The amazing value of employee engagement and retention

During the dotcom boom of the late 1990s, I took a job with a very cool tech startup. I was around the 20th employee. It was the smallest employer I’d ever worked for, which was scary. With my second child on the way, career stability was a top priority.

Everybody at the startup had so much energy; contagious energy that almost felt electric. I knew I had to take this job; risk-schmisk.

Within a year, the dotcom universe imploded. During tough economic times, it’s the firms of real substance that stand out. We had a product that delivered actual value to our customers and we had enough grit to survive the recession.

Fast forward 10 years, I headed the software development team. The company had 6 products and was approaching the 100-employee mark. More importantly, it was solvent with over 2000 customers.

During that decade, I had no idea how much we’d benefited from our culture. It didn’t seem like a big deal – sure, the founders were honest and respectful. They always told us why we were doing what we were doing. I’d come to expect this from leadership and took it for granted.

I unknowingly perpetuated this amazing culture through my own engineering organization. The team was engaged and rewarded the organization by being insanely productive. I rarely had to ask anybody to go an extra mile. We just did it.

During this time, turnover at the organization was essentially non-existent. In over a decade, 1 employee had resigned from my team – to go to medical school. He’s currently an ER doctor. I figured that was ok.

So, to sum up, the team was happy, worked extremely hard and didn’t resign (except to fulfill the dream of being a doctor). As a manager, this made life very easy for me. I didn’t have to recruit or onboard replacement hires. We were able to focus on making great software and the team always got the job done.

Fast forward another 5 years. We had been acquired by a larger organization and we were merging our teams into the collective. The original founders had left the organization. We became “corporate.”

I should note that the parent organization was very friendly during the transition. They handled things fairly and were honest with us. They were generous in many ways. However, our culture changed quickly.

The first time I noticed a problem was with customer support incidents. Developers would occasionally have to drop things to tend to a customer issue – a painful and valuable experience. I was accustomed to the team fiercely addressing production problems without much of a push. The team had always taken amazingly good care of our customers.

Instead of customer issues being owned and crushed, incidents were bouncing from department to department and taking longer to resolve. Customer complaints began to escalate. This was weird because we loved our customers yet were allowing them to be underserved.

Next, I noticed things getting quiet around five o’clock. Due to flex work hours, the teams were normally active into the evenings. Many of the developers preferred to work at home after dinner and family time. This extra effort tapered off.

Next up was a delayed product release cycle. Our development estimates were based on historical team output and seemed fair. Yet we kept having trouble hitting dates. It was apparent that we weren’t getting as much done as we had in the past. The overall output of the team had gone from awesome to good enough. By now, I realized this wasn’t coincidence.

The clincher was when excellent employees resigned. Within a 10-month period, the team lost a director, a manager, a product manager and two great contributors. It was unprecedented for us.

These positions were difficult to replace. The labor market was fickle and our reviews in Glassdoor weren’t the best. However, we were good at recruiting, found some great candidates, and made some great employment offers.

About half of our offer letters were declined. People wanted to work for other employers over us. This was a change from the previous 100%-ish offer acceptance rate. It was no longer easy to fill open positions.

At a point, my team had 4 open positions as we headed into annual budgeting. After the budget review, my 4 open positions became 1 open position. Now we had a smaller team which could deliver less product.

Turnover cost the organization a lot of effort and opportunity. It also cost money. I had a look at the cost of replacing a resource. Here’s the basic recruiting checklist:

  1. Advertise the open position
  2. Screen resumes
  3. Phone screen candidates
  4. Interview candidates
  5. Find the right candidate and negotiate
  6. Onboard new employee
  7. Train new employee
  8. Pay the outside recruiter (20% of candidate’s annual salary)

As a hiring manager, I only really considered #8 – paying the recruiter. This was a lot of money (around $20k). So, in my simplified view of the world, it cost about $20,000 to hire a new resource.

I added up the actual cost of a replacement and it blew my mind. Here is what each replacement hire really cost our organization:

  1. Advertise the open position – $800
  2. Screen resumes – $1,700
  3. Phone screen candidates – $840
  4. Interview candidates – $3,020
  5. Make offer/negotiate – $760
  6. Onboard new employee – $7,920
  7. Train new employee – $29,200
  8. Pay the outside recruiter – $20,000

The actual cost to replace an employee on my team was over $64,000. These are hard costs that don’t include the impact on morale, tribal knowledge or customer relationships.

This stuff is easy to measure but painful to digest. My team’s voluntary turnover cost the organization about $320,000 in a 10-month period and we ended up with a smaller team.

There is a big push these days for companies to have a great culture and a focus on engaging the workforce. Many times, the message is murky as to why this is important. When you calculate the actual cost of turnover, the message gets clearer. Turnover negatively impacts profitability.

When employees are engaged at work, turnover decreases. I saw this happen in reverse. What I’ve learned through this experience is that leadership needs to live core values and recognize people for exemplifying them. That’s a key pillar in engaging your team.

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