Turnover is very expensive!

Do you know how much this costs you? When talking with managing partners of the largest law firms, there is a consensus that the number is between $200,000 and $400,000! Yet, there doesn’t seem to be a great consternation about this phenomenon. It’s accepted as a cost of doing business. One managing partner even had a name for it, the “culling process.” Separate the wheat from the chaff, he said.

The analogy that comes to mind is basketball. Drafting players from college into the professional ranks doesn’t mean that these young men will have the same impact at the pro level that they did in the college ranks. But, it seems to me that there is far more measurability in judging a law school graduate’s likely success at a firm than a college basketball player’s success in the pros.  And there is no likelihood of a career-ending injury.

Far less money would need to be spent to create better retention mechanisms, including better hiring practices. Why is not more effort expended to keep lawyers (not to mention less money than terminating or losing lawyers)?

Here are some other estimates of the cost of terminating people:
The Society for Human Resource Management estimated that it costs $3,500 to replace one $8 per hour employee when all costs – recruiting, interviewing, hiring, training, reduced productivity, etc. were considered. This estimate was the lowest of 17 nationally respected companies who calculate this cost.

Another organization provides this estimate:  30% – 50% of the annual salary of entry-level employees; 150% of middle level employees and up to 400% for specialized, high level employees.

Here’s another way to look at this issue. Suppose we use the example of a secretary who earns $40,000 per year. Suppose further that we use the lower end of the calculation mentioned above, 30%. Thus, multiply 130% times $40,000, and we get $52,000 as the cost to replace one secretary. Larger firms will replace more than one secretary per year and you can do the math for that. We have now determined the cost of replacement for one secretary! We haven’t even calculated the cost of the lawyer, which is how this article began. That’s the bottom line cost. Is the top line impacted? If the law firm’s profit margin is 10%, a good number for business generally and really quite low for law firms, it would take $520,000 to place the firm in the same economic position as before the departure of the secretary!  

You choose the yardstick. If you think lawyers are specialized, as I would, now you’re talking about 4 times their annual salary, perhaps 4 times $150,000 (the starting salary at a large New York law firm), or $600,000 cost to the firm for the lawyer to leave!  Think about the lateral partner who leaves … !!!!!   No, I don’t want to think about the cost to the law firm.

Yes, some turnover is unavoidable. Time to care for family members, time to increase one’s family needing maternity leave. Time to advance one’s own career.  And, some turnover is good, replacing marginal with productive people.  And bringing in people with new ideas and expertise, especially when adding new practice areas to the skills we offer clients or enhancing the quality of skills we already offer to clients.

Most firms have no process in place to determine the cost of change; most firms don’t measure these costs; and of those that do, they tend to underestimate such costs, thus thinking it’s not a major problem; and, many firms think such costs are unavoidable.

If firms measured the costs of such change, I believe they would come to understand they have more control over the subject than they current admit to at the present. Here are some metrics to consider:
1.    Exit costs
2.    Recruiting
3.    Interviewing
4.    Hiring
5.    Orientation
6.    Training
7.    Compensation and benefits while training
8.    Lost productivity
9.    Customer dissatisfaction
10.   Reduced or lost business
11.   Administrative costs
12.   Lost expertise
13.   Temporary workers

And how about stress and additional workload on others during a transition until a new person is hired?

“Retain and gain” is the motto that makes most sense! One source suggested that a 10% reduction in turnover is more valuable, more profitable, than a 10% increase in revenue or a 10% increase in efficiency/productivity!

Categorized in: Management