February 15, 2023

The True Cost of Your Employee Value Cycle

On Turnover
Calculating an organization’s overall turnover rate can help leaders better monitor the movement of employees in and out of the organization, but how can leaders realize the true costs of attrition without recognizing which people are leaving? 

New hire turnover is not uncommon– about 20% of employees terminate their employment within the first 45 days of working. According to a study conducted by intelliHR, one organization had an annualized turnover rate for permanent employees of 34%—of this group, 46% left within their first six months. Even if the onboarding process is both comprehensive and systematic, integrating new employees into the organization comes with substantial investment costs, which can ultimately end up being a waste of time and resources for HR if not conducted properly. 

The good news is that entry-level turnover can be mitigated, especially with the use of competency science HR software like Claira. This article will cover the underlying costs associated with employee attrition and introduce data-driven strategies that can be used to break the “employee lifecycle.”

Deciphering the Employee ROI Curve
In order to better understand the costs of employee turnover, we first need to understand the Employee Return on Investment (ROI) Curve.

While it can seem a bit abstract, the Employee ROI Curve is a useful tool that helps leaders understand at what point in time their new employees begin to help the business become profitable throughout their lifecycle. In other words: When does profitability outweigh employee investment?

The ROI Curve is characterized by three stages: onboarding, performing, and offboarding. We’ll discuss each one briefly.

Perhaps the most critical stage in setting the stage for ROI, this phase is characterized by the business investing in their new hires. Beyond providing a salary, this significant financial investment can also include any recruitment fees, such as advertising costs, internal HR and administration, and the opportunity cost of a vacant position. 

Even with the finalizing of the new hire, the organization incurs costs related to training, development, and support, which—in its totality—exceeds the amount of revenue that the new employee is generating. 

This stage is characterized by employees using their invested resources , or what we generally call the “return on investment.” When the employee begins generating more value than what is paid out, does the curve begin to turn upwards. Even as the employee’s activities begin to bring in revenue, the sum of money invested in their development can offset their gains for an undetermined amount of time. 

Otherwise known as the “declining profitability” stage, offboarding is often the result of employees becoming disengaged, reflected by a downturn in productivity and performance—and subsequently, profits. Disengagement can be attributed to a number of factors, including lack of role clarity and limited mobility within the organization, and if not anticipated by leaders early on, it can lead to significant reductions in employee retention.

Why People Matter
Most organizations erroneously believe that profitable employee performance begins immediately once the “training period” of skill-sharing is over, but calculating the returns on employee investment is actually determined by something unquantifiable: a connection to the organization’s culture, vision, and mission.

Since April 2021, more than 19 million US workers—and counting—have voluntarily left their jobs, contributing to high attrition rates everywhere. If the past two years have taught us anything, it's that employees are invested in the human aspects of working. They want a renewed sense of purpose and belonging; they want to have meaningful interactions with their colleagues and employers, not just transactions during their “training.” Given that the total cost of employee turnover is estimated to be 1.5 to 2x the exited employee’s annualized salary (and likely higher due to sunk recruiting costs), HR managers need to critically evaluate how they hire from the start. 

Furthermore, for an organization to be successful, they have to onboard their people with compassion. All too often, businesses focus on preventing the voluntary departure of experienced individuals because they may understand how to drive productivity, possess key industry relationships, or have unique intellectual property that cannot be replicated. 

These attrition concerns towards experienced workers are disproportionately high, relative to the fact that the value of their knowledge often goes unquantified. This cultural emphasis on keeping experienced employees in the organization also overshadows the costly significance of a talented, newer employee’s departure, who may still have been in the investment phase but lost interest in the company as a result of management’s differing priorities. 

Starting at the Roots: Claira’s Solution to Onboarding and Beyond
Claira can help reduce entry-level turnover by leveraging a multi-pronged approach: first, by hiring better, and second, by evaluating opportunities for employee growth within an organization. This multi-pronged approach is done by a proprietary machine learning-based platform and competency science to match people and roles proactively, filling talent gaps and creating faster, more profitable pathways. 

By leveraging automation to fill your human capital needs, improving first-year churn rates while increasing your firm’s profitability is possible—and with quiet hiring on the horizon, internally sourcing talent may be the best way to avoid the declining profitability (offboarding) phase.  

While keeping track of post-hire metrics is critical to gauging the success of your organization’s retention strategies, opening channels for feedback and constructive honesty from employees may be the best way to improve the hiring process. The true cost of entry-level employees leaving in their first year can have long-lasting negative financial effects on an organization—and by bringing Claira into the early stages of the onboarding process, companies can immediately mitigate retention costs and boost their employee’s profitability performance potential, generating continuous value in the long run.

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