It costs over £30K to replace a staff member

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The new report was carried out by Oxford Economics and reveals that replacing members of staff incurs significant costs for employers: £30,614 per employee. There are two main factors that make up this cost:

  • The Cost of Lost Output while a replacement employee gets up to speed
  • The Logistical Cost of recruiting and absorbing a new worker

The report reveals that a major cost implication for firms replacing staff is the lost output a company experiences during the period of time the new worker is getting up to speed i.e. the cost of them being less effective until they reach their ‘Optimum Productivity Level’. The findings unveil that, on average, workers take 28 weeks to reach optimum productivity which has an attached cost of £25,181 per employee. This is by far the dominant cost factor for replacing a departing employee.

The logistical cost of replacing an employee incorporates expenditure such as advertising costs and agency fees, as well as invested time such as interviewing prospective candidates. On average businesses spend £5,433 on logistical costs, with the following factors contributing:

  • Hiring temporary workers before the replacement starts: £3,618
  • Management time spent interviewing candidates: £767
  • Recruitment agency fees: £454
  • Advertising the new role: £398
  • HR time spent processing replacement: £196

The overall financial impact of staff turnover across the five sectors analysed amounts to a staggering £4.13bn per year. To bring this cost down, Unum recommends that businesses do more to retain existing employees.

Linda Smith, HR Director of Unum said: “This report reveals a stark cost implication for businesses dealing with staff turnover. While the logistical cost of replacing an employee will probably come as no surprise to businesses, the financial impact of having replacement workers learn the ropes is probably a cost that businesses have not before considered.

£30,614 is a startling amount, and I would encourage businesses to place more emphasis on retaining talent and developing good staff to reduce the cost of staff turnover. Put simply, people stay with companies that demonstrate they value – and care for – their employees. For businesses trying to do this, financial reward is not always the answer – we know that staff increasingly value long-term employee benefits such as Income Protection so they should look at their entire benefits offering to help them keep their best people.”

There are a number of additional factors which can lead to significant differences in staff replacement costs.

On average new employees in SMEs (1-250 workers) take 24 weeks to reach optimum productivity, compared to 28 weeks for large firms with over 250 workers. What’s more, microbusinesses (1-9 workers) take an even shorter amount of time to reach optimum productivity at just 12 weeks.

The report analysed the cost implication of staff turnover in five different sectors: Retail, Legal, Accountancy, Media & Advertising and IT & Tech. Differences between the sectors are revealed in the table below. These can partly be attributed to the varying salaries for each sector, but are also driven by the different periods workers take to get to optimum productivity.

 

Sector

Time taken to Optimum Productivity (weeks)

Cost per replacement employee

(£)

Overall annual cost to the sector

(£)

Legal

32

39,887

805m

Accountancy

32

39,230

580m

IT & Tech

29

31,808

1,891m

Media & Advertising

20

25,787

184m

Retail

23

20,114

673m

 

The report reveals that new workers joining from the same sector reach optimum productivity in 15 weeks – much faster than those joining from elsewhere. Workers joining from another sector spend 32 weeks reaching optimum productivity, new graduates spend 40 weeks and those coming from unemployment or inactivity spend the longest time at a full calendar year (52 weeks).

Linda Smith continued: “The variation in cost implications of staff turnover emphasises that it is possible to reduce these costs. It is particularly interesting to see smaller companies leading the way in keeping the cost of staff turnover low. Larger companies should take note of what SMEs are doing to accelerate the learning curve of new joiners, and see if they can adopt elements of their approach of bringing staff up to speed more rapidly to deliver significant financial savings.”

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15 Comments - Write a Comment

  1. Really? Gosh. CIPD calculated that the average of cost of replacing an employee is £4800, rising to £7000 for a manager/professional. That said, their study was undertaken in 2004! It would be be interesting to see how they might respond to this.

  2. L. Williams - Director of HR and Talent, Financial Services · Edit

    Sorry but £30K is far to high to ‘replace’ – really!! and it is so generic it does not ‘hold water’ for me. I can imagine if it was someone in a sales or business dvelopment based role as ‘ sales pipeline can take 12 weeks to form’ but this research is far too GENERIC and you are right – it is completely indifferent to the CIPD guidance and having worked previously in 3 out of 4 areas highlighted I totally disagree with the results.

    Even such recorded figures seem very very wrong to me and if you can get an agency fee for £454 …….. please tell me

    • Recruitment agency fees: £454??? is this number missing a zero especially as VAT could actually be at 50% if not more!! of the total cost of £454 alone.

    I am even surprised that certain key metrics on turnover/replacement costs have not even been mentioned in this report! at all

  3. I can only speak for SMEs but many recruit the best leaders they can afford. They invest time, energy and capital attracting high-potential talent but then lack the bandwidth to provide an induction process that successfully engages their new hire from the outset or helps them to cut through distractions and establish where to focus to have the greatest impact on the numbers. Could outsourced induction programmes be the future for SMEs?

  4. Although I agree that the data provided in this article is spurious at the very least, there is in fact a lot of validity in the idea that a bad hire can cost a company in excess of £30k

    In fact, various other research by Forbes, PWC and KPMG estimate the figure to be in excess of £50k

    CIPD are deluded if they think the cost of making a bad hire is just £7k and anyone that buys into that idea is a dangerous asset within a company.

    The average agency fees for a £40k salary role alone would be around £6 – 8k and the labor costs associated with the hiring process would typically be in excess of £2k. (A major defence company that I have worked with calculated their own internal logistical costs, to be in excess of £5k)

    Most bad hires take at least 6 months to be fully identified and then there is a period of performance management out of the company.

    If we say 6 months salary + NI = another £25k in costs
    Plus the cost of disruption to the team, lost business, training and development and then the cost of replacing, training and bringing up to speed of the replacement and you can see how these organisation arrive at a figure in excess of £50k when a company makes a bad hire.

    In my experience, too often HR calculate costs against just the recruitment fee and until people responsible for the hiring process start to measure the true overall costs to the business, when a mistake is made, then recruitment strategy will not adapt and change in line with the business interests and needs.

  5. I would suggest £30k is not far off the mark – the lost productivity in the 6 month run up to the employee leaving, whether it’s voluntary or not, would be significant – the cost of disengagement…

  6. Having done similar research ourselves I think this is pretty conservative, but this is very much an average by the looks of it, and will include a bulk of people who are lower paid and more easily sourced by cheap ads. Hence the admittedly absurd £454 agency fees; they’re an average and maybe only account for 20% of the hires. Without seeing the raw data it’s impossible to say.
    As a result they are, in our opinion, ‘low-balling’ the numbers for the many companies who don’t have factory/shop floor/call centre/factory workers. In such purely ‘professional’ environments the numbers become truly scary. Ads rarely if ever work, agencies become the norm not the exception, time spent by management/HR increases by five to ten times and the effect/cost of the time to optimum productivity goes through the roof. Then you can forget £30k, forget £50k, we’ve seen £100k and even £250k per head once you factor in all the elements, and we’re not talking about CEOs or star bankers.
    In comparison the CIPD figures can only refer to the headline costs, cost of ads/agencies etc.
    The fact is that once you dig down and look at it in detail recruitment isn’t just important for getting the right people, it is actually a make or break P&L line item, but because it’s camouflaged very few people realise.

  7. Well if these figures are true, although some people in the comments disagree, then this just shows to go that maybe some companies should focus on employee training rather than keep renewing their work force. The cost of training would surely outweigh the cost to keep hiring new people, factoring in the fact that having one person work in a company for a long time is better for the individual and cultural aspect within the workplace, it would be silly to always hire new people.

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