The Costly Cost of Turnover

Happy Friday,

Do all leaders at your organization fully grasp the staggering business and financial cost of voluntary turnover? Its impact gets widely minimized as “just a cost of doing business.” But imagine if the entire cost were totaled, and your 2025 Profit and Loss statement suddenly showed ‘Voluntary Turnover Cost’ as a line item expense. All hell would break loose, and action to address the cause would be swift. (Understated)

The only difference between that imagined scenario and where we are today is that the cost today isn't being totaled. It exists nonetheless, amplifying corporate overhead and hobbling growth and opportunities.

For scale, an example:

Consider a consulting firm with 1,000 employees. Despite its noble mission, virtuous values, thrilling LinkedIn presence, and declaration that “Our people are our greatest asset”, ~150 people, 15% of the workforce (the industry average) choose to quit every year.

The rule-of-thumb cost to recruit, replace, and retrain a new employee is 1-2 times their annual salary, depending on their experience. Unfortunately, voluntary turnover disproportionately impacts the organization's more valuable employees because they’re the most actively recruited and face the least friction to move, i.e., can get a job anywhere, anytime.

So, using an ultra-conservative average annual salary of $100,000, replacing 150 employees costs the organization $15-30 million annually. That’s real money. You’d need to win, staff, and deliver $100-200 million worth of engineering work, all at a 15% margin, to earn that.

And yet, there's more:

1.     Engagement and Morale: Each departure signals to the remaining employees that greener pastures exist elsewhere. Those closest to the departed are now at much greater risk of following, and employee engagement takes a torpedo. As I’ve said before, employee engagement equals EBITDA, so when engagement falls, profit falls. Quantifying the impact on engagement from 150 torpedoes per year is tough, but heightened risks and costs are undeniable.

2.     Opportunity Cost: The biggest cost not factored into the 1-2 times salary estimate is the hit to client trust. Client trust is the organization's other most valuable asset. But it's an asset largely held by individual employees rather than the organization itself. When 150 above-average people quit every year, the trust they earned will go with them, and some of “your” clients are destined to follow. The net present value of lost clients and potentially years of future consulting revenue can easily double the $15-30 million turnover cost.

Punchline: People don’t quit your organization because they want to. They quit because they've been trying to fill a void in their career and life that their boss(es) have repeatedly failed to recognize and fill. To be worthy of a leadership title, leaders need to invest in understanding their people’s aspirations, write them down, remember them, talk about them, and be attentive to helping people achieve them. Done regularly, people have no reason to quit, so some or most of that $15-30+ million per year being wasted on employee churn will accrue to the bottom line instead.

It's a heckuva lot easier for an organization to demand that its leaders be minimally good at leadership than it is to go out into the marketplace and win and do another $100-200 million of engineering work. Both achieve the very same result.

To all my start-up friends, do not accept the 15% industry average turnover rate. Voluntary turnover is NTE 5%. Firm.

Have a terrific weekend!

Dave

Attention remains firmly focused on the macroeconomy and AI

Feedback and blowback are always welcome: dave@goodnewsfriday.com

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