The Hidden Cost of a Dysfunctional Culture By Eric Flamholtz Corporate culture is a critical variable for organizational performance.

It has many dimensions and affects several aspects of performance1. Culture and Turnover Cost One aspect of organizational performance that is affected by culture is turnover. When people leave an organization, the investment made to recruit, hire, orient and train them is lost. The company must also incur an out of pocket replacement cost. A positive culture can help preserve valuable human capital. A positive (functional) culture should result in retention of human capital and reduced turnover. A negative (dysfunctional) culture can result in increased turnover and the loss of human capital. Since turnover is costly, if turnover is reduced it should result in a benefit to a company and vice versa.2 A reasonable estimate of turnover cost is one years compensation (salary plus benefits).3 Since human capital is costly to acquire, a dysfunctional culture can create a hidden cost. The greater the degree of turnover experienced by an organization, the greater the cost of turnover. Data from a Recent Culture Management Project Culture assessments are one of the core managerial tools offered by our firm, Management Systems. Learn more about our Culture Management Tools offered by Management Systems. Our culture assessments assist our clients in indicating: 1) The extent to which people employed have embraced the companys culture, 2) The extent to which that stated culture is being practiced, and
See Eric Flamholtz and Yvonne Randle, Corporate Culture: The Ultimate Strategic Asset , Stanford University Press, 2011. 2 See Eric Flamholtz, Human Resource Accounting, Kluwer Academic Publishers, 1999, Chapters 2-3. 3 Ibid.
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3) The extent to which there are gaps between the stated and actual practiced culture. Findings A recent culture study (assessment) conducted for a client resulted in a very interesting and significant finding concerning the relationship between culture and turnover4. The culture assessment involved several organizational units of a rapidly growing company. In this company, growth is occurring organically and via acquisitions. What we found was that a perfect relationship exists between culture and voluntary turnover5. Specifically: When culture become more favorable (scores increase), voluntary turnover decreases. When culture become less favorable (scores decrease), voluntary turnover increases. When culture remains unchanged (scores remain unchanged), voluntary turnover remains unchanged.

The results are statistically significant. Implications What are the implications of this study for management? The key finding is that culture influences voluntary turnover. When people leave organizations the investment made to recruit, hire, orient and train them is lost. This is a hidden cost of a dysfunctional culture. When people remain in an organization, valuable human capital is preserved. Culture management can impact voluntary turnover. This means that culture management can impact the bottom line of profitability. This also implies that companies ought to learn how to manage their corporate cultures in order to minimize the hidden costs of turnover and preserve valuable human capital. Action

This was the third assessment of culture (the second reassessment) by this rapidly growing company. 5 Voluntary turnover occurs when people leave a company of their own volition, and are not terminated by the organization.

For more information about culture management see, Eric Flamholtz and Yvonne Randle, Corporate Culture: The Ultimate Strategic Asset, Stanford University Press, 2011. Explore our frameworks and tools for Culture Management.