sibson Consulting. The human resources department "is starting to catch up with finance" when those requests come in from the CFO — and to estimate such serious indirect costs as loss of productivity and capacity, misallocation of resources, reduced bench strength, increased training time, lost work hours, and vanishing customer base.
"Typically, doing that straight headcount approach doesn't answer a company's business needs," Sorensen tells CFO.com. "Companies need to determine what they must do over the next three years to solve the problem. When the CFO is involved, the conversation happens around that framework."
The Sibson approach to reversing "undesirable turnover," which is part of its Human Capital Planning program, starts with identifying just what roles at a company are critical — even if there's not a current turnover problem. Then, the company needs to quantify the costs, both direct and indirect. These HR activities put the "focus on the management of turnover as a strategic business issue, both in terms of controlling bottom-line costs and driving top-line results," according to the consultancy's report.
"In some cases — such as where a role is no longer important — it may not matter if good people are leaving," the report says, noting that turnover is a natural part of many systems. But if companies know what jobs have the most strategic and core meaning within the corporate structure, then when they note unusual turnover occurring, "a red flag should go up" and action should result.
When Young CPAs are Critical
Sibson cites the case of an electronics company that needs software engineers to help it perform on a government contract. "If the company cannot attract and retain the right engineers, it will not be able to deliver the product on time, which will have a negative effect on its income." The threat that engineers might quit thus could represent toxic turnover. Likewise, a pharmaceutical company recently granted approval to market a new drug may find marketing staff to be critical, and the loss of marketers a severe drag on the bottom line at that particular time.
A financial services firm Sibson studied had a similar toxic-turnover problem, based on a system in which experienced managers review the work of recent college graduates with CPAs — normally considered among the most expendable of employees. "If the firm cannot get those young graduates, the managers will have to do the work and the partners will have to review it, meaning that they will have less time to perform the higher level tasks that they are paid to do, such as attracting new clients and developing new services," according to the report.
"Three or four years ago, these CPA jobs weren't core, and the company was outsourcing them," Aaron Sorensen tells CFO.com. But the increase in demand from the Sarbanes-Oxley Act "heightened expectations for performance from people in those roles." The firm studied by Sibson "didn't understand what skill sets were needed, and as a result, it had to spend $3 million over a two-year period in order to bring people into these roles. The jobs were used as a feeder pool for the next level up."
The Sorensen-Rich report did not look at the critical nature of executive or C-suite jobs, concentrating instead on more-general employment. But Sorensen sees the CFO as the key player in helping with the cost quantification process, and especially the identification of hidden costs. "One of the things we're seeing with our clients is that finance is working more with HR on the implications of losing people in these critical roles," he says.
"What we've done specficially with our human capital work is to install what we call the CFO dashboard. Once you go through your human-capital plan you see what those hidden costs are — and what it will cost to get the corporation to attract, motivate, and retain people in those critical roles."
He cited the case of a client that was a fast-growing part of Johnson & Johnson, where Sibson took the finance chief through the planning process. "The CFO said, 'I don't want to see the lines cross when it comes to profitability and staffing costs. The key message we got there from the CFO was that as we grow the business, we cannot erode our margins." That visualization in graphic form helped the J&J unit avoid "getting too far behind the talent curve," Sorensen says. By getting three years ahead in nurturing employees in this case, "the profit margins wouldn't be impacted."
Factors that Cause Turnovers
The report lists five categories as a start at detailing the factors that lead to turnover: compensation, benefits, career opportunities, the quality of the "work content," and "affiliation" — the degree to which the organization supports employees in their functions. Companies with a turnover problem need to attack these areas to help them retain employees and bring in new ones when needed. Sibson calls this the "employee value proposition."
The consultancy has identified "exit drivers" that companies need to consider as part of the cure for toxic turnover. Some are obvious; drivers in the compensation area include a lack of "pay system satisfaction" and "pay raise satisfaction," along with low levels of information about pay. In the affiliation area, however, the drivers may be a bit muddier; not enough organizational commitment or support for employees, who also rate "trust in management" and "understanding of vision," along with fairness and reputation in deciding whether to stay on.
In one case that Sibson offers as an example, a company found turnover up 20 percent over historic rates, and even higher in some business units. After interviewing exiting employees, administrators saw that the problem was more than low pay, which was at first suspected. The problems cited were unhappiness with project assignments, training, and scheduling. To confront the real problems, the company changed its project assignment and training, and installed a comprehensive communication system to explain the changes. Pay levels weren't changed at all, but turnover rates plunged.
Finance chiefs should get involved in this process early, demanding richer, less simplistic information about critical jobs from HR — and increasingly they are, says Sorensen. "Ultimately, if the business can't afford to fill the critical gaps, it's going to have to go to the CFO anyway to ask for more money."
That's if the company even survives the outflow in a competitive world.