The Cost Of The Competitive Advantage

by Diane Herbert and Pamela Millard

- Scott McNealy, Sun Microsystems

Think good employees are expensive? Figure out your costs when you lose one.

McNealy's words apply to insurance agencies as well as to technology firms. Attracting great people may be even more challenging in an industry that has a poor public image as a place to work. Insurance agencies as a group hire fewer college graduates, pay lower wages, and invest less in training and staff development. A tight labor market makes the challenge even greater. Competition for good employees is as tough as competition for good business. Business owners must spend as much time and energy developing and retaining their people as they spend developing their customers.

Knowledgeable, personable, and satisfied employees are a very real asset. They contribute to the bottom line in very tangible ways by helping to find and keep new customers. Great employees are what set a business apart more than any other single factor - they give you a true competitive advantage.

If employees aren't knowledgeable, personable, and satisfied, costs increase and profits decline. If employees don't have the right tools to do their jobs effectively, or if they aren't treated fairly, or are overworked and stressed out, they can become frustrated and unhappy. More important, disgruntled employees can be disruptive to the entire organization - sharing their discontent with anyone who'll listen. This attitude has a tendency to rub off on others, bringing the morale of the entire organization down and having a negative effect on productivity.

Low morale exacts a heavy toll as the staff attempts to provide customer service. It can be heard in their voices, and it shows in their attitudes. Certainly they're not focused on looking for ways to delight the customer. Nor are they attempting to cross-sell accounts or upgrade coverages.

There's a compounding effect. Account rounding and upgrading coverages not only generate revenue, they also improve retention. Increasing retention by just 5% can boost profitability by 50%-100% or more. The reverse is also true. Dissatisfied employees can cause retention to drop significantly. Lower retention equates to lower profits. Lower profits mean less money available to invest in employees. It's a vicious cycle.

When morale drops, turnover goes up, and turnover is expensive. The cost to replace an employee can be 150%-200% of the employee's annual salary and benefits. That means that replacing just one employee can cost $50,000-$100,000 or more. Impossible? Look at how the costs add up.

Even before the employee leaves, lost productivity begins to take a toll. The employee who's leaving is no longer focused on the job at hand. The productivity at their desk is going to drop by 50% or more. Also consider the lost productivity of co-workers caused by the gossip about the departing person's reasons, discussions on who'll perform their work, planning going-away parties, and so forth. Even if it's only a few hours per person, departmental productivity will decline by 10%-20% for a couple of weeks.

Take into consideration the time required for the manager to assess what work remains and to determine how to cover the work until a replacement is found. These costs may be intangible, but they're real.

Now consider the cost to recruit and hire a replacement: Advertising. Fees paid to recruiters or employment agencies, which can be as high as 25%-30% of the annual salary. The cost of time spent by management to recruit and evaluate applicants.

Most agencies consider testing a good investment, especially for sales, management, and even high-level technical positions. This adds another $100 or so for each applicant tested.

While recruiting, there's the ongoing cost of getting the work done until the position is filled. This may involve hiring a temp and paying full price to someone who's going to be only half as productive (or less). If the position is just left vacant, there's still the cost of getting the work done by others in the agency. They take time from their own work to keep up. The lost productivity will amount to at least 50% of the former employee's compensation and benefits for each week the position is vacant. If the position stays vacant for any length of time, the cost for lost productivity can increase to 100%.

Training costs also have to be considered - specific internal or external training programs plus licensing or certification. Not only do you pay the cost of training the new employee, but also you lose the investment made in the former employee.

There are some additional intangible but potentially significant costs to consider. There's the cost of lost knowledge, skills, and contacts the departing employee takes from the agency. This can be as much as 50% of the person's annual salary -increased by 10% for each year of service. Perhaps even more significant is the potential for lost business. Producers and CSRs may take business with them, or come back for it later. This is in addition to the overall poor retention that results if service levels significantly deteriorate.

Even after the position is filled, it costs money. It takes, on average, 131/2 months for a new employee to reach maximum efficiency in performance. Effectiveness gradually increases over that period with average productivity of about 70% the first year. That's another 30% added to the cost of turnover.

Add up all the hard dollar costs and the soft costs of lost productivity and it's easy to see how it can total 11/2 or more times the individual's salary. And doesn't turnover often seem to come in clusters? All too frequently it isn't just one employee who leaves. Sometimes it's purely coincidental. But often, if it becomes known that there's been some turnover at an agency, other employees may begin to specifically target the agency. And many times the departed employee will recruit former co-workers.

There's another negative effect of high turnover: an unwillingness to let anyone else go. As costly as turnover is, living with poor performers can be even worse. They lower expectations for the group and create more morale problems. The long-term effects are far more costly than the turnover.

The correlation between satisfied employees and satisfied customers is unmistakable, as is the relationship between great employees and higher profits. So how do you find and keep great employees?

Employees are 'volunteers.' They choose types of work and places of employment for their own reasons. For most people, a competitive wage is a given - it's table stakes. If the salary is inadequate they won't play. Even if it's higher than average, however, it may not be enough to overcome some of the others factors that make one job more or less satisfying than another. There's more to it than just a paycheck. Here's what people look for in a job:

• Financial rewards. Not just salary or commission but the whole package - benefits such as Health insurance; provision for a more secure future, such as 401(k)s or other retirement plans; and sometimes an opportunity to have a piece of the pie, such as stock options or, in the case of producers, the opportunity for ownership in their book of business.
• Mission. People want their jobs to have meaning. They want business goals that align with their personal values. They also want to understand the vision of their leaders and to contribute to the achievement of that vision.
• Worth. People like to be affiliated with organizations that feed their sense of pride. The success of the organization becomes personal.
• Education. Talented people want intellectual challenge and the opportunity to learn and grow professionally.
• Fun. People look for friendship and camaraderie in the workplace. Rather than detracting from productivity, a little fun makes people feel good about working together to accomplish common goals.
• Balance. The ability to successfully manage the personal and the business sides of their lives is important to people's sense of well-being. More than simply providing flextime or personal leave, encouraging balance is a way of doing business. Again, the result is more productivity, not less.

People 'volunteer' to work for one company over another based on their individual needs, often making trade-offs. The business owner also makes trade-offs. Finding the balance between short-term profitability and investing in the future is part of the challenge of creating a good business and a great place to work.