According to Philip Harkins in Workforce Magazine, turnover can cost as much as three to five times the annual salary of the individuals involved.

John Binning notes that it is "not uncommon for even medium-sized companies to lose several million dollars a year resulting from employee turnover.

The average Fortune 500 company expects 33 percent turnover at the executive ranks in the next five years, and fully one-third said they’re not confident that they will be able to find suitable replacements." (ASTD Trends Watch)

There’s a war on - a war for finding, retaining, and developing talent. Hundreds of thousands of jobs sit vacant because companies can’t find the skilled workers they need. Turnover is at an all-time high and the costs associated with replacing employees is skyrocketing. Morale is low, stress is high and productivity is in the toilet. Here’s a quick rundown of what we’re up against:

People are a company’s number one asset, which makes the processes associated with people – like recruiting, retention and training, critical business processes. This is a paradigm shift for many companies who have traditionally viewed people management as less important than many other management processes.

Turnover is at an all time high, up to 30-40% annually in many industries, even higher in some. According to Lyle Spenser, turnover in retail and insurance sales is estimated to exceed 50% annually. The National Institute of Business tells us to expect 60% turnover over the next 3 years.

Losing talented people has serious business implications. According to Philip Harkins in Workforce Magazine, turnover can cost as much as three to five times the annual salary of the individuals involved.

John Binning notes that it is "not uncommon for even medium-sized companies to lose several million dollars a year resulting from employee turnover." The Department of Labor says, "Most companies IT departments are experiencing attrition at enormous rates. It has been said that it cost a company a minimum of $100,000.00 to replace each employee lost." Department of Labor Report 1999

Although there is much debate as to the true costs of replacing an employee, experts estimate the cost to be somewhere in the range of 1 ½ to 2 times the employee’s annual salary. These same experts also admit that they don’t really know what it costs because so much of the costs are hidden or intangible. These hidden costs come not just from finding and training replacements, but also in customer satisfaction and lowered efficiency for those who work with the new hire (or pick up the slack while you’re looking for the new hire). When organizations lose many employees, even at low salary levels, the costs can be substantial.

The National Institute of Business Management claims that in the next three years, employers will replace 60% of their staff. A recent ASTD/SHRM study puts the cost of replacing a typical professional at 1 ½ times the annual salary. To get an idea of what this means in dollars and cents, consider this: If there are 250 people in your company with an average salary of $50K, you’d end up spending a little over 11 million dollars to replace lost employees. That’s if you were actually able to find replacements. The longer the position stays empty, the more the price goes up.

Retention Strategies Have Big Payoff

In The Loyalty Effect, Frederick Reichheld shows how retention directly impacts the bottom line. Reichheld maintains that the "turnover tax" though invisible in most accounting systems, is larger than any state or federal tax. At one of the companies the study team looked at they found that the company could increase profits 50 percent by cutting turnover in half. In another example, they found that a 10 percentage point improvement in retention would increase value by 155 percent.

"Employee retention is not only critical for cost efficiency but an important factor in revenue growth as well, because of its direct like to customer acquisition and retention."

Several studies suggest that all too often companies don’t think they have a recruiting or retention problem, when in fact they do. Part of the reason for this disconnect is that companies tend to focus only on the top executives, where average attrition is typically low. There is far too little attention paid to the middle ranks, where companies are likely to be hardest hit.

According to a survey done by Development Dimension International (DDI), even the executive ranks are feeling the turnover pain. A survey of 150 Fortune 500 companies showed that "the average company expects 33 percent turnover at the executive ranks in the next five years, and fully one-third said they’re not confident that they will be able to find suitable replacements." (ASTD Trends Watch)

HR Magazine’s Marc Adams warns companies about continuing skill shortages. "Companies will contract or shift direction more frequently in the future in response to ever-changing customer demands. That means your employees may need different skills in a year or two from those they have today. But the labor force is changing so rapidly that those skills might not be available when you need them."

The US Bureau of Labor Statistics shows the demand for trained IT workers increasing by 95,000 jobs per year. They anticipate US businesses will generate a demand for more than 1.3 million additional information technology professionals between 1994 and 2005.

Unfortunately, demand far exceeds supply. According to a study by the Information Technology Association of America (ITAA), there are 346,000 information technology (IT) jobs that remain unfilled because of a lack of skilled workers. Another industry estimate is that three out of every 10 computer-related vacancies now take six months or longer to fill. The Department of Education reports that the number of students graduating with bachelor's degrees in computer science continues to decline.

According to Howard Rubin, Consultant and Computer Science chair at Hunter College, in Pound Ridge, N.Y.

…….the gap between IT supply and demand will cost U.S. businesses $500 billion per year in lost revenue, $10 billion per year in lost business income and $15 billion per year in compensation…….

The way Rubin figures it, for every dollar spent on information systems salaries, a company can expect to generate $43 in revenue, he says. Under that assumption, a company could lose $2.4 million per year for each IT professional it can't hire.

IT isn’t the only area where demand exceeds supply. The telephone and cable industries, health care, customer service, finance, and engineering areas are all experiencing the same problems. Even NASA can’t find the people they need to build and operate space shuttles.

According the 1998 Manchester Retention and Staffing Report turnover costs run highest in the pharmaceutical/biotechnology industry and within that industry, research and development employees are the hardest to retain. The second and third highest turnover costs were found in the Chemical and Information Technology industries, with the Banking and Financial Services industry at number four. Within the functional areas, Sales/Marketing/Customer Services and Computers/Information Systems functions had the highest turnover across almost all industry categories.

It appears that one of the hardest hit industries is professional service firms. Oh my God, there’s a shortage of consultants! Whatever will we do? A Fortune magazine articles states that even the most prestigious of firms faces an acute shortage of talent. New business is attracting new entrants into the consulting industry and they all need to hire. Many companies are competing for the same people.

At the other end of the retention bar we find another profession we like to poke fun at – lawyers. According to the Manchester Report, the lowest retention and turnover is found in the legal area – up to a whopping 2% in 1998.

Downsizing continues, though perhaps not with the same vigor it did a decade ago. Two things are different: one is that the intent of the downsizing is not just to cut people; it’s to replace old skills with new ones.

"When a company announces that its cutting 40,000 managers, that doesn’t mean it can operate with 40,000 fewer managers," says Peter Cappelli, director of the Center for Human Resources at the University of Pennsylvania’s Wharton School. "All they’re doing is churning the skill base. They’re going out and rehiring 40,000 managers who have different skills." (Mark Adams, HR Magazine, October 1998)