Intellectual Capital, Client Satisfaction, Cost Of Turnover
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Why Retention Matters?

While most of the companies suffer from a high turnover rate up to 50%, a sizable minority enjoys rates below 10%. The retention of valuable employees matters in three important reasons:

  • The growing importance of intellectual capital,
  • The link between employee tenure and customer satisfaction,
  • The high cost of employee turnover.

The Importance of Intellectual Capital

Physical assets of “Industrial Age” such as machinery, plants and land give their place to intellectual capital that defines a company’s competitive edge in our time of “Knowledge Era”. Unique knowledge and skills determine how strong intellectual capital a company has.

Successful businesses are formed by innovative ideas and quality products or services, all of which developed from knowledge and skills. Computer programmers, network engineers, technical designers, CPAs, direct-marketing analysts possess intellectual capital. Other people are mid-level managers as they have contact to solve things out, top-level executives as they have long years of experience and industry knowledge, strategic-planning/business-development professionals as they know other forms of analysis, human resource professionals as they have knowledge in recruiting, employment law, compensation and in-house legal counsels as they understand intellectual property, securities and business law.

When a valuable employee leaves the company, the company loses knowledge and skills, but when a valuable employee goes to a competitor, then the loss is multiplied as simultaneously you are losing and your competitor is gaining without investing money or time that your firm did.

Retention and Customer Satisfaction

Employees who are satisfied with their work and the company are likely to create satisfied customers, which is one of the most important factors to survive and grow in business.

A research study was performed in a declining retail company to understand the reasons of losing money and customers. Study involved 800 company stores and thousands of store employees and found that:

  • Negative employee behaviors adversely affected customer satisfaction and trust.
  • Customer satisfaction and store revenues decreased due to the high employee turnover.
  • The extent to which store employees understood their jobs and company’s strategic objectives had a direct bearing on their attitudes and behaviors.

The study proved that employees’ behaviors and attitudes toward work were poor and these attitudes were the reason of reduced customer satisfaction and sales revenue. Starting from this point view, company developed an “employee-customer profit chain model” that quantified the links between employees’ attitudes, job tenure and the financial performance of the store in which they worked.

The results were remarkable and it was understood how inseparably the links are connected to each other: Internal quality drives employee satisfaction, employee satisfaction drives loyalty, employee loyalty drives productivity, employee productivity drives value, value drives customer satisfaction, customer satisfaction drives customer loyalty and customer loyalty drives profitability and growth.

This discovery led a multi-company project, which understands the relation between employee attachment and customer attachment. When employees feel commitment to the company, they are more likely to reflect the positive feeling about the company and therefore the customers respond more favorably to the firm.

The Cost of Turnover

High price of turnover involves three types of costs:

  • Direct expenses which are related to recruiting process with interviewing and training replacements,
  • Indirect costs of workload, morale and customer satisfaction,
  • Opportunity costs including lost knowledge and the work that doesn’t performed while managers or other employees focus on filling the position or trying to find a replacement.

Cost of losing and replacement of an employee vary depending on the position, individual and the industry. A general cost of turnover is about one third of the new employee’s salary and this increase depending on the position. If it is a high effective employee, the cost is much higher than a cost of losing an average performer even if they have the same or similar salaries, benefits or compensations. Fields with higher salary levels such as information technology, software programming, management consulting have higher cost of turnover.

On the other hand, the turnover of insufficient employees may eliminate some certain costs aside from producing costs for your company. Consider an incompetent person in an important position in the company and turnover of this person will be in benefit of your company.

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