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Costs of Turnover – Hidden and Unknown

Written on:February 5, 2010
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What about the costs of turnover?  You may be amazed at the numbers.

I have seen many organizations agonize over a $10,000 dollar decision – and ignore one or two percentage points on turnover, which may be worth $100,000 or more.  The costs of turnover are frequently hidden, not easily seen or understood, not easily reported, and so they get overlooked – nevertheless, it is a very real cost and it hits your bottom line.  Hard.

Are you debating $10,000 and ignoring $100,000?

I have seen leaders struggle with paying for a dedicated nurse recruiter, while ignoring turnover and the costs associated with replacing vacant staff hours using overtime or other special pay programs.  Other items that roll into the costs are recruiting, hiring, on-boarding, loss productivity, training and mentoring.  A long list of other staffing implications also impact your business, such as employee morale, patient satisfaction, quality of care, and issues that float up to our Risk Managers.  (More on the various cost elements in another post.)

Just back filling an open job with overtime or agency hours can become a crippling expense.  And an unneeded one.  We all know it costs money to do business – so the question isn’t “how do I staff without spending money” – the question is “where do I spend money to get the best value, the best return”.

Let’s look at some illustrative numbers.  These numbers are from the 30,000 foot level and are based on a few simple inputs, but they will get us into the right frame of mind.  We can always use more sophisticated analysis to get more accurate numbers, however, the concepts remain the same.

Let’s use these assumptions.  You work at a hospital that employs 500 RNs.  You pay on average $30 an hour ($62,400 a year).  Benefits and employee programs average 30% of pay.  You have a 10% turnover rate – that means 50 RNs leave annually.  Your back fill costs are high because you must fill shifts, and you use some overtime, some agency, some Per Diem or Contingency and some part-time staff.  This costs on average 150% of the average RN wage.

Your cost for 10% turnover with these assumptions is in the neighborhood of $6,084,000.

That is a lot of money.

If you drop turnover to 8%, and all other inputs remain the same, you can reduce your costs by $2,028,000.

Is it worth hiring an extra dedicated RN recruiter at $65,000 a year to go after $2,000,000?

Is it worth having a team dedicated to retention?

I can’t answer those questions for you – however, for me, I would easily make the decision to go after the 2% variance for an annual payment of $65,000 – as an example.  That is more than 30 years of salary (not factoring for inflation and other normal increases).  Even if we discounted the 30 year number with other sophisticated sensitivity analysis, and cut it by two thirds, would we be willing to invest over a ten year period for a multi million dollar return? (Please note – I am not suggesting that hiring extra recruiters will solve your turnover; I am asking how high a priority is it on your resource decision list.)

Let”s look at another example with the following assumptions.  You work at a hospital that employs 3000 staff.  You pay an average annual salary of $50,000.  Benefits and employee programs average 30% of pay.  You have a 10% turnover rate – that means 300 staff leave annually.  You fill some shifts and some you don’t.  Some get filled at a lower average rate since we are looking at all employees, clinical, office and support staff.  A mix of current staff, agency, temporary, and overtime are used to pay for covered shifts – so we estimate (or calculate) the  back fill cost rate at 100%.

Your cost for 10% turnover with these assumptions is in the neighborhood of $19,500,000.

That is a lot of money.

If you drop turnover to 9%, and all other inputs remain the same, you reduce turnover costs to approximately $17,550,000 – still a lot of money, but $1,950.000 less – almost $2 million less.

1% is worth $2 million!

Is it worth looking at a detailed turnover report to better understand how to go after this one percent variance?  I think it is.  What if you can only get to a half a percent correction or improvement?  Is it worth going after about $1 million?  I think it is.

Please know these numbers are illustrative in nature, given that every organization operates differently.  What is not illustrative is that turnover is costing you way more than you think it is – and you can do something about it.

As with many people related issues or challenges, turnover is a multi-faceted challenge, and is best solved through a broad partnering approach.  A single manager, a single HR representative, a single recruiter, a single VP will not solve turnover.  It does take coordinated work on the part of a number of key people working closely together toward a common goal.

To be fair with these numbers, when compared to high level numbers from a consulting firm that specializes in on-boarding and retention, when performing a similar calculation, and for a 1,000 employee company with 10% turnover, and an annual salary of $50,000 with replacement costs at 150%, they estimate overall costs to be $7,500,000.

Many times turnover fixes are not intuitive, and it takes time to measure and see outcomes.  Perhaps that is why so many $10,000 debates take place – at times it is so much easier to go after a tangible 10k rather than a broader challenge.

How many 10k decisions will fit into a 1% turnover variance at your company?  If you don’t know, you should.

Caution: Keep it real.  If your turnover rate is low, meaning less than 30% of norm when benchmarked against your company peer group, then you will have less opportunity than if you are coming in at 75% or even at 100% of benchmark.  If you are not benchmarked, a very general rule of thumb is that 13% to 18% can be considered high, and 3% to 5% can be considered low (this is very industry dependent).

Part of your routine turnover reporting should also include benchmark numbers – even if they are only based on annual surveys.

Grab that Power Tool and see what opportunities are out there!

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