Thursday, 30 May 2013

What happens to an organisation when people leave?

Today, one of your colleagues is packing the contents of his desk into a cardboard box. A few weeks back you were at a leaving do for someone in another department. On the personal scale, these can be sad events. But what does turnover augur for the organisation? Different studies show different things, for example that sales suffers, benefits or is unaffected by turnover rates. Contrasting hypotheses exist, but a meta-analysis by Tae-Youn Park and Jason D. Shaw takes us from the theories into the data. Let's start with the competing ideas.

The first position is that turnover disrupts how well an organisation does. More experienced workers perform better, an idea stemming from human capital theories. And people in an organisation for a while get to know each other, reducing transaction costs between them, an insight from social capital theory. Replacing people undermines these benefits and is costly.

Another view is that in a company with low turnover - people don't leave often - human capital is indeed accumulating. This means when people leave the organisation loses a resource, as per idea one. However, when turnover stands at a high rate, the company isn't accumulating appreciable human/social capital: it simply isn't a big part of how the organisation succeeds. Hence losses are fairly painless, and to boot the company is likely to be efficient at replacing staff, given it's such a routine issue. So low levels of turnover hurt, but the impact tails off at higher levels.

The third perspective turns this on its head: at low levels, turnover is actually useful, as it revitalises the workforce by eliminating misfits who harm performance. It's only when turnover gets too high, meaning fewer misfitting people are exiting, that costs exceed this benefit.

To decide between these possibilities and explore other factors described below, Park and Shaw identified 255 studies on the relationship between organisational performance and turnover using standard searches of databases. Through use of exclusion criteria, they arrived at 110 sources containing 371 correlations. Before performing analysis, correlations were coded according to a number of factors, from industry of organisation to methodological approach. We'll see these in a moment.

Across the studies, a significant negative effect was found of -.15, suggesting that a 1SD increase in turnover produces a .15 decrease in performance. And when turnover was higher, the negative relationship became if anything stronger. This aligns most strongly with the simple human/social capital predictions: turnover hurts at all levels.  But the relationships varied widely across the included studies, and it's important to understand what's behind this.  Here's the overview.

Turnover affects certain performance measures more than others
  • Customer Satisfaction and Quality showed large effects
  • Weaker effects found for employee attitudes, productivity and financial performance
  • Generally the effects were greater when measuring performance soon after the turnover, rather than moderately far or far into future
Organisational Type and structure matters

More effects were found in
  • smaller companies
  • executive level samples
  • industries such as healthcare and hospitality, coded as 'human-capital-centric'
  • those with so-called 'primary employment systems' that focus around delivery through committed employees (instead of a transactional, control-system)
These all paint a consistent picture that when organisations rely more on human capital, turnover hurts more. A large company which differentiates itself through use of equipment/other resources, eg mining, is less hurt by departures, especially so if it isn't investing in people practices (such as training, development, or engagement strategies) that secure commitment.

Turnover type matters

Reduction in force (downsizing) and voluntary turnovers both showed a significant negative relationship to performance. Involuntary turnover (getting fired) showed a relationship not different from zero. As some theories suggest all turnover should hurt, and others suggest that involuntary turnover should help organisations by losing weak performers, it's important to take this away. Possibly the benefits of losing misfits are cancelled by the costs of rehire.

The author conclude that 'organizations must recognize that when turnover rates rise, their workforce and financial performance are at risk. They should
 search for strategies to mitigate and eliminate turnover, recognizing
 that lower turnover is always better.'

ResearchBlogging.orgPark, T., & Shaw, J. (2013). Turnover rates and organizational performance: A meta-analysis. Journal of Applied Psychology, 98 (2), 268-309 DOI: 10.1037/a0030723

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