Employee Turnover Depresses Earnings, Stock Prices by 38%, Nextera Research Study Shows

Aug 08, 2000, 01:00 ET from Nextera Enterprises, Inc.

    PRINCETON, N.J., Aug. 8 /PRNewswire/ -- Recent research by an operating
 unit of Nextera Enterprises, Inc. (Nasdaq:   NXRA), a global management
 consulting firm, shows that employee turnover replacement costs have reduced
 earnings and stock prices by an average of 38% in four high turnover
 industries: specialty retail, call center services, high tech, and fast food.
     "Employee turnover is draining profitability from companies in many
 industries," said Jude Rich, chairman of Sibson & Company, the Nextera
 subsidiary whose talent management practice conducted the study.  "By reducing
 turnover, the opportunity to improve a company's stock price can be
 substantial, but many companies have not declared an all-out war against
 turnover.  We believe that there are several reasons for this: many managers
 do not know how much turnover really costs; others have not figured out the
 root causes, so they do not know what actions to take; while others mistakenly
 believe turnover is inevitable in their industry."
     According to the research, turnover rates ranged from 31% annually in call
 centers to 123% in fast food.  Sibson estimates employee turnover is costing
 companies in these industries more than $75 billion to just replace the more
 than 6.5 million employees who leave companies every year.  Average turnover
 across all U.S. industries has climbed to nearly 15%.
     Direct employee replacement costs may be just the tip of the iceberg.
 "Employee turnover has a significant effect on companies' top lines by
 inhibiting their ability to keep current customers, acquire new ones, increase
 productivity and quality, and pursue growth opportunities," said Seymour
 Burchman, a principal of Sibson.
     "At a company that specializes in services within the home," Burchman
 said, "we found that customer cancellation rates were three times higher for
 new sales technicians than for experienced ones, principally because customers
 are more comfortable when they see familiar faces providing services at their
 homes.  Today's tight labor markets have exacerbated the problem, forcing many
 companies to operate under capacity -- managers are having difficulty finding
 people to replace the workers who leave, much less hiring people to pursue
 growth initiatives.  An employee retained, is a new hire avoided."  The study
 focused on 'front-line employee' turnover (those employees who have direct
 impact on a company's customers) because "front-line employees can have a
 significant impact on revenue generation, productivity, and growth potential,"
 said Burchman.  The following table shows how dramatically turnover can affect
 earnings and stock price.  As noted previously, these figures do not include
 the impact on lost revenues, productivity, operating under capacity or reduced
 quality.
 
     Industry
               Front       No. of    Annual   Industry-   Cost as  Reduction
               -Line        Full    Turnover    Wide     a Percent    In
             Employee      -Time              Costs(1)       of       Market
            Population    Employees         ($ billion)  Industry   Capital-
                          (millions)                     Earnings  ization(2)
                                                                  ($ billion)
 
     Specialty
     Retail   Sales clerks     2.3      97%     $23.2       50%       $204.2
 
     Call
     Centers   Non-
               supervisory
               phone reps      2.5      31%      $5.4       43%       $134.4
 
     High Tech
              Systems
              analysts,
               programmers
              and computer
              engineers        5.2      25%     $44.3       43%       $633.0
 
     Fast     Store workers   1.82     123%      $3.4       16%          $33
     Food
 
     (1)  Only includes direct replacement costs and not opportunity costs such
          as lost revenue, productivity, operating under capacity or quality
          costs.
     (2)  The reduction in market capitalization was assumed to be proportional
          to the reduction in operating earnings attributable to the cost of
          turnover.
 
     Additionally, Burchman pointed out that the impacts of turnover are not
 limited to just companies in these high turnover industries.  Companies with
 high turnover rates in other industries are often unknowingly experiencing
 material reductions in their earnings and stock price because of turnover.
     "For companies experiencing high turnover, there is a strong potential to
 increase their stock price by reducing attrition," said Burchman.  "This is
 true in companies in many industries.  At a telemarketing service call center,
 we found that if management halved the turnover, which management agreed was
 attainable, the company's market value would be increased by one-third."
     While working with a retail stock brokerage firm, Sibson's models showed
 that for every 1% reduction in stockbroker turnover, profitability would
 increase by 2%.  "That is a significant improvement, given declining margins
 in the retail brokerage industry," stated Burchman.  The study confirms these
 results.  For example, a high-tech company with industry average turnover
 achieves a 20% increase in stock price by halving the turnover rates of their
 system analysts, programmers, and computer engineers.
     Burchman pointed out that knowing what actions to take begins with
 targeting employee segments with high costs of turnover.  At a technology
 company, 5% of the employees made up 42% of the costs.  Once high-cost
 employee segments are identified, it is important to determine the root causes
 of turnover for a particular employee population.  "For example," he said,
 "for stock brokers, we found that the two most important causes of turnover
 were not hiring the right people in the first place and not having the right
 incentive programs.  The solutions to turnover in this industry are better
 recruiting and selection criteria and sound, financially-based retention
 packages."
     "Programs emphasizing career development are just not worth the investment
 for stockbroker retention," said Jim Kochanski, another Sibson principal and
 head of the firm's talent management practice, who worked with Rich and
 Burchman on the study.  "Another key to successful retention efforts is
 estimating the return on turnover reduction investments.  Management must take
 this step to determine if investment is warranted."  Kochanski added that an
 ROI estimate could also assist management in identifying the optimal level of
 turnover, the economic break-even point for retention investments, and whether
 solutions should be across the entire company or targeted at specific employee
 segments.  "Many companies are under-investing in turnover reduction because
 they don't have the information they need to calculate the ROI," he said.
     Kochanski noted that managers must then implement creative solutions in
 areas that matter to employees.  "We have seen some very creative solutions,"
 he said.  "Turnover reduction solutions vary by industry and client.  At one
 call center, we saw a company put trailers on a college campus to attract
 students who did not have cars or could not afford the commuting time."
     Solutions can range from changing an employee's job, increasing an
 employee's affiliation to the company, or increasing compensation.  UPS found
 that drivers left because they found loading their truck too exhausting.  UPS
 pushed the loading task downstream to dock workers and driver turnover
 decreased significantly.  Although turnover increased in the dockworkers, UPS'
 overall cost of turnover decreased because driver turnover has more impact on
 customer retention and is more costly to replace.
     Although some managers accept turnover as a given, Sibson found that this
 rarely is the case. "Our data and experience indicate that reducing turnover
 by as much as 50 percent is realistic for many companies even if some managers
 don't believe it can be accomplished," said Kochanski.  "The companies with
 the lowest turnover rates in an industry often have turnover rates that are
 two to four times better than the worst performers."
 
     Steps to Reduce Turnover
     Sibson has found there are four key steps to reduce turnover:
     -- Make a quantitative, financially driven, business case for change by
        identifying the total costs of employee turnover, and the potential
        savings if turnover is reduced.
     -- Develop a robust qualitative and quantitative fact base, to identify
        the root causes for turnover of specific employee segments.
     -- Come up with tailored, creative solutions aimed at eliminating the
        root causes, rather than the flavor-of-the-month solution, or what
        another company tried.  For example, throwing more cash or benefits at
        turnover caused by poor advancement opportunities or unacceptable job
        content will not work.
     -- Identify the necessary investment to increase employee retention and
        the expected return on that investment.
 
     About Nextera Enterprises
     Nextera Enterprises, Inc. is a provider of management and technology
 consulting services and integrated Internet solutions.  Our end-to-end
 professional service offerings encompass business and digital strategy,
 business transformation solutions, customer relationship management, economic
 analysis, organizational and process design and Internet technology consulting
 to both innovative Fortune 500 as well as emerging companies.  The breadth of
 our practice portfolio allows us to assist clients in achieving enhanced
 business performance, building new businesses, entering new markets and
 redefining the way in which their existing work is conducted. We do this by
 utilizing proprietary econometric modeling tools and capitalizing on our
 knowledge of vertical markets.  Nextera Enterprises headquarters are located
 in Lexington, Mass., and the firm currently has other offices in New York, San
 Francisco, Chicago, Princeton, Cambridge, Raleigh, Rochester, Atlanta, Los
 Angeles, Dallas, London, Sydney and Toronto.  More information can be found at
 www.nextera.com.
 
     About Sibson & Company
     Sibson, founded in 1959, specializes in: creating customized solutions for
 its clients' problems; helping companies build value by optimizing their
 investment in people; and, developing and implementing sales and marketing
 strategies.  One of Sibson's key practices is the talent management practice
 in which Sibson helps client companies obtain superior talent, manage it well
 and retain it, knowing that companies with better talent provide higher
 returns to shareholders.  Sibson has demonstrated that reducing turnover will
 have an impact on the bottom line.  Sibson is a wholly owned subsidiary of
 Nextera, a publicly traded company.  Sibson consultants have served more than
 half of the Fortune 100 companies.  Sibson's Web-site address is
 www.sibson.com.
 
     This press release contains certain forward-looking statements (as such
 term is defined in the Private Securities Litigation Reform Act of 1995)
 relating to Nextera Enterprises that are based on the beliefs of Nextera's
 management.  Any statements contained in this press release that are not
 historical facts are forward-looking statements.  Such statements are based on
 many important factors that may be outside Nextera's control, causing actual
 results to differ materially from those suggested.  Such factors include, but
 are not limited to, Nextera's limited operating history, dependence on key
 personnel, attracting and retaining qualified consultants, new business
 solicitation efforts, intense competition, risks of acquisitions, regulatory
 changes, and changes in technology.  Further information on these and other
 potential factors that could affect Nextera's financial and operating results
 are included in Nextera's 10-K filed on March 30, 2000 with the Securities and
 Exchange Commission.
 
 

SOURCE Nextera Enterprises, Inc.
    PRINCETON, N.J., Aug. 8 /PRNewswire/ -- Recent research by an operating
 unit of Nextera Enterprises, Inc. (Nasdaq:   NXRA), a global management
 consulting firm, shows that employee turnover replacement costs have reduced
 earnings and stock prices by an average of 38% in four high turnover
 industries: specialty retail, call center services, high tech, and fast food.
     "Employee turnover is draining profitability from companies in many
 industries," said Jude Rich, chairman of Sibson & Company, the Nextera
 subsidiary whose talent management practice conducted the study.  "By reducing
 turnover, the opportunity to improve a company's stock price can be
 substantial, but many companies have not declared an all-out war against
 turnover.  We believe that there are several reasons for this: many managers
 do not know how much turnover really costs; others have not figured out the
 root causes, so they do not know what actions to take; while others mistakenly
 believe turnover is inevitable in their industry."
     According to the research, turnover rates ranged from 31% annually in call
 centers to 123% in fast food.  Sibson estimates employee turnover is costing
 companies in these industries more than $75 billion to just replace the more
 than 6.5 million employees who leave companies every year.  Average turnover
 across all U.S. industries has climbed to nearly 15%.
     Direct employee replacement costs may be just the tip of the iceberg.
 "Employee turnover has a significant effect on companies' top lines by
 inhibiting their ability to keep current customers, acquire new ones, increase
 productivity and quality, and pursue growth opportunities," said Seymour
 Burchman, a principal of Sibson.
     "At a company that specializes in services within the home," Burchman
 said, "we found that customer cancellation rates were three times higher for
 new sales technicians than for experienced ones, principally because customers
 are more comfortable when they see familiar faces providing services at their
 homes.  Today's tight labor markets have exacerbated the problem, forcing many
 companies to operate under capacity -- managers are having difficulty finding
 people to replace the workers who leave, much less hiring people to pursue
 growth initiatives.  An employee retained, is a new hire avoided."  The study
 focused on 'front-line employee' turnover (those employees who have direct
 impact on a company's customers) because "front-line employees can have a
 significant impact on revenue generation, productivity, and growth potential,"
 said Burchman.  The following table shows how dramatically turnover can affect
 earnings and stock price.  As noted previously, these figures do not include
 the impact on lost revenues, productivity, operating under capacity or reduced
 quality.
 
     Industry
               Front       No. of    Annual   Industry-   Cost as  Reduction
               -Line        Full    Turnover    Wide     a Percent    In
             Employee      -Time              Costs(1)       of       Market
            Population    Employees         ($ billion)  Industry   Capital-
                          (millions)                     Earnings  ization(2)
                                                                  ($ billion)
 
     Specialty
     Retail   Sales clerks     2.3      97%     $23.2       50%       $204.2
 
     Call
     Centers   Non-
               supervisory
               phone reps      2.5      31%      $5.4       43%       $134.4
 
     High Tech
              Systems
              analysts,
               programmers
              and computer
              engineers        5.2      25%     $44.3       43%       $633.0
 
     Fast     Store workers   1.82     123%      $3.4       16%          $33
     Food
 
     (1)  Only includes direct replacement costs and not opportunity costs such
          as lost revenue, productivity, operating under capacity or quality
          costs.
     (2)  The reduction in market capitalization was assumed to be proportional
          to the reduction in operating earnings attributable to the cost of
          turnover.
 
     Additionally, Burchman pointed out that the impacts of turnover are not
 limited to just companies in these high turnover industries.  Companies with
 high turnover rates in other industries are often unknowingly experiencing
 material reductions in their earnings and stock price because of turnover.
     "For companies experiencing high turnover, there is a strong potential to
 increase their stock price by reducing attrition," said Burchman.  "This is
 true in companies in many industries.  At a telemarketing service call center,
 we found that if management halved the turnover, which management agreed was
 attainable, the company's market value would be increased by one-third."
     While working with a retail stock brokerage firm, Sibson's models showed
 that for every 1% reduction in stockbroker turnover, profitability would
 increase by 2%.  "That is a significant improvement, given declining margins
 in the retail brokerage industry," stated Burchman.  The study confirms these
 results.  For example, a high-tech company with industry average turnover
 achieves a 20% increase in stock price by halving the turnover rates of their
 system analysts, programmers, and computer engineers.
     Burchman pointed out that knowing what actions to take begins with
 targeting employee segments with high costs of turnover.  At a technology
 company, 5% of the employees made up 42% of the costs.  Once high-cost
 employee segments are identified, it is important to determine the root causes
 of turnover for a particular employee population.  "For example," he said,
 "for stock brokers, we found that the two most important causes of turnover
 were not hiring the right people in the first place and not having the right
 incentive programs.  The solutions to turnover in this industry are better
 recruiting and selection criteria and sound, financially-based retention
 packages."
     "Programs emphasizing career development are just not worth the investment
 for stockbroker retention," said Jim Kochanski, another Sibson principal and
 head of the firm's talent management practice, who worked with Rich and
 Burchman on the study.  "Another key to successful retention efforts is
 estimating the return on turnover reduction investments.  Management must take
 this step to determine if investment is warranted."  Kochanski added that an
 ROI estimate could also assist management in identifying the optimal level of
 turnover, the economic break-even point for retention investments, and whether
 solutions should be across the entire company or targeted at specific employee
 segments.  "Many companies are under-investing in turnover reduction because
 they don't have the information they need to calculate the ROI," he said.
     Kochanski noted that managers must then implement creative solutions in
 areas that matter to employees.  "We have seen some very creative solutions,"
 he said.  "Turnover reduction solutions vary by industry and client.  At one
 call center, we saw a company put trailers on a college campus to attract
 students who did not have cars or could not afford the commuting time."
     Solutions can range from changing an employee's job, increasing an
 employee's affiliation to the company, or increasing compensation.  UPS found
 that drivers left because they found loading their truck too exhausting.  UPS
 pushed the loading task downstream to dock workers and driver turnover
 decreased significantly.  Although turnover increased in the dockworkers, UPS'
 overall cost of turnover decreased because driver turnover has more impact on
 customer retention and is more costly to replace.
     Although some managers accept turnover as a given, Sibson found that this
 rarely is the case. "Our data and experience indicate that reducing turnover
 by as much as 50 percent is realistic for many companies even if some managers
 don't believe it can be accomplished," said Kochanski.  "The companies with
 the lowest turnover rates in an industry often have turnover rates that are
 two to four times better than the worst performers."
 
     Steps to Reduce Turnover
     Sibson has found there are four key steps to reduce turnover:
     -- Make a quantitative, financially driven, business case for change by
        identifying the total costs of employee turnover, and the potential
        savings if turnover is reduced.
     -- Develop a robust qualitative and quantitative fact base, to identify
        the root causes for turnover of specific employee segments.
     -- Come up with tailored, creative solutions aimed at eliminating the
        root causes, rather than the flavor-of-the-month solution, or what
        another company tried.  For example, throwing more cash or benefits at
        turnover caused by poor advancement opportunities or unacceptable job
        content will not work.
     -- Identify the necessary investment to increase employee retention and
        the expected return on that investment.
 
     About Nextera Enterprises
     Nextera Enterprises, Inc. is a provider of management and technology
 consulting services and integrated Internet solutions.  Our end-to-end
 professional service offerings encompass business and digital strategy,
 business transformation solutions, customer relationship management, economic
 analysis, organizational and process design and Internet technology consulting
 to both innovative Fortune 500 as well as emerging companies.  The breadth of
 our practice portfolio allows us to assist clients in achieving enhanced
 business performance, building new businesses, entering new markets and
 redefining the way in which their existing work is conducted. We do this by
 utilizing proprietary econometric modeling tools and capitalizing on our
 knowledge of vertical markets.  Nextera Enterprises headquarters are located
 in Lexington, Mass., and the firm currently has other offices in New York, San
 Francisco, Chicago, Princeton, Cambridge, Raleigh, Rochester, Atlanta, Los
 Angeles, Dallas, London, Sydney and Toronto.  More information can be found at
 www.nextera.com.
 
     About Sibson & Company
     Sibson, founded in 1959, specializes in: creating customized solutions for
 its clients' problems; helping companies build value by optimizing their
 investment in people; and, developing and implementing sales and marketing
 strategies.  One of Sibson's key practices is the talent management practice
 in which Sibson helps client companies obtain superior talent, manage it well
 and retain it, knowing that companies with better talent provide higher
 returns to shareholders.  Sibson has demonstrated that reducing turnover will
 have an impact on the bottom line.  Sibson is a wholly owned subsidiary of
 Nextera, a publicly traded company.  Sibson consultants have served more than
 half of the Fortune 100 companies.  Sibson's Web-site address is
 www.sibson.com.
 
     This press release contains certain forward-looking statements (as such
 term is defined in the Private Securities Litigation Reform Act of 1995)
 relating to Nextera Enterprises that are based on the beliefs of Nextera's
 management.  Any statements contained in this press release that are not
 historical facts are forward-looking statements.  Such statements are based on
 many important factors that may be outside Nextera's control, causing actual
 results to differ materially from those suggested.  Such factors include, but
 are not limited to, Nextera's limited operating history, dependence on key
 personnel, attracting and retaining qualified consultants, new business
 solicitation efforts, intense competition, risks of acquisitions, regulatory
 changes, and changes in technology.  Further information on these and other
 potential factors that could affect Nextera's financial and operating results
 are included in Nextera's 10-K filed on March 30, 2000 with the Securities and
 Exchange Commission.
 
 SOURCE  Nextera Enterprises, Inc.