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SERVICE ORGANISATIONS
Conrad Lashley
The level of staff turnover in hospitality service organisations has been shown
to be high across a range of large and small companies as reported by a research
project commissioned by the British Institute of Innkeeping. The research showed
that 30 firms operating a pub estate of directly managed properties were
experiencing high levels of staff turnover. The earlier paper reported that some
firms covered in the survey have no formal records of staff moving into and out
of their organisations and managers frequently had a fatalistic view about staff
turnover. The need to replace staff who leave the organisation represents a
considerable added cost to the business. This paper demonstrates that managers
are faced with added direct costs associated with the replacement of former
employees. In addition to this there are a number of indirect costs associated
with lost customers and other hidden but none-the-less real costs. This paper
costs out the levels of staff turnover at unit, area, organisational and sector
levels. Given the volume of staff turnover and the high extra costs involved, it is
surprising that few firms make managers accountable for reducing staff turnover
levels.
INTRODUCTION
T
his paper reports on research exploring levels of staff turnover in
licensed retail organisations and provides an indication of the cost
of losing staff that is indicative of costs across all sectors of hospitality
services. The benefit of exploring one phenomenon, such as staff turnover,
across one sector is that it deals with the ceteris paribus criticism levelled
at some studies of labour turnover across different types of hospitality
operation (Lashley & Rowson, 2000). Accepting that there are some
variations, the service provided across different licensed retail organisations
are broadly similar and the skills required of service deliverers are also
similar in the main. Whilst acknowledging sectoral variation, employment
practices across a variety hospitality sectors are similar, and it is possible
to generalise the particular study within licensed retailing to other sectors
in hospitality provision (Guerrier et al, 2001).
The level of staff turnover in the licensed retail sector is high by
Journal of Services Research, Volume 1, Number 2 (October, 2001)
© 2001 by Institue for International Management and Technology. All Rights Reserved.
4 Costing Staff Turnover in Hospitality Service Organisations
comparison with many other industries. The flow of staff leaving and being
replaced in thirty firms operating directly managed pubs and bars was shown
to average over 180 per cent in a research project reported on in an earlier
paper (Lashley and Rowson, 2000). Furthermore, the study showed that
there is considerable variation in the levels of staff replacement at
organisation, area, and unit level. Levels varied between 90 to 300 per cent
amongst the thirty firms in the study. Across areas the rates ranged from
just over 100 per cent to a little under 500 per cent per annum. At individual
unit level there were some pubs that had lost only one member of staff in a
year, whilst others were recruiting almost seven staff for every post within
a twelve months period.
These wide variations in the incidence of staff turnover at all levels
does question the somewhat fatalistic pronouncements of some managers
that high staff turnover is ‘just the way things are in the industry’. If that
were the case, the levels of turnover would be high across all firms with
little variation. It does not explain why one pub can have staff turnover at
approximately 12 per cent whilst another pub with a similar number of
employees can have turnover of nearly 700 per cent, almost 56 times greater.
Although some have argued that hospitality industry workers suffer from a
‘hobo phenomenon’ (Hartman and Yrle, 1996), these wider variations
suggest that other phenomenon are at work. Traditionally, economists and
human resource specialists have looked to labour market conditions to
explain variations in staff turnover (Milward et al, 1992). Where there is
high unemployment turnover levels will be lower because alternative jobs
are harder to find, and conversely, turnover rates will be higher in conditions
of full employment. Whilst these factors are acknowledged as being
influential in the earlier study, general employment practices were said to
be more influential. In particular the actions of management at unit level
created circumstances that either ‘pushed’ or ‘pulled’ employees from one
pub or bar to another.
In particular, the management of people in their workplace seemed
to have a powerful impact on the decisions of individual employees to
either leave or stay with the pub. Some studies (Wasmuth and Davis, 1983)
suggest that the style and priorities of the immediate supervisor or unit
managers had an influence on the levels of staff turnover. Managers who
demonstrated through their actions a belief in employees, and the importance
of their contribution, were more likely to retain staff. Flowing from this
The nature of pub-going and the profile of typical pub customer has gone
through some dramatic changes over recent years. These are having a
fundamental effect on the nature of services being offered in the pub, and
most importantly for the topic under discussion on the nature of the
management of these businesses. Despite the general growth of leisure
activities, going to the pub still remains the most popular out of home
leisure activity (Mintel, 1998). However, when compared with the immediate
post war period, pub customers are less overwhelmingly male beer drinkers.
Typically pub customers in the new millennium are likely to include more
women, families, youth and older people. They are drinking more soft and
low alcohol drinks, wine and coffee. More premium label, premium beers
and lagers and packaged drinks are being consumed, and customers are
more likely to eat in pubs (Keynote, 1997). Increasingly pubs are offering
leisure facilities and games in the pub and these represent major sources of
income. Alcoholic drinks continue to be major sources of revenue in the
industry, but catering and the revenue from machines are growing both in
terms of quantum and as a share of total income.
Though the local brewer retailers operate on a smaller scale, national
firms, which continue to have substantial retailing businesses with high
volume brands, tend to directly manage most of the larger volume units. In
the main these tend to be units with annual sales in excess of £600,000
although some units have annual sales over £2 million. These larger high
volume businesses allow the brewer linked retailers to make profits on
both stages in the production and distribution chain. The non-brewery linked
licensed retailers can make additional profits through the purchasing benefits
that come from high volume sales.
The impact of these market and structural changes in the industry,
as a result of the ‘Monopolies Commission’ report, have led to dramatic
changes in the strategic objectives of these businesses and radical
restructuring of the industry. Earlier motives to secure distribution outlets
and markets for brewed cask beer through the tie have become less relevant.
The sector is still going through turbulent change, with mergers and
divestment announced on a regular basis. The need to establish consistent
brands with uniform operating systems creates pressures towards highly
centralised procedures and controls, yet at the same time successful units
require flexibility and responsiveness to local customers and market needs.
On another level, the shift away from a preoccupation with outlets for beer
sales means that skills needed by the employees are different. Fast moving,
strongly branded, customer focused businesses that have significant income
the further cost of retraining is both an opportunity cost and a direct cost to
that unit (see Table 1).
Table 1 illustrates both the direct and the indirect or hidden costs
of high staff turnover. However it does not include lost business due to staff
turnover. In the licensed retailing business, service is a key word and an
ever-changing staff can challenge the consistency of service quality, which
in turn can result in customer dissatisfaction and loss of revenue (Church,
and Lincoln, 1998). In particular, customers like to be recognised and
acknowledged by staff when they visit the unit. Consequently high staff
turnover creates a barrier to facilitating this most basic requirement of the
hospitality business (Lashley and Morrison, 2000). In one of the few attempts
to cost customer dissatisfaction, Leech (1995) estimated that every pub
customer spent an average of £785 per annum in public houses. A customer
lost due to an unresolved complaint implies a direct business loss of the
said amount. In addition, he estimated that a dissatisfied customer tells
Journal of Services Research, Volume1, Number 2 (October, 2001)
10 Costing Staff Turnover in Hospitality Service Organisations
another thirteen people about their experience. ‘The potential cost of one
unresolved complaint is, therefore, 14 times this amount - £11,032.’ (Leech,
1995).
The Institute of Personnel and Development (IPD) survey (1999)
attempted to quantify the costs of labour turnover. The occupation with the
highest turnover cost is ‘management/administration’ the IPD estimated
that the cost of recruiting a unit manager was £5008. Furthermore, the IPD
estimated that the average cost from turnover of replacing ‘routine unskilled’
workers, the lowest cost group, was £735. The differences in the estimated
costs of turnover are likely to reflect a range of different variables, such as
labour availability, salary and training costs. However, the IPD report goes
on to say that although the IPD does not collect data on the relative
importance of these costs they are significant and it is clear that turnover
can impose considerable costs on a firm. Indeed, even though steps to reduce
turnover may impose additional costs on employers, there are potentially
substantial savings to be made from reducing labour turnover (IPD, 1997).
Whilst some costs will always be incurred because staff have left
the unit for unavoidable reasons, improved management control of avoidable
staff turnover can reduce both direct and indirect costs thereby adding value
to the ‘bottom line’ of the business. Clearly in an ever growing competitive
market any competitive advantage is valuable to that business, and where
businesses struggle to compete on every medium, including reduced wage
costs, the value of increasing staff retention becomes greater by the day.
RESEARCH APPROACH
The aims of the research was to establish levels and costs of staff
turnover in a selection of licensed retail organisations. After an initial survey
of macro-levels of staff turnover in some leading licensed retail organisations,
two organisations were selected for a more detailed study. Clearly to achieve
the aims of this study one of the selected organisations has a staff turnover
above the national average for the licensed retail sector, and the second
organisation has a staff turnover below the national average. In each case
six business units were selected for further study. Three having high turnover
by the organisations average and three having low staff turnover below the
average.
Primary sources of data were collected by the following.
= A series of telephone interviews with key licensed retail organisations
= Interviews with head office corporate level personnel
= Company records
= Interviews with unit managers
= Interviews with unit based staff that included the conducting of an
employee satisfaction survey
Focus Organisations
Research Key sector High staff High Low staff Low staff
methods organisations t/o head staff t/o t/o head t/o
office units office units
Telephone 30
interviews
Interviews 2 2
Executives
Interviews 6 6
Unit -
managers
Interviews 24 24
Unit staff
Employee
satisfaction 24 24
survey
Following these interviews a selection of employees from each
unit were interviewed and the researcher was looking for areas of
dissatisfaction and the push and pull factors both internally and in the local
labour market.
Interviews with managers at head office and unit were conducted
to gain some insights into the processes undertaken whilst replacing staff
with a view to draw some sense of the costs associated. In both cases the
list of costs was largely confined to the direct costs identified in Table 1.
SURVEY DESIGN
After reviewing the literature it became apparent that best way to approach
the research was to design three semi-structured interview schedules because
of the differing levels of enquiry within the sample organisations. First a
schedule was designed for senior managers and company executives, the
purpose of this questionnaire was to review the culture of the business and
its use of human resource management practices, training and development,
measurement of staff turnover, and to assess the senior management culture
FINDINGS
Measuring the full cost of staff turnover is difficult. Direct costs are the
easiest to measure. The managers, time spent during recruitment,
interviewing, and selecting, time spent on inducting the new recruit, lost
training, extra overtime, the use of expensive agency staff to cover while
recruiting replacement staff, are all relatively easy to measure. However,
the indirect costs are the problem to measure, as they tend to be ‘soft issues’
such as, managers opportunity cost, service disruption, wastage while
training new recruits, customer dissatisfaction during this period or complete
loss of customers. It takes an enormous amount of time and effort to build
up good customer relations and to secure loyal brand seeking customers in
the licensed retail sector, and just the ‘click of fingers’ to lose them.
Therefore, the indirect costs are just as significant as the direct costs that
can be measured easier.
The unit manager’s questionnaire, an attempt to collect data relating
to both direct and indirect costs, was made and the following series of
elements was offered to unit managers and they were asked to give either a
financial cost or the time they would spend on each particular task. Table 4
lists the elements together with an estimate of the costs gathered from the
managers in each of the units. These figures are therefore based on their
own estimates of time and money spent replacing the average member of
staff. Using the list of elements, monetary values where apportioned to
each element either by the manager suggesting a cost or by assessing the
time the unit manager spent on each task. A conservative estimate of the
Table 5 returns to the survey of thirty firms where the average staff
turnover amongst the respondents in the telephone survey had an average
of over 180 per cent. This displays the calculation, firm by firm, the direct
cost of staff turnover using the somewhat cautious figure of £500 per head
for each employee who leaves and is replaced. It is worth bearing in mind
that the IPD’s more rounded estimate including some of the indirect costs
would add almost fifty per cent to these estimates.
Table 5: Estimated Direct Cost of Staff Turnover in 30
Licensed Retail Organisations
Licensed Number of Number of staff Staff Turnover Cost of staff
Retail managed units Employees Rate (%) turnover (£)
Organisations @ £500
It is often said that labour turnover levels reflect the state of the
labour market. During periods of high unemployment levels will be low
and during periods of full employment staff have many opportunities to
find alternative employment and consequently levels of turnover will be
higher (Millward et al, 1992). The general thrust of this argument is broadly
true, and variations in staff turnover amongst the units in both the Alpha
and Beta organisations, featured in Table 6, might be explained by variations
Here the rate of added direct cost per post varied considerably with
the pubs in this one management area. Unit 21 had the lowest cost per post
at £475, and Unit 18 had the highest added cost per post at £3,375 per post.
Whilst these figures are little more than an expression of the assumed direct
cost expressed in relationship to the rate of turnover per unit, their expression
in monetary values might help firms focus on this as a problem for their
business. It could be used as a source of bonus and accountability.
During the face to face interviews, some managers interviewed felt
that customer loyalty was not as important to them as to licensed retailers
with a regular customer base. Clearly, these estimates of lost custom and
other hidden costs are likely to vary between units and businesses. However,
even if the direct costs of staff turnover are taken into account, they can
represent a considerable added cost to each unit. Individual companies,
and the industry at large, are spending very large amounts of money replacing
employees. Firm 3 in the Table 5 has 6,841 employees and a staff turnover
averaging 203 per cent. Even using the direct cost, staff turnover is costing
it £6,916,210 to replace employees. Taking the IPD estimate, the figure
could be over £10,000,000. Indeed the cost for the whole licensed retail
sector could easily exceed £300 million - given the numbers employed, the
estimated level of staff turnover and these direct costs.
Interestingly, interviewers reported in the earlier paper, that some
of the firms in the survey did not calculate the levels of staff turnover in
their estate. Many saw it as a local unit management problem with which
they need not concern themselves. In other cases, managers at head office,
or brand level, were concerned about staff turnover, did measure it and
declared it as a problem. However, these fine intentions were sometimes
betrayed by a failure to address actions at local level, and there was frequently
a disjuncture between the head office intention and the unit manager’s
practice. So the earlier paper quoted two managers working in the same
brand of a large multi-branded business where the senior manager talked
about targets and managing the level downwards, and the unit manager
saying he did not even record it when staff left. He just ‘knocked them off
the payroll’. None of the interviewees recorded levels and costs of staff
turnover and set this into the bonused accountabilities of managers at
different levels within these organisations. Indeed when interviewers
attempted to elicit an estimated cost of replacing staff, managers invariably
underestimated the costs. Where they did hazard an estimate, the figure
was about one third of the conservative estimate we have used in the tables
above - typically £140/150. When interviewing McDonald’s management
personnel Eaglen et al, (1999) also found this tendency to underestimate
the cost of staff turnover.
DISCUSSION
In many ways, the treatment of staff turnover reveals much about both the
origins of the pub and bar trade in the United Kingdom, and about the
narrow range of measures of business performance used by managers across
many sectors of industry. The licensed retail sector has emerged from a
context where there was a high degree of vertical and horizontal integration.
Unlike many international brewing industries, UK brewers controlled a
large number of pubs and bars as outlets for their product. By the late
1980s six brewers controlled 75 per cent of beer sales and over half of all
pubs were directly owned by brewers (Lashley and Lincoln, 2000). In these
circumstances, a large slice of the collective pub ownership was in the
hands of firms making profits at both production and distribution stages of
the process. The control of pubs was largely concerned with outlets for
beer product rather than as retail leisure venues. Business strategies in the
directly managed units was chiefly concerned with cost minimisation, and
labour cost management was a key element of this. The dominant approach
in many pub companies was to keep the direct labour costs as represented
wage rates, hours worked, induction and training provided to a minimum.
High levels of staff turnover were just regarded as ‘the way things are,’ and
there was little consideration of the costs incurred by this ‘churning’ of the
workforce.
Since the introduction of the Beer Orders in the later 1980s, there
has been a large amount of industry restructuring, and whilst there is still a
high degree of pub and bar ownership concentration, this is less likely to be
linked to a direct brewer interest. At the same time as this supply-side
restructuring, there has been an unrelated, but equally significant, change
in the demand for pub and bar services. Pubs and bars have changed in the
range of services they offer, and the sorts of customers who use them. The
emergence of the ‘licensed retail outlet,’ re-emphasises the key contribution
of staff in meeting customer expectations, generating repeat custom and
meeting a range of business objectives. In these circumstances high levels
of staff turnover represent a considerable added cost to these business.
This paper suggests that for some organisation the added costs,
though largely unaccounted for, run into millions. When the intangible
cost of lost customers, increased wastage, or reduced sales are taken into
account the direct cost of severance and staff replacement are considerably
increased. The figures provided here show that no firms accounted for these
costs, and firms need to be much more systematic in both recording and
costing their levels of staff turnover. Fundamental action to reduce staff
turnover is a recognition of it as a costly, but manageable activity for which
managers at all levels share a responsibility.
Flowing from this, managers need to be accountable for the levels
of staff turnover in their ‘patch’ and they need to ensure that targets, budgets
and bonuses are set to account for progressing staff turnover towards the
desired objective. Clearly, this means that firms will need to be more
concerned, with an array of measures of business that more accurately
reflects the interests of a wider range of stakeholders than has occurred in
the past. A more balanced score card approach accounts for business
performance from employee and customers as well as shareholders.
Measuring and costing staff turnover is consistent with measures that
consider employees as internal customers and highlights this along with
employee satisfaction and employee training.
CONCLUSION
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