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How Employee Attrition Hurts the Bottom Line

Service companies pay a steep price for large numbers of departures.

(originally published by Booz & Company)

Title: The Long-Term Influence of Service Employee Attrition on Customer Outcomes and Profits (Fee or subscription required)

Authors: Mahesh Subramony (Northern Illinois University) and Brooks C. Holtom (Georgetown University)

Publisher: Journal of Service Research, vol. 15, no. 4

Date Published: November 2012

Managers and scholars have long paid attention to the consequences of too much employee turnover. Stanford University’s Jeffrey Pfeffer, in particular, has warned of the pernicious effects that layoffs can have on employees and companies. But despite the recent economic downturn and the deep job cuts that resulted, relatively few studies have empirically assessed the impact of worker attrition on corporate performance.

The authors of this study set out to fill the gap, by examining how large numbers of layoffs and voluntary departures can damage a company’s brand and bottom line over time. They found the service industry ripe for analysis: Recent statistics show that more than 80 percent of employees in the United States (and about 60 percent in the European Union) provide a service rather than make a product. And previous research has determined that consumers evaluate the quality of service-oriented firms largely on the basis of their interactions with employees, meaning the impact of worker attrition on customer attitudes should be measurable. The authors predicted that customers would perceive a drop in service from the loss of relationships with departing employees and from the diminished morale and motivation of those who remained.

To that end, the authors collected data from 64 regional offices of a U.S. temporary help services firm. They focused only on the full-time staff members who recruited and directed subordinates to perform short-term administrative tasks for their customers: more than 40,000 organizations operating in a range of industries. These managers dealt directly with clients to match IT workers to temporary data-entry and programming assignments, for example, or to send accountants to firms nearing the end of the fiscal year.

The authors gathered information over a six-year period, beginning in 2005. Whereas most of the recent research on this topic has focused on either voluntary exits or forced cutbacks, this study gathered data on both. The authors captured some of the time-lag effect of the departures with customer evaluations of the company collected via phone surveys, as well as online questionnaires completed by employees describing the company’s relationships with its clients. They followed the impact of the employee departures to 2010 by obtaining the company’s profitability data for that year.

The researchers found that the number of full-time staff who willingly left each office in 2005 ranged from 10 percent to an astonishing 76 percent. Meanwhile, 4 to 28 percent of the staff left each office that year because of layoffs or terminations. Although many who left were replaced, 86 percent of the offices nonetheless experienced a net decline in 2005 of at least 5 percent of their full-time staff, a level of loss traditionally seen as signifying a deliberate reduction in workforce. Controlling for the size of each office, the number of its employees, and unemployment data for 2005, the authors found that the offices were not likely to be hit by significant numbers of voluntary resignations and forced departures at the same time—backing up their decision to examine the two types of turnover independently.

To illustrate the practical implications of the study, the authors compared clients’ evaluations of their service experiences at offices hit with low and high levels of turnover. (These customers rated several aspects of their experience on a five-point scale.) The authors found that offices that experienced the highest levels of voluntary turnover (at or above the 80th percentile) received an average score from customers of 3.94. Those with the lowest rates of voluntary turnover (at or below the 20th percentile) earned a higher average score of 4.19, a statistically significant difference. Similarly, offices that went through the most severe rounds of layoffs and terminations earned an average score of 3.93, whereas the offices that had the fewest cuts came in at 4.38. As predicted, the loss of employees led customers to perceive a drop in company performance.

The impact of these scores extended beyond perceived performance to the bottom line. After again controlling for size and other factors, the researchers found that offices with lower customer experience scores had profits of about US$486,000, on average, whereas those earning higher approval scores earned more than $1.9 million. In other words, the authors write, the offices that remained in the good graces of their clients tended to be about four times as profitable as those whose performance was perceived to wane.

“These findings highlight the financial benefits of creating positive [service brand image] in the minds of customers, as well as the importance of controlling employee turnover, and improving customer orientation and service delivery levels,” the authors write. And they believe their findings are likely to apply to many other arenas in which employees must satisfy customers’ individual requirements on a continual basis—such as financial services and healthcare—as well as business-to-business industries.

Just as it takes time for marketing campaigns or service upgrades to register positively for a firm, the negative effects of employee attrition are likely to emerge slowly, the authors write. Although layoffs, in particular, may provide savings in the short term, they can lead to significant long-term financial hits and hidden costs that managers may not anticipate. As employees leave, profits eventually go with them.

Bottom Line:
Continuity is vital in staffing, especially for service-oriented businesses that rely on building relationships with customers and clients. Companies that are hit by waves of turnover—both voluntary and forced—see some of those bonds erode, and the damage to performance and profitability is tangible.

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