Forecasting and Preventing Turnover to Increase Profits

There are many costs involved in doing business. One of these costs is turnover. When employees leave the organization, they represent investments that are no longer reaping dividends.

Turnover involves separation costs including:

• the costs incurred for exit interviews, and
• administrative functions related to the employee's exit.

Replacement costs include:

• the costs of attracting new applicants,
• entrance interviews,
• testing,
• travel/moving expenses,
• preemployment administrative expenses,
• medical exams,
• acquisition and dissemination of information, and
• the costs of attracting new applicants,
• training costs.

In addition, there is the cost of the performance differential between those employees who leave and their replacements. These costs add up to a substantial part of an organization's operating budget. One study in the health care industry, published in Health Care Management Review, found that the minimum cost of turnover represented a loss of greater than five percent of the total annual operating budget. Aharon Tziner and Assa Birata published an article titled "Assessing Employee Turnover Costs: A Revised Approach" in the Human Resource Management Review. According to their formula, it can easily cost six figures to replace an employee. Nationally the average employee turnover rate for all organizations is approximately 15%. These numbers can be discouraging, but there is good news: there is much you can do to decrease these costs.

Q: What can you do to decrease the high cost of turnover?

A: Prevent it from happening.

How? Use science to forecast turnover and prevent its occurrence. The lower your turnover rate, the lower your expenses will be to replace exiting employees. Can this really be accomplished using science? Yes! The secret is knowing how to apply it. A study by Mark Huselid, published in the Academy of Management Journal, found that human resources departments could successfully decrease turnover by implementing changes in response to employee survey data.

Much can be learned about improving organizational effectiveness from organizational psychologists. Scientists in this field have been trained to use the scientific method to meet the goals of psychology and apply them to better understand organizations. These goals include:

1. describing behavior,
2. explaining behavior,
3. predicting behavior, and
4. influencing behavior.

Let's start with the first goal, describing behavior. Organizational psychologists know how to apply the scientific method to describe human behavior as it occurs in a particular environment. Big deal, right? How hard is it to describe behavior? While anyone can make observations and describe behavior, it is important to keep in mind that this is a foundational goal in psychology; all of the other goals build upon it. Therefore, it is also crucial to keep in mind that since the ultimate goal is to apply this information to your organization in order to improve effectiveness and decrease costs, you want the most accurate information possible. We all observe human behavior every day. We also tend to make assumptions about behavior based on those observations. But our observations are limited. Each of us over a lifetime interact with only a very limited number of people and this limits the accuracy of our conclusions about behavior. For example, most of us grow up in families. We have all made assumptions about what families are like based on our experience in our own families. However, these assumptions about family life may not apply to families from other socioeconomic statuses, racial and ethnic groups, cultures, etc. Likewise, we each make observations in our work settings and draw conclusions about the organizations we work for. But, like our observations of our families, these observations are limited and the conclusions drawn from them may not accurately describe behavior in other parts of the organization.

The bottom line?

Observing behavior is not as simple as it sounds. Fortunately, when organizational psychologists apply the scientific method to describe behavior in organizations the result will be accurate, unbiased, information that can be used to meet the other goals.

Now, for the second goal: explaining behavior. When it comes to turnover, explaining behavior may seem easy: simply perform exit interviews and let the exiting employees tell you why they are leaving. That is a good start, but it is only a beginning. Why? Because people do not always know the causes of their own behavior. Much of our decision making occurs at an unconscious level. There are factors that influence our decisions that we are aware of and others that we are not. When organizational psychologists survey employees regarding a broad range of aspects of their jobs, causal factors can emerge that the employees themselves are not even aware of. However, these drivers are no longer hidden once statistical analyses identify the relationships between all the survey items employees have responded to.

Now that employee behavior has been described and explained, it is possible to meet the third goal: predicting behavior. The data will allow you to forecast the future behavior of your employees. Information gleaned from exiting employee survey data can be used to predict the percentage of employees in the current population who will voluntarily exit the organization in the near future. The data will also identify the reasons driving the employees' decision to leave.

Next you can proceed to the final step: influencing behavior. Once the drivers influencing employees' decisions to exit have been identified, action planning can begin to develop interventions to change employee perceptions of these drivers.

Q: How do you integrate these processes effectively to decrease turnover, decrease costs, and increase profits?

A: Implement the Turnover Cause Analysis (TCA).

Recently our organizational research firm, The National Business Research Institute (NBRI), developed a new technique to meet the above goals in an organizational setting in order to predict turnover in the current employee population. This technique combines state-of-the-art statistical procedures to compare the psychological profiles of employees who have exited with current employees. In this process, data is collected from employees over a period of time. This data is used to create psychological profiles. Separate psychological profiles are generated on data from employees who voluntarily exit the company. The profiles include the identification of the drivers that influenced the employees' decision to leave. This is done using a technique known as the Root Cause Analysis. Using this advanced statistical technique the exiting employee profile can be used to predict the percentage of current employees who will choose to leave in the future.

This process does not end with the prediction of how many employees will choose to leave. The Root Cause Analysis indicates the drivers that most often lead to a voluntary exit. A psychological path analysis identifies a small number of items that have the greatest effect on employee perceptions of the largest number of other items. The results of this analysis facilitate preventive measures. Knowledge of these drivers empowers you to take actions to change the perceptions of current employees regarding these drivers in a positive way. Improving employee perceptions decreases the likelihood that employees will choose to exit, thus decreasing your costs.

Scientific studies have indicated that statistical procedures can be successfully applied to identify drivers of turnover. One study, published in Personnel Psychology, involved an analysis of data from 178 independent samples from 155 studies. The study confirmed that drivers could be successfully identified and that statistical analysis can reveal causes of exiting that employees themselves are unaware of.

The results of NBRI's standardized and customized surveys have enabled businesses from all sectors to forecast the behavior of their employees and implement changes to increase profits. If you would like to learn more about how NBRI can help you describe, explain, predict, and influence the behavior of your employees call us today at 1-800-756-6168.

Ken West, Ph.D.
Organizational Psychologist
National Business Research Institute, Inc.