CHAPTER – 1

INTRODUCTION OF EMPLOYEE RETENTION

– A CONCEPTUAL FRAMEWORK

This new millennium is witnessing intense competition which is profoundly impacting

the business environment. The emerging new economy, in which services,

communications and information technologies play a significant role, has created

new avenues for developing countries endowed with skilled workers. Competition

among business houses is high due to fast track innovations, shorter product cycles,

and ever fast changing markets due to varies demands of the customers.

Liberalization across border has also taken place moving towards globalization.
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Today’s organizations are undergoing constant and substantial change due to many

internal and external forces. These changes are impacting on the inter and intra

organizational career mobility of managers and employees (Kondratuk, Tammy B.;

Hausdorf, Peter A.; Korabik, Karen & Rosin, Hazel M).Under such circumstances

talent retention has become a big problem for the business and organizations

(Bhardwaj,Sharma,2010). The uncertainties of a changing economy, increasing

competition and diversity in the workplace have compelled the organizations to hold

on to their top performers at whatever cost they have to pay. It is very difficult task

1
Kondratuk, Tammy B.; Hausdorf, Peter A.; Korabik, Karen & Rosin, Hazel M.: Journal of Vocational Behaviour, 2004 (Oct), Vol
65 (2), 332-349.

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for the recruiters to hire professionals with right skills set all over again. Thus the

focus has shifted from numbers to quality and from recruitment to retention.2

The reason being that in a world where technologies , processes and products are

quickly duplicated by the competitors , and the pace of change and level of

competition are constantly increasing , people are the key to the most reliable

resources of advantage – better service , increased responsiveness , stronger

customer relationships , and the creativity and innovations that keep a company one

step ahead. 3Within the resource based view ( RBV ) , Researchers assumed that

the firm is a pool of hard- to- copy resources and capabilities ( Conner 1991) and

those discrepancies in size distribution and competitiveness of firms occur from their

distinctive capabilities to build up , expand and organize those resources and

capabilities to create and apply value – enhancing strategies ( Amit and Shoemaker ,
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1993 ; Barney , 1991 ; Peteraf , 1993; Conner . 1991 ). These develop

organizational capabilities which are 1) static capabilities to consistently outperform

rivals at any given point in time 2) dynamic capabilities that enable a firm to improve

its performance.

2
The Punia, B.K. and Sharma, P; Vision – The journal of Business perspective. Vol 12. No 4. October – December 2008

Resource based view (RBV) of the firm (Porter 1959; Barney 1991) emphasizes the role of heterogeneous
capabilities as drivers of firm strategies . According to Barney (1991) the term “resourece” covers all assets ,
capabilities , organizational process , firm attributes , information and knowledge controlled by firm “
3
Nelson and Winter (1982) explain that a firm’s capability development depends upon access to technological
and organizational knowledge and conditioned by its past learning

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In an environment of rapid growth, globalization and expansion, the pressure to

attract and retain outstanding employees has become a scary reality for most of the

organizations. The new-age economies, with their attendant paradigm shifts in

human capital management, have placed a heavy demand on today’s organizations

and retention is emerging as a key business concern for organizations.5 Talent pool

management is the most challenging area to any organization. The challenge of

finding, attracting developing and retaining the right talent is taking up a major part of

management and once the right talent is found the next demanding job is to retain

that talent. It is turning into a bigger issue than attracting talent. The annual retention

rate is 20-30 per cent (reduction in the number of employees through retirement,

resignation or death) across industries in India. It is as high as 44 per cent in BFSI

(banking, financial services and insurance) vertical and 35 per cent in BPO (business

process outsourcing).

Employee Turnover or Attrition -

People leave the organizations for various reasons at crucial points. This process is

normally known as employee turnover or attrition. 6Turnover is defined by (Campion,

1991)” as an individual motivated choice behavior “which leads an employee to leave

the organization for other opportunities. Macy and Mirvis (1983) defined employee

4
Ahuja, V., Vais, A.K.; Retention Management, H.R Journal of Management, Vol 2, No 2, Oct 09 – March 2010.

5
In literature , turnover intention has been identified as the immediate precursor for turnover behavior (Mobley
et al., 1978; Tett and Meyer ,). It has been recognized that the identification of variables associated with
turnover intention is considered an effective strategy in reducing actual turnover levels ( Maertz and Campion ,
1998)

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turnover as the movement of employee beyond the boundary of the organization.

Bluedorn (1982) defined withdrawal as a reduction of employees ‘socio

psychological attraction to or interest in the work organization. Companies around

the globe are really concerned about the staff attrition which costs significantly to

almost most of the organizations today. Attrition signifies the shifting of the

workplace in and out of an enterprise. Attrition is the cause of and effect of

instability of employment, apart from being a measure of the morale and

efficiency or otherwise of workers, whereas, “attrition rate is the rate of

shrinkage in size or number of employees”.

Defining Attrition: “A reduction in the number of employees through retirement,

resignation or death “.

Classification of Employee Turnover –

The major causes of employee turnover fall into four categories.

When an employee is attracted by an offer provided by any other organization and

he/she quits the organization, it is referred to as Pull Type. In this type, the employee

may find a better option in terms of career advancement, high salary, more benefit

packages, opportunity to work overseas, etc. When the employees negatively

perceive the organization and / or may be dissatisfied with the existing situations.

factors such as uncongenial organizational culture , problems with superiors or

colleagues , job boredom , perception of unfairness on issues like pay and promotion

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( distributive justice ) causing great deal of dissatisfaction . These factors trigger the

intention of quitting .This is called “Push Type “employee turnover.

Uncontrollable factors that are outside the purview of an organization are the major

reasons for Unavoidable Turnover. The reason for resignation is the area unrelated

to work in any direct sense. The most common is retirement and some of the other

reasons are illness relocation – primarily to join with spouse and family , to pursue

higher education , responsibilities to care for their aged parents , proximity to their

residence , child care, maternity etc.

Involuntary Turnover is the departure of employees, which are involuntary and are

initiated by the organization itself. Examples are layoffs, employee’s termination due

to problems, ending of contract etc. The first two types of the turnover, the Push and

Pull can be avoided if the organization reacts properly to the turnover symptoms of

their employees.

Voluntary Turnover has become a problem in many organizations, regardless of the

nature of job, in today’s society. An assessment of Meyer and Allen’s (1991) three

component model of organizational commitment by Jaros (1995) showed that an

employee’s effective commitment to the organization was the most important

component of organizational commitment in predicting turnover intentions

Consequences of Employee Turnover—

Attracting and retaining key talent has become one of the key drivers of overall

business performance in organizations and companies have been utilizing a diverse

range of methods to draw in new hires and ensure they stay as retention is an

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expensive phenomenon, potentially impacting the bottom line of businesses. 7The

cost of retention is not just the loss of that employee but it includes an array of

hidden costs such as recruitment costs, selection costs, training costs, cost of
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covering during the period and opportunity costs. The organizational costs

associated with the turnover in terms of hiring, training and productivity loss costs

can add up to more than five per cent of an organization’s operating costs. Fitz-enz

stated (1997) that the average company loses approximately $ 1 million with every

10 managerial and professional employees who leave the organization. The

combined direct or and indirect costs associated with one employee leaving an

organization can be minimum of one year’s pay and benefits. Costs of this turnover

not only have an impact on organizations but also affect the morale for the rest of the

staff.

Impact of attrition

Direct impact: A high attrition indicates the failure on the company’s ability to set

effective HR priorities. Clients and business get affected and the company’s internal

strengths and weaknesses get highlighted. New hires needed to be constantly

added, further costs is added in training them, getting them aligned to the company

culture, etc.

7
. Shaw, Jason D.; Duffy, Michelle K.; Johnson, Jonathan L. & Daniel E. : Academy of Management Journal 2005 (Aug), Vol 48 (4), 594-
606. Assessed the ability of social capital losses to predict valence in store level performance above and beyond that predicted by small
turnover rate and in role performance losses from turnover.

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A recent figure explained that attrition costs accompany $ 78000 to replace an employee (Ramsay-Smith, 2004). These costs include the
cost of recruitment and training of employees ( Alexander et al.,1994),loss of firm level social capital ( Dess an Shaw , 2001), decrease in
temporary productivity ( Osterman , 1987 ) and loss of important tacit knowledge (Droege and Hoobler , 2003 )

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Indirect impact:

High attrition generates problem for the company in attracting potential employees.

Typically, high attrition also leads to a chronic or systemetic cycle—attrition brings

decreased productivity, people leave causing others to work harder and this

contributes to more attrition. All this has a significant impact on the company’s

strength in managing their business in a competitive environment. Productivity and

profitability are both impacted, either negatively and positively, according to the type

of attrition. The cost of hiring is sometimes not less than two to three times the salary

of the employee. The impact on work progress is tremendous, particularly if a project

is underway and one of the key people leaves. “It leads to dip in entire organizational

efficiency, and a lot depends on how it is able to cover the setback”. Voluntary

employee turnover is expensive9.

Cost of Attrition

There are a number of costs which are incurred by an organization when they hire

any new employee. These costs can be in terms of monetary or can be in terms of

time wasted or any other intangible things. Some of these costs can be as stated

below: -

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Haltom, Brooks C.; Mitchell, Terence R.; Lee, Thomas W. & Inderriden, Edward J. Human Resource Management, 2005 (Fal), Vol 44(3),
337-352.

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(A). Recruitment Costs

1. The cost of advertisements; agency costs; employee referral costs; internet

posting costs.

2. The cost of the internal recruiter's time to understand the position requirements,

develop and implement a sourcing strategy, review candidates backgrounds,

prepare for interviews, conduct interviews, prepare candidate assessments, conduct

reference checks, make the employment offer and notify unsuccessful candidates.

This can range from a minimum of 30 hours to over 100 hours per position.

3. Calculate the cost of the various candidate pre-employment tests to help assess

candidates' skills, abilities, aptitude, attitude, values and behaviors.

(B). Training Costs

1. The cost of orientation in terms of the new person's salary and the cost of the

person who conducts the orientation. It also includes the cost of the orientation

materials.

2. The cost of the departmental training as the actual development and delivery cost

plus the cost of the salary of the new employee.

The cost will be significantly higher for some positions such as sales representatives

and call center agents who require 4 - 6 weeks or more of classroom training.

3. The cost of the person(s) who conduct the training.

4. The cost of the various training materials needed including company or product

manuals, computer or other technology equipment used in the delivery of training.

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C. Lost Productivity Costs

As the new employee is learning the new job, the company policies and practices,

etc. they are not fully productive. These are the following guidelines to calculate the

cost of this lost productivity:

1. Upon completion of whatever training is provided, the employee is contributing at

a 25% productivity level for the first 2 – 4 weeks. The cost therefore is 75% of the

new employee’s full salary during that time period.

2. During weeks between 5 - 12, the employee is contributing at a 50% productivity

level. The cost is therefore 50% of full salary during that time period.

3. During weeks 13 - 20, the employee is contributing at a 75% productivity level.

The cost is therefore 25% of full salary during that time period.

4. Calculate the cost of mistakes the new employee makes during this elongated

indoctrination period.

D. New Hire Costs

1. The cost to bring the new person on board including the cost to put the person on

the payroll, establish computer and security passwords and identification cards,

telephone hookups, cost of establishing email accounts, or leasing other equipment

such as cell phones, automobiles.

2. The cost of a manager's time spent developing trust and building confidence in the

new employee's work.

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E. Lost Sales Costs

1. Calculate the revenue per employee by dividing total company revenue by the

average number of employees in a given year. Whether an employee contributes

directly or indirectly to the generation of revenue, their purpose is to provide some

defined set of responsibilities that are necessary to the generation of revenue.

Calculate the lost revenue by multiplying the number of weeks the position is vacant

by the average weekly revenue per employee.

Thus we can say that if a person leaves a job company has to suffer losses as it

involves many costs.

So we can summarize that high attrition can have severe consequences

 Decreased productivity; work backlog, increased workloads.

 Increased investment in recruitment, training and maintenance of employees.

 Decreased commitment and morale among the employees, leading to poor team

dynamics.

 Knowledge transfer to the competitors: When an employee quits, he carries the

knowledge that he has acquired in the present organization.

Employee Retention is a process in the current scenario of high economic growth

and rapid globalization, the fight for talent is becoming increasingly intense. Talent or

human resource is a major asset for any company. Company invest high amount of

money for their recruitment, selection & training and what happens to company if

these talents or employees leave the organization in short while seeking new

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opportunities. Plagued by erratic retention trends and cut throat global competition,

organizations are now realizing the need to understand the supply-demand equation

better in order to garner strong mechanisms to attract and retain top talents.

In the best of worlds, employees would love their jobs, like their coworkers, work

hard for their employers, get paid well for their work, have ample chances for

advancement, and flexible schedules so they could attend to personal or family

needs when necessary and never leave. But then there's the real world and in the

real world, employees, do leave, either because they want more money, hate the

working conditions, hate their coworkers, want a change, or because their spouse

gets a dream job in another state.

Employee Retention is critical to the long-term health and success of any

organization; however it is becoming increasingly difficult for companies across the

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globe to attract, Motivate and retain key talent. Employee Turnover is a major

challenge faced by the companies globally (James, Leena; Mathew, Lissy).

Retention rates are still on the rise and as the war for talent becomes more intense

each year it is becoming increasingly important for companies to ensure they have

the right in which the employees are encouraged to remain with the organization for

10
Employee Retention Strategies: IT Industry; James, Leena; Mathew, Lissy : July 2012 ; SCMS Journal of Indian Management; Jul2012,
Vol. 9 Issue 3, p79; Academic Journal

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the maximum period of time or until the completion of the project. Employee

Retention is beneficial for the organization as well as the employee.

Reasons for High Attrition

The emerging new economy, in which services, communications and information

technologies play a significant role, has created new avenues for developing

countries endowed with skill workers (Satendra, Ambrish, 2010). Competition among

business houses is high due to fast track innovations, shorter product cycles, and

ever fast changing markets due to varied and changing demands of customers.

Liberalization across border has also taken place moving towards globalization.

Under such a situation talent retention has become a big problem for the business

and organizations.

Innovation in manufacturing, information and communication technology and

changing market conditions in the course of globalization and worldwide customers

have changed the conditions for internalizations dramatically. More and more

young firms are characterized by important foreign operations already at the time of

founding or shortly afterwards. These include not only exports but also more

complex forms of internalization such as joint ventures, wholly owned subsidiaries or

franchising networks. As a consequence, traditional explanations of internalization

such as the stage model Johnson & Vahlne (1977, 1990) are put more and more into

question.

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Employees today are different. They are not the ones who don’t have good

opportunities in hand. As soon as they feel dissatisfied with the current employer or

the job, they switch over to the next job. It is the responsibility of the employer to

retain their best employees. If they don’t, they would be left with no good employees.

A good employer should know how to attract and retain its employees. Most

employees feel that they are worth more than they are actually paid. There is a

natural disparity between what people think they should be paid and what

organizations spend in compensation. When the difference becomes too great and

another opportunity occurs, turnover happens.

Employees today have manifold aspirations. There are economic aspirations,

professional aspirations, family aspirations and aspirations that affect a person’s

desire to move. In the past organizations grew at a pace and stability and individuals

mostly saw their career in one organization and stuck to the same. Now-a-days

either organizations don’t grow at the pace at which the individual career aspirations

grow or organizations do not grow at a pace that matches the individual’s, causing

individuals to move (Rao, 2006). They join an entity, gain knowledge, skills,

undergo training, work for a short period of time and then quit.

In the recent decades the Indian industry has changed its outlook. The employment

scene has changed its appearance. The factors like skill sets, job satisfaction drive

the employment and not just the money. The employer hence faces the heat of

continuous employee turnover.

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It is not easy to find out as to who contributes and who has the control on the

Retention of employees. Various studies/survey conducted indicates that everyone is

contributing to the prevailing retention. Retention does not happen for one or two

reasons. The way the industry is projected and speed at which the companies are

expanding has a major part in retention.

 Organizational matters:

The employees always assess the management values, work culture, work practices

and credibility of the organization. The Indian companies do have difficulties in

getting the

businesses and retain it for a long time. There are always ups and downs in the

business. When there is no focus and in the absence of business plans, non-

availability of the campaigns makes people to quickly move out of the organization.

 Working environment:

Working environment is the most important cause of attrition. Employees expect very

professional approach and international working environment. They expect very

friendly and learning environment. It means bossism; rigid rules and stick approach

will not suit the call center. Employees look for freedom, good treatment from the

superiors, good encouragement, friendly approach from one and all, and good

motivation.

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 Job matters:

No doubt the jobs today bring lots of pressure and stress is high. The employees

leave the job if there is too much pressure on performance or any work related

pressure. It is quite common that employees are moved from one process to

another. They take time to get adjusted with the new campaigns and few employees

find it difficult to get adjusted and they leave immediately. Monotony sets in very

quickly and this is one of the main reasons for Retention. Youngsters look jobs as

being temporary and they quickly change the job once they get in to their own field.

The other option is to move to such other process work where there is no pressure of

sales and meeting service level agreements (SLA). The employees move out if there

are strained relations with the superiors or with the subordinates or any slightest

discontent.

 Salary and other benefits:

Moving from one job to another for higher salary, better positions and better benefits

are the most important reasons for attrition. The salaries offered from MNC

companies in Bangalore, Delhi and Mumbai have gone up very high and it is highly

impossible for the Indian companies to meet the expectations of the employees. The

employees expect salary revision once in 4-6 months and if not they move to other

organizations.

i) External inequity of compensation

External inequity arises when an employee realizes that some other employee from

a different organization puts in much less efforts than he does, but receives a much

15
higher compensation than him. This could cause an employee to feel that maybe he

is not getting compensated fairly and can cause him to quit the job.

ii) Internal inequity of compensation

Internal inequity occurs when the employee feels that the amount of efforts he puts

in to do his job are much more than what rewards he gets in return for them. This

can cause him to feel de-motivated and nurture feelings of dissatisfaction and

eventually resign from his post.

 Personal reasons:

The personal reasons are many and only few are visible to us. The foremost

personal reasons are getting married or falling in love or change of place. The next

important personal reason is going for higher education. Most of the BE, MCA and

others appear for GATE examination or other examinations and once they get

cleared they quickly move out.

Health is another aspect, which contributes for attrition. Employees do get affected

with health problems like sleep disturbances, indigestion, headache, throat infection

and gynecological dysfunction (for lady employees). Employees who have allergic

problems and unable to cope with the AC hall etc will tend to get various other health

problems and loose interest to work.

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 Poaching:

The demand for trained and competent manpower is very high. Poaching has

become very common. The big companies target employees of small companies.

The placement agencies have good days for doing more business.

The employees with 4-6 months experience have very good confidence and dare to

walk out and get a better job in a week's time. Most of the organizations have

employee referral schemes and this makes people to spread message and refer the

know candidates from the previous companies and earn too.

 Employee’s advocate:

One of the main reasons why employees leave companies is because of problems

with their managers. An HR professional can be termed an employee’s advocate and

a bridge between top management and employees at all levels. There is a huge gap

between HR professionals and employees in terms of understanding challenges and

delivering requirements. HR has not really understood the problems associated with

employees’ careers and jobs. The company’s overall plans and strategies also

depend on HR professionals as they voice employees’ problems and requirements.

The HR department should have genuine interest in the employees’ welfare…it is

responsible for making sure that their expectations are met. By doing this it is easier

to meet the company’s business targets.

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 Work Timings

The work timings are very odd in IT companies and this affects the family life of the

employee. Moreover, the pressure is more on female because of her traditional role

in the society. Now day’s nuclear families are there and it becomes really difficult to

manage work and life if work timings are odd. Work timings are another cause for

attrition.

 Career Growth

Only 2 out of 10 employees on an average go on to be at the senior level. This

means that other employees look forward to change their job at other places where

they can get better opportunities to progress. Also, another problem arises with the

mis-match of expectations and qualifications of the employees. Along with that,

some employees see no career growth in this sector, so they move on to other

companies in search of changing the sector.

 Higher Education

This is a problem as most of the employees in this sector are pretty young and

aspiring. They join the firm because of lucrative salary. But with time, they try to

move on to other sectors or top management and one of the ways to do this is higher

education.

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 Role stagnation

Attrition rate is higher at knowledge level (middle level) in which the employee has to

do the same work again and again, which makes his work monotonous and due to

lack of responsibility and authority his growth is restricted to a particular role, so they

move to other companies where they can play different roles and handle

responsibility.

 Work life imbalance

The scientific approach towards management and organization resulted in a rigid

structural hierarchy, exhaustive specialization of jobs, deployment of unskilled

employees and an unfavorable work environment. This led to high employee

turnover, decline in productivity, absenteeism.

 Lack of recognition

When an employee feels that he is not getting due recognition for his achievement, a

feeling of demotivation creeps into him, and this can cause him to consider leaving

the organization. Employees have an expectation that when they work well, they will

get some recognition from their managers in the form of a personal appreciation or

an award etc.

 Under-utilization of skills

Proper utilization of skills has a tremendous impact on the satisfaction of employees.

If a work is given to an employee it must be supported by adequate powers and

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responsibilities which enable them to move up the career ladder and when their skills

and potential is being overlooked they end up with leaving the job.

 Performance assessment

An employee may feel disappointed by the performance appraisal report and feel

that he has not been appraised in an unbiased manner. It may happen that he feels

that the appraisal process itself is flawed and the appraisers are biased. This can

cause the employee to put in his papers and leave the organization.

 Business instability

Many a times, when the organization faces some kind of instability or uncertainty

with regards to operations, an employee might quit his job before he is asked to

leave. Many a times when employees get a whim that the organization is going to

down-size or is going to be taken over by another company, they tend to feel safer

quitting the job than worrying about whether the organization will retain them.

Attrition Rates in Different Sectors in India

As far as India is concerned, attrition is a serious trend, especially in today’s

knowledge-driven marketplace where people are the most important assets. While

organizations cope with attrition by devising compelling retention strategies, it is

imperative for organizations to predict attrition early in the recruitment process to

curtail loss of time, cost and effort.

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Recession in global economy, especially, in the United States, has affected job

scenario over the world. India too has been reeling under such pressure. Amidst the

fear of retrenchment and uncertainty caused due to the global financial crisis, various

sectors like financial services, tourism sector, aviation industry and the most volatile

information technology and information technology enabled services (ITES) sectors

have witnessed a steep decline in ’attrition’ rate as compared to last few quarters.

According to the leading recruitment managers, the attrition rate has touched an

unexpected low in the last quarter of 2011.

The Following graph describes the Attrition Rates in Different Sectors in India.

All the sectors are facing attrition. But the reasons and effects of attrition in every

sector are different.

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Once a company has captured talented people, the return on investment requires

closing the back door to prevent them from walking out. After two decades of

corporate downsizing , middle management layoffs , merger mania and hostile

takeovers companies in every industry are waking up to the reality that it is

imperative for them to lay top priority to the management and motivation of their

employees or risk falling behind the competition and eventual corporate death .

Successful organizations realize employee retention and talent management is

integral to sustaining their leadership and growth in the market place (Harpreet Singh

Grewal )“In the emerging global economy, everything is mobile: capital, factories;

even entire industries. The only resource that ‘s really rooted in a nation – and the

ultimate source of all its wealth is its people.” Sustainable competitive advantage is

no longer rooted in physical assets and financial capital , but in effective channeling

of intellectual capital ( Seubert , Balaji and Makhija , 2001 ) .Turnover is costly,

particularly when organizations have spent time and money on identifying,

developing, and promoting individuals who are viewed to be the future .

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With the revival of the job market India Inc is all set to witness a significant jump in
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attrition levels as well, especially in sectors like aviation, information technology. A

sector-wise analysis shows that BPO, ITES and aviation sectors will witness attrition

level of as much as 40-45 per cent this year, followed by retail and telecom (35-40

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Business process outsourcing, executives search firm Global Hunt India,2011 . The International Labour Organization also reported that
as many as 500,000 jobs were created in the third quarter following the government's stimulus measures. Besides, according to global
staffing services firm Manpower, recruitment pace is expected to return to the pre-recession level this year and corporate India's hiring
outlook has risen across all sectors.

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Goel “"Increase in hiring across different sectors will lead to increase in attrition as well. Employees who fall under 25-30 age group
bracket and hold less than 5 years of experience will cause maximum attrition."

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per cent), IT (30 per cent), pharma and infrastructure (20-25 per cent), while

research and development will see 15-20 per cent of attrition. The attrition is majorly

at the age group of 25 – 35 , more or less in every sector .

Attrition and IT Sector

Despite advances in technology and major shifts in economy people remains an

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organizations most valuable resource. Human capital and intellectual assets make

a difference to the competitive advantage of the firm in a knowledge based industry

and thus there is a war for talent retention. In fact, quality people are no longer

available in plenty and cannot be easily replaced.

In today’s knowledge intensive organizations, processing knowledge is central to

business success. (Prahlad and Hamel.1990; Drucker, 1998 ) . Attracting the best

professionals is never easy no matter what industry segment we consider. There is

some truth in saying that what the Middle East is to oil, India is to software

professionals. So, in a predominantly manpower intensive software industry,

issues of the manpower availability, its cost, turnover and productivity are

critical issues.

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The war for talent is a phrase coined by Steven Hankin of McKinsey and Company in 1997, and is a book by Ed Michaels, Helen
Handfield – Jones, and Beth Axelrod, Harvard Business Press. It refers to an increasingly competitive setting for recruiting and retaining
talented employees. In the book, Michaels, et al, portray it as a mindset that emphasizes the importance of talent to the success of
organizations.

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Attrition is beginning to significantly affect offshore ROI. Just as businesses faced a

scarcity of talented IT resources during the dotcom era, organizations in offshore

countries such as India are experiencing similar pains. Skilled employees are

hopping from job to job and taking with them the customer knowledge and technical

expertise that any company needs. Their salaries are increasing, along with their

perks, benefits, and bonuses.

Global outsourcing and the astounding amount of foreign direct investment pouring

into China, Russia, and India have created tremendous opportunities and

competition for talented IT professionals in those countries. The downside of this

increased competition is a rising rate of attrition, particularly in India. Fiscal third-

quarter 2005 (ended December 2004) results filed by Infosys, Wipro, Satyam, and

TCS listed attrition rates between 7.6% and 17.7%. Vendors that we have

interviewed place the numbers much higher, at 25%–60%, while an April 2005

Business Week article estimated an attrition rate of 60%, with some India service

providers experiencing up to 80% turnover.

To put these attrition numbers into perspective, if a company has 100 programmers

and an attrition rate of 25%, then 25 of its IT staff will leave each year. Think about

the time and money it took to find, interview, hire, train, and coach those 25 people.

Now think about losing them and starting the hiring and training processes anew.

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How do the hiring and training processes break down in terms of total costs in India?

The typical time for advertising, interviewing, screening, negotiating, and hiring a

new employee is about two weeks. Companies usually allot one week for

programmers to become familiar with the new business, two more weeks for

technical training, and one last week for customer training. Now imagine a 25%

attrition rate and replacing 25 of these programmers each year. Based on a yearly

salary of $15,000 for the human resource person and $25,000 for the programmer, it

would cost an additional $63,000 annually in acquisition and employee training

costs. After considering these figures, it quickly becomes apparent why companies

are investing in strategies to prevent attrition.

Importance of Retention

Employee Retention is a process in which the employees are encouraged to remain

with the organization for the maximum period of time or until the completion of the

project. Employee Retention is beneficial for the organization as well as the

employee. The cost of employee turnover adds hundreds of thousands of money to

a company's expenses. While it is difficult to fully calculate the cost of turnover

(including hiring costs, training costs and productivity loss), industry experts often

quote 25% of the average employee salary as a conservative estimate.

When an employee leaves, he takes with him valuable knowledge about the

company, customers, current projects and past history (sometimes to competitors).

Often much time and money has been spent on the employee in expectation of a

future return. When the employee leaves, the investment is not realized.

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Customers and clients do business with a company in part because of the people.

Relationships are developed that encourage continued sponsorship of the business.

When an employee leaves, the relationships that employee built for the company are

severed, which could lead to potential customer loss.

When an employee terminates, the effect is felt throughout the organization. Co-

workers are often required to pick up the slack. The unspoken negativity often

intensifies for the remaining staff.

The goodwill of a company is maintained when the Retention rates are low. Higher

Retention rates motivate potential employees to join the organization.

If an employee resigns, then good amount of time is lost in hiring a new employee

and then training him/her and this goes to the loss of the company directly which

many a times goes unnoticed. And even after this you cannot assure us of the same

efficiency from the new employee.

There is increasing pressure on executives to connect a company’s human capital

with its business strategy. Executives and senior managers understand that the

success in global economy will depend on the talent level that derives core

competence of an organization. They also realize that talent retention is a great

challenge as well as threat to them. Business today is undergoing a silent revolution.

For the first time business are recognizing the power of individual. Employee

relationship Management is based on the conviction that satisfied employees tend to

be more loyal, more motivated, more likely to have positive impact on the retention of

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customers, all of which is better for business bottom line. Retaining key employees is

one of the leading problems facing human resource managers today.

A solution to this problem would imply more profitable companies, happier, more

productive employees and more satisfied customers. Losing employees not only

leads to human resource related issues but has financial and business connotations

as well. Studies have found that the cost of replacing a lost talent is 70 to 200

percent of that employee’s annual salary. Thus there is a financial implication that a

low retention rate has and this affects the bottom line of the organization as well.

The financial cost of attracting employees include advertising and recruiting ,

orientation and training of the new employee , decreased productivity until the new

employee is up to full efficiency and loss of customers who were loyal to the

departing employee . Once a company has captured talented people, the return on

investment requires closing the back door to prevent them from walking out. After

two decades of corporate downsizing , middle management layoffs , merger mania

and hostile take overs, companies in every industry are waking up to the reality that

it is imperative for them to lay top priority to the management and motivation of their

employees or risk falling behind the competition and eventual corporate death .

Successful organizations realize employee retention and talent management is

integral to sustaining their leadership and growth in the market place.

When managers or supervisors are asked why good people leave, most respond,

"It’s about money." Or, they dismiss the departure matter-of-factly by stating the

employee "received a better offer." Contrary to popular belief, research indicates that

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money is not even on the list of top five reasons employees give when asked why

they are leaving an organization.

Research shows the reasons for employee departures are (in descending order):

1. Employee/manager relationship

2. Inability to use core skills

3. Not able to impact the organization's goals, mission

4. Frequent reorganizations; lack of control over career

5. Inability to grow and develop

6. Employee/organization values misalignment

7. Lack of resources to do the job

8. Unclear expectations

9. Lack of flexibility; no 'whole life balance'

10. Salary/benefits

It is very important to know that the above factors are often NOT the ones mentioned

in most Retention studies published by individual organizations. Additionally, this

information does not match the data frequently obtained during an employee's exit

interview when asked about the reasons for departing. The rationale behind this

discrepancy is that exit interviews are frequently conducted by the departing

employee's manager or HR manager, hindering honest responses. Typically,

employees are hesitant to tell these company representatives the truth for fear of

burning bridges or getting a bad reference.

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“In the emerging global economy, everything is mobile: capital, factories; even entire

industries. The only resource that’s really rooted in a nation – and the ultimate

source of all its wealth is its people.”

Turnover is costly, particularly when organizations have spent time and money on

identifying, developing, and promoting individuals who are viewed to be the future. It

is the responsibility of the employer to retain their best employees, a good employer

should know how to attract and retain its employees.

This is the question on the minds of CEOs and managers worldwide as the

technology boom lifts and the employment market opens. From the employer's

perspective, employees are an investment. You interview to make sure an individual

has good work ethic, motivation, and drive. Most of the time, employees are

considered a financial investment. Yet there's much more to it than that. There is a

significant emotional investment that is crucial to accelerating business strategies

and reaching organizational goals. The cost of replacing the vehicle would be

enormous compared to the cost of upkeep on the old one. Even with inanimate

objects, we become accustomed to personality and quirks and develop a common

trust. When this same logic is applied to employees, we find the cost of replacing

employees comparable to that of investing in a new automobile. Recruitment, hiring,

benefits and administrative costs put an organization upside down on the

investment.

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Thankfully, companies have come to realize that keeping employees is more cost-

effective than replacing them. Retaining valuable employees has other benefits -

retaining the vault of knowledge that's been accumulated, skills learned and trust and

relationships they have built with customers and co-workers.

Even though today's pool of unemployed workers is deep, organizations choose to

spend more time and resources on retaining existing employees than starting from

scratch. Yes, there are financial reasons behind this focus on Retention. However,

there are many other contributing factors such as the effect retention has on

customer service, corporate culture and employee morale and loyalty. All these

factors can and will be affected by turnover. Basically, when good people leave an

organization they take their training and knowledge and often times, relationships

with them.

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 References:

1. Tiwari. Joseph Mini; IT cos move to 3 – month notice to counter attrition ;Times

of India , January 2011

2. Bhagwati, J.N. (2003), ‘borders beyond control.’ Foreign affairs, Jan. /Feb.

3. Castels, M. (1998), the information age: Economy, society and culture, Vol. 3.

Malden, MA: Blackwell publishers.

4. Chalamwong, Y. (2004), the migration of highly skilled Asian Workers in OECD

Member countries and its effects on economic development in East Asia,

Paris: OECD.

5. Commander, S.M. Kangasniemi, and L.A. Winters (2004), “the Brain Drain:

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December 2009,Prahlad and Hamel.1990; Drucker, 1998

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Employee Development Initiatives and their Impact on Retention Intentions :

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(UK)

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Journal of Vocational Behaviour, 2004 (Oct), Vol 65 (2), 332-349.

14. Punia, B.K. and Sharma, P; Vision – The journal of Business perspective. Vol

12. No 4. October – December 2008

15. Ahuja, V., Vais, A.K.; Retention Management, H.R Journal of Management,

Vol 2, No 2, Oct 09 – March 2010.

16. Shaw, Jason D.; Duffy, Michelle K.; Johnson, Jonathan L. & Daniel E. :

Academy of Management Journal 2005 (Aug), Vol 48 (4), 594-606.

17. Haltom, Brooks C.; Mitchell, Terence R.; Lee, Thomas W. & Inderriden,

Edward J. Human Resource Management, 2005 (Fal), Vol 44(3), 337-352

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18. James, Leena; Mathew, Lissy; Employee Retention Strategies: IT Industry;:

July 2012 ; SCMS Journal of Indian Management; Jul2012, Vol. 9 Issue 3, p79;

Academic Journal

19. Hay Group - BPO Companies Highest Attrition Rate in India

20. The Economic Times - Attrition rate in BPOs falls by 20%

21. The Mint - Slowdown cools attrition in outsourcing industry

22. www.google.com

23. http://en.wikipedia.org/wiki/

24. http://www.ibef.org/industry/

25. http://www.mit.gov.in/

26. http://www.olcsoft.com/information_technology_trends.htm

27. www.encyclopedia.com

28. www.indiainfoline.com

29. www.atosorigin.com

30. www.rave-tech.com

Publications

1. Business Today

2. Human capital

3. C. Reports

4. McKinsey Report on retention

5. AIMA study on retention

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