Calculating employee attrition

: The high attrition rate in the IT industry has always been its greatest concern, and a subject of much analysis and debate. Organisations use different methodologies for calculating their turnover rate. It is a known fact that turnover calculation is a grey area which does not always depict the true picture. While a few techniques are common, there are no proven theories. Furthermore, the approach to this calculation might vary from organisation to organisation. Disclosure of the figure not only has a direct impact on the business, but also affects employee morale and productivity. Significantly, it might also trigger off a chain reaction-a high attrition rate will lead to more people leaving the organisation, while a lower rate will act as a retention strategy. It is not surprising that most industry observers are sceptical when organisations disclose their employee turnover.

A high attrition reflects poorly on an organisation's ability to hold on to its people. Monisha Advani, CEO, Emmay HR, states that unfortunately, attrition is viewed as a management flaw, when in fact, it could well be a recruitment error. In some cases it can be simply seen as an organisation's competitor appreciating its quality of hires and the output, post-training-almost a backhanded compliment!

"Ideally, attrition should be calculated on a monthly basis for companies that have over 50 employees for the first five years of its business. Subsequently, a quarterly index should be applied till a company's 10th anniversary. Post this, annual attrition figures should be measured and accounted for. This is optimal within the services industry as companies tend to have different challenges at different stages of their business life-cycle, and also maturity achieves stability around a company's 10th anniversary," says Advani.

Different theories

The attrition rate remains a debatable area, as there is no standard formula to calculate it. This can be attributed to many factors. Suhas Nerurkar, President, TVA Infotech, lists a few of them:

* The employee base changes each month. So if a company has 1,000 employees in April 2004 and 2,000 in March 2005, then they may take their base as 2,000 or as 1,500 (average for the year). If the number of employees who left is 300, then the attrition figure could be 15% or 20% depending on what base you take.

* Many firms may not include attrition of freshers due to higher studies or attrition within three months of joining.

* In some cases attrition of poor performers may also not be treated as attrition.

* Essentially the attrition number is also a PR or stock/analyst statement and is prone to 'dressing' up.

Varied theories are also applied as organisations like to brand themselves differently as far as their HR and recruitment strategy is concerned. "Each company positions itself uniquely in a common market place on account of having exceptional HR policies, procedures and management styles that directly impact retention or attrition. Hence the absence of a homogenous system. Also, in scenarios where a common attrition measurement formula is applied, companies find a way to justify their results to position their statistics differently from their peers on account of having differing operating practices," explains Advani.

Anil Noronha, Director Human Resources, Indian Subcontinent, Onward Novell Software ( I ), however states that most would use a fairly standard method-the number of employees that left during the year divided by the average number employed for that year.

The true picture

The attrition rate that is generally disclosed by most organisations does not always show the correct picture. Nerurkar acknowledges this to be true. "I agree that the figure has direct impact on stock markets, employee morale and customer confidence. There is too much at stake and neither US GAAP or SEBI require that this be calculated in a particular way."

Attrition rate has always been a sensitive issue for all organisations as it can have a major fallout on the bottomline. Kranti Munje, Senior Manager, HR, Bristlecone India furthers, "This is because the attrition rate is an indicator to many things intrinsic to the organisation, and revealing it may affect it negatively. In fact at times, disclosing this data can be like a self-fulfilling prophecy-if you tell the fact that the attrition is high, it may actually become higher."

It is also not uncommon to find companies proclaiming an attrition rate that is much less than the others in the industry or their competitor's turnover rate. Bijayinee Patnaik, HR Head at Mahindra Special Services Group (MSSG) states, "Companies must be projecting their attrition rate incorrectly as it tends to affect their brand image both internally and externally. Internally, it sends a wrong signal to their employees and the board of members and externally, it can affect in various ways such as developing a bad image or dissuading talent." She adds that companies do not realise that hiding their attrition rate is never a solution in reducing the same.

Cause & analysis

Calculating employee turnover is not a matter of simple mathematical method. It is necessary to take into account the root of the problem, by going back to the hiring stage. Harish Bhattiprolu, Director, Sales, Kenexa Technologies points out that most organisations in practice do not evolve robust measurements for calculating cost of a bad hire or labour turnover. The detail of information required and the measurement metrics are not common formulae, but have to be designed dependent on the nature of business and function. "As a result most organisations do not intend to mislead by disclosing statistics which may not be true, it is just that perhaps they believe those to be true. It is imperative to evolve the science of measurement before the measure itself," he asserts.

Organisations will however know what their real attrition figures are as this has a huge impact on business, believes Noronha. "Like with most data, attrition too can be interpreted in different ways and it is upto each organisation how and what they wish to share. Organisations are generally much concerned about regretted voluntary attrition. These are people who leave at their own will and those whom the organisation would have loved to retain. Similarly, organisations measure managed attrition. These are people made redundant, laid off or exited. Though managed attrition is non-regretted by the organisation, the trend of managed attrition if on the higher side may show the organisation in poor light and does have an impact on the organisation's health."

Attrition does not only reflect the hiring policies of an organisation, but also induction and retention strategies, training methodologies, work culture and many other factors. Munje reminds that it costs the company valuable time, money and often credibility (especially where employees develop relationships with customers). "Some companies just look at the employee turnover in terms of the cost (based on the PwC Saratoga Institute theory) involved in the hiring and training of the individuals. While others look at the opportunity lost and cost. Sometimes companies also use the figure between 50% to 200% of the annualised salary."

Organisations aim to reduce voluntary attrition of productive employees and encourage unproductive staff to leave its fold. "It makes way for career progression, new thinking and innovation.