Hidden costs of employee turnover

January 14, 2016 Ryan Perrone 1 comment

Employee Leaving

Conventional wisdom / research says that employee turnover can be very costly to an organization (50% of annual salary and up).  The usual factors that most studies focus on is the costs related to the new / replacement employee:  recruiting, training, and to a lesser degree, lost productivity during the transition.   However, there are other impacts (ranging from difficult to impossible-to-quantify) that have ramifications throughout the organization.


Having worked in many turnaround situations, where it was crucial to re-structure organizations, I have been part of many decisions to reduce headcount.  Sometimes this was by closing facilities, eliminating divisions, or just general reductions as a result of zero-based budgeting.  The following hidden costs are the ones I have witnessed in my career:

  • Tribal knowledge – Even if a company has well documented procedures (that’s a big IF), there is still a certain amount of know-how that ends up walking out the door (or in reality, is essentially chucked into the trash).  In one instance, a manufacturer was relocating its operations to Mexico.  Some products made in the new facility were not being produced correctly.  As it turns out, they were now being made to the exact specifications. However, the previously departed employees knew the spec was wrong and had figured out how to make the product correctly, but never changed the documentation.
  • Lost time due to gossip / speculation – This one is somewhat easy to manage by having a good and timely communication plan.  If a company is downsizing its workforce, it is usually a good idea to have additional follow-up with all employees to answer questions and address concerns after the news has broken.  If the company is making a large announcement, usually the work force knows that something is coming (seriously, all those secret meetings in the conference room are a good indicator).  There is a decent chance that the gossip train might very well have left the station before the official word is communicated.
  • Missed assignments – Once an employee is on their way out (either by choice or force), odds are, they will not be giving it their all.  People can be very fickle, even if they claim or intend to leave on good terms, this does not always happen.  It’s usually the less-visible items that get skipped.  I have witnessed (after the fact) an accountant stop reconciling cash accounts and stop paying sales taxes (including ignoring calls from the Department of Revenue).  The worst is when managers stop managing their people and it effectively becomes the inmates running the asylum.  These types of events always get uncovered after the fact and cause much more work for everyone else to clean up.
  • Interviewing – Even if the company uses a recruiter to find the new candidate, people at the company still have to spend time interviewing candidates and discussing them.  For each position, this can easily consume a half day, or more, to assess all of the potential candidates.  Usually, some of these people conducting interviews, are the same ones who could have a higher workload from the departing employee.
  • Inter-departmental strife – Since the new employee is either not yet hired, or still learning, this can impact other parts of the organization that need to interact with this position.  Miscommunication opportunities are extremely high when people lack a working relationship.  This can either slow down other parties as they work with the new person, or in certain instances, can cause a brush fire if one party decides to go up the organizational ladder to ruffle some feathers.
  • Culture changes – One person has the ability to impact the culture of an organization or department.  Typically, it is much easier for them to have a negative impact, rather than a positive one.  If a new person simply does not communicate well, this can have a chilling effect, it doesn’t even have to be shoddy work or overtly negative behavior.

Here are some things that a company should keep in mind to keep the organization positioned for success:

  • Communicate, openly and honestly – Keep open and clear communication within the right circle, whether it is a department, division, facility or the company as a whole.
  • Maintain engagement with the departing personnel – Have an open dialogue with the employee that is leaving.  Be honest with each other, acknowledge that they are going to check out, ask them what they are intentionally neglecting (without judging).
  • Part on good terms – Sometimes, the easiest way to solve a problem is to reach out to the former employee.  Even if it costs the company a rate that is higher than the employee’s previous salary, it could be money well spent if you save your own employees countless hours trying to figure things out.

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