Turnover can be a significant financial burden for small businesses. From direct expenses like hiring and training new employees to indirect costs such as lost productivity and decreased morale, the impact is substantial. Understanding these costs and exploring alternatives like fractional leadership can provide a clear path to substantial savings.
The Real Cost of Employee Turnover
Employee turnover costs can range from 50% to 200% of an employee's annual salary, according to various studies. These costs include:
Recruitment Costs: Advertising the position, recruitment agency fees, and time spent by HR and management in the hiring process.
Training Costs: Time and resources spent on onboarding and training new employees.
Lost Productivity: New employees take time to reach the productivity levels of experienced employees. Additionally, existing employees may be less productive as they cover for vacant positions or train new hires.
Operational Disruption: Delays and disruptions in projects, potential impact on customer satisfaction, and the temporary loss of institutional knowledge.
Morale and Engagement: High turnover can negatively affect the remaining employees’ morale, potentially leading to further turnover.
For instance, if a small business loses an employee with an annual salary of $60,000, the total turnover cost could range from $30,000 to $120,000.
The Savings with Fractional Leadership
Fractional leadership involves hiring part-time executives or managers who provide their expertise and leadership on a part-time basis, usually for a fraction of the cost of a full-time executive. This model offers several financial benefits:
Reduced Salary Costs: Fractional leaders are typically paid only for the time they work, which can significantly reduce salary expenses. For example, instead of paying a full-time executive $150,000 annually, a business might pay a fractional leader $60,000 for part-time work.
Experience and Efficiency: Fractional leaders often have extensive experience and can make impactful decisions quickly, leading to faster problem resolution and strategic advancements.
Flexibility: Businesses can scale the hours and involvement of fractional leaders based on current needs and budgets, allowing for better financial management.
Avoiding Full-Time Overhead: By not having a full-time executive, businesses save on benefits, office space, and other overhead costs associated with full-time employees.
Potential Savings Example
Consider a small business that needs a COO but cannot afford a full-time salary of $150,000. Instead, they hire a fractional COO for $60,000 annually. The savings include:
Salary Savings: $90,000 annually.
Overhead and Benefits: Additional savings could be around 20-30% of the salary ($18,000-$27,000), assuming costs for benefits, office space, etc.
Conclusion
The total savings from utilizing fractional leadership instead of full-time executives can be substantial, often amounting to tens of thousands of dollars annually. These savings can be redirected into other areas of the business, such as growth initiatives, marketing, or employee development, making fractional leadership an attractive option for small businesses aiming to reduce turnover costs and optimize their expenditures.
By understanding the real costs of turnover and leveraging the benefits of fractional leadership, small business owners can make informed decisions that contribute to the long-term success and financial health of their companies.
Sources
Society for Human Resource Management. (2017). The hidden costs of employee turnover. SHRM. Retrieved from https://www.shrm.org/resourcesandtools/hr-topics/talent-acquisition/pages/the-hidden-costs-of-employee-turnover.aspx
Forbes Human Resources Council. (2020). The cost of employee turnover. Forbes. Retrieved from https://www.forbes.com/sites/forbeshumanresourcescouncil/2020/01/20/the-cost-of-employee-turnover/?sh=2b2168b14228
Harvard Business Review. (2021). How fractional leadership can help your business. HBR. Retrieved from https://www.hbr.org/2021/05/how-fractional-leadership-can-help-your-business
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