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While preparing revenue
projections for the upcoming fiscal year, Les pushes back
from the 12
percent proposed just a few months ago to a more realistic 8
percent, based on industry and government forecasts.
Les and his management team
have exceeded projections in each of the past seven
years. The
business has nearly doubled in size during that time and
increased profitability - until this past year. They contributed the
break-even year to a general economic slowdown and increasing
turnover in their hourly labor force.
While stopping short of a
recruitment and retention overhaul, they did offer signing
bonuses, more competitive wages, and an employee health fair
in attempt to stop no-shows, change bad attitudes, and boost
morale. These
improvements seemed to satisfy and retain the one-year plus
employees.
Employee churn for new hires
nevertheless increased by 33 percent for the third straight
year. At nearly
$6,000 for recruitment, hiring and training every new
employee, Les sees less profits each year and is puzzled and
frustrated by the attitudes and ethics of the new workers.
Unfortunately Les and his
team have fallen prey to the “industry-average syndrome”. By virtue of the
latest industry survey, they deemed their turnover rate
acceptable compared to their industry cohorts. That thinking may be
acceptable if it's okay just to be the last ship to sink, but
it's unacceptable if you want to stay afloat. A fatal flaw in
Les' team strategies is misunderstanding how to calculate and
control turnover. Without controlling turnover, most if not
all of the revenue projections will be offset by rising costs
to recruit and replace workers without any increase in
productivity.
Churn-over, turnover of
twelve months or less (six months may be acceptable in some
industries), not turnover, is grinding up the profits of
businesses unwilling to stop the turnstile of employees coming
and going. Turnover is
inevitable. Churn-over is unacceptable. The costs
of mis-hiring are staggering. The effort and sales
needed to pay for these costs and still make a profit are
crushing.
Hiring
more and more employees to replace workers may be enough to
increase top-line growth. But stopping churn-over is a must to
increase the bottom-line.
Success Performance Solutions works with small
businesses as well as the Fortune 500 to provide convenient,
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out unqualified candidates and translate the usual behavioral
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managers. |
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Les's business generated revenues of $6.6
million in 2001.
Profit margins were 14%. The newly projected
increase in revenues (an eight percent increase) is
$528,000.
Last year, Les’s company
produced sixty-four W-2’s for 35 positions. Essentially
they hired 64 new employees for twenty positions; 15 employees
were employed more than 12 months.
On the surface, turnover
appears to be
83 percent, less than the 92 percent
industry average. Churn-over, the number of employees hired
and gone in less than one-year, was a whopping 320 percent (64
attempts at hiring for 20 positions)!
At the cost of $6,000 per
employee, these 64 employees cost the company $384,000. Even at the same clip
this year, churn-over will eat up nearly seventy-two percent
of the projected revenue gains.
What’s worse – much worse –
is how much revenue has to increase to sustain the 14 percent
profit margin.
At fourteen percent profit margin, nearly
$2,743,000 in additional revenues need to be brought in just
to keep pace with the lost costs of churn-over.
If Les and his team would
only put a plan in motion to reduce annual hourly turnover to
25%, they would find it much less painful to grow the business
at the top line and the bottom line.
The cost of 16 churned
employees would be $96,000, a savings of $288,000 in the human
resource line item.
Re-funneling a portion of the savings for wages,
benefits and training back to the remaining employees would
certainly be a good idea too as the return on retaining
employees is clearly much greater than recruiting new
ones.
Of even greater importance
will be the increased profit margin from revenue growth. Although the revenues
required to foot the bill for even 25 percent turnover is
still over $600,000, Les’s company will increase profits due
to increased productivity and quality from a more experienced
workforce, lower administrative and training costs for new
hires, and less stress on supervisors, managers and
co-workers.
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