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Healthy Turnover? -- part two

Turnover is expensive—very expensive in terms of replacement costs and lost productivity. Last month we looked at how a deliberate focus on acquiring top talent and setting up systems of forced turnover are not guarantees for success. Yet, there are many reasons for turnover and for management to plan for it rather than avoid it. Managers should know when to expect (and accept) reasonable turnover and be aware of the risks in recruiting replacements.

First, companies operate in dynamic environments, often leading managers to change strategy, or to select new businesses to conduct. So some skill sets become obsolete and experience can become a hindrance. Changes often are caused by technology. For example, a company shifting its business model to an online sales channel will need people who have knowledge and skills in this channel; fewer floor salespeople will be needed. Likewise, for support areas like IT where new applications or protocols may emerge, some employees will pursue other opportunities where they can still use applications they have mastered.

Second, individual circumstances often lead to turnover. As people get older and their family responsibilities increase, they may demand more money from their job. While companies can sometimes accommodate this with transfers or promotions, often the only alternative is for the employee to seek new positions with other companies. Most people want to learn and develop which means they may outgrow their job. Companies cannot always accommodate such growth. Under these circumstances turnover is natural.

Third, experience in some contexts may have quickly diminishing returns. Consider three restaurant servers: one with 9 days experience, one with 9 months, and one with 9 years. Certainly, the one with 9 days is going to be challenged by lack of experience, but is the one with 9 years necessarily that much better than the one with 9 months (all other things being equal)? Sharp people can easily pick up the skills needed to do some jobs. Even though servers are the critical interface with the customer, many good restaurants primarily rely on 18-24 year olds who will not stay more than a few years to fill these positions. Not all work requires veteran experience.

In fact, experience can be too costly. Having too many highly qualified and experienced people can strain a company's resources because of the cost of having this experience. Accounting firms expect about 5 or 10% of the entry level people they hire to stick with the firm (and become partner) for this very reason. It is not that they seek to shed the "bad" workers, it is that they cannot afford to have all highly experienced and highly paid accountants. This works for other skills. Software development requires creative minds, but a project group can't have all creative people as other more tactical work must get done. G.E. has a surplus of general managers, which leads to turnover as some of these managers develop beyond the job available; thus, the forced ranking system we discussed last month helps shake the surplus out.

Since turnover is a given in these circumstances, managers should be wary of the risks associated with hiring new people. First, there is no guarantee that someone who has achieved success in another situation — even a very similar one requiring the same skills — will succeed in a different one. The Washington Post recently hired an "expert" in creating "hyperlocal content" sites to replicate the model in the Post's geographic area. The venture has so far flopped because (according to a Wall Street Journal article) the new people did not understand the local environment in the Maryland area.1

Assessing candidates who have been successful is difficult because that success can be the result of things other than skill or experience. Their success could be a result of the efforts of others (they were part of a great team); it could be the result of established systems; or it could be luck. Bottom line, don't overvalue success in different situations and don't overpay for unneeded experience.

1"Big Daily's 'Hyperlocal' Flop." By Russell Adams. The Wall Street Journal, June 4, 2008, p. B1.

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