Sagging bottom lines in a pointless war against attrition - Is it time for a fresh perspective?

This is a guest post by Saurabh Deshpande from Knowledgefaber. Margins for IT Services & BPO companies in India are under tremendous pressure today and high employee attrition is to be blamed. Or is it? Knowledgefaber takes a fresh look at the Gen Y workforce and advises companies not waste precious resources fighting a battle they cannot hope to win

A lot has been spoken and written about attrition and retention in the Indian IT Services & BPO industry. Consultants, industry experts and academicians broadly concur that employee engagement is an outcome of making employees feel valued and involved. These feelings of being valued are an outcome of both intrinsic and extrinsic factors, and most consultants/ researchers assert that monetary considerations largely play the role of hygiene factors only.

As a result, organizations are today investing huge amounts of management bandwidth and money on training & development, benefits and recognition programs in an attempt to miraculously cure their attrition problem. But the big question remains – have these huge investments actually demonstrated meaningful results? And even if they have, are the results commensurate to the size of these investments?

Let us look at the organizations that have consistently won employment awards in the last 3 years. Across surveys, be they the Hewitt Best Employers in India, Great Places to Work or BT-Indicus-PeopleStrong Best Companies to Work For, 9-10 of the top 25 companies are from the IT Services & BPO industry[1]. Yet, as per Hewitt’s Salary Increase Surveys, it is these industries that have witnessed the highest levels of attrition. For example, in 2007, 1/3^rd of Hewitt’s Best Employers were IT Services or 3^rd party BPOs and in this year, the average attrition for these companies was 20.4% and 36.7% respectively. Even in 2009, when these export oriented industries witnessed a huge slowdown in hiring, attrition for IT services was 14% and for 3^rd party BPOs was 24.6%[2].

Specifically, let us look at Infosys, one of the strongest employer brands in India, the ‘darling’ of most employer of choice surveys and winner of BT-Indicus-PeopleStrong Best Companies to Work For in 2009-10 (they did not participate in other surveys in that year). In the financial year 2009-10, over 12,000 employees left Infosys, leading to an overall attrition rate of 13.5%. In the 1^st quarter of financial year 2010-11, Infosys has already had almost 8,000 employees leaving, with an annualized attrition rate of 27.4%[3].

I am in no way trying to either denigrate Infosys (a company for which I have a huge amount of regard), nor am I questioning the validity of employer of choice awards. My argument is simply that at an industry level, having great HR practices does not necessarily have a high correlation with employee attrition. Even if there is some amount of correlation, the question to ask is if the return (in terms of reduction in cost of attrition) is healthy enough to justify the extent of investments. Ultimately, the fundamental take-away from my argument is that the high level of attrition in the Indian IT Services & BPO companies is systemic; attributable to the demographics and nature of workforce that these companies employ. Importantly, the points of view expressed in this paper pertain to the junior individual contributor segment of the employee population only.

I strongly believe that there is a need to follow an approach of mass segmentation of employees for effective talent management results. Having spent over 7 years working with IT Services & BPO companies on areas such as rewards management & employee engagement, my hypothesis concurs in principle with what has been established over years of research, but differs in interpretation and application. For the sake of clarity, I am elucidating the key points on which my hypothesis is based:

• 70-80% of the talent pool in the IT Services & BPO industry is in the junior individual contributor levels within the age-group of 21-27 years. Hence, when we refer to any talent metrics in this industry, we are broadly looking at the Gen Y employees
• Gen Y employees are driven by passion and idealism but their definition of values is very different from their predecessors. Loyalty towards an employer is driven by energy and motivation towards work and not by the number of years worked for that employer
• The number of topics that compete for mindshare among Gen Y employees is far larger than that for their predecessors. Rapid developments in technology, newer forms of communication & social media and in general, the overall flattening of the world have led to a situation where Gen Y minds are always on the look-out for something new. Moreover, given the drastic increase in the number of career options, increased fungibility of skills and improved mobility, Gen Y is reasonably confused about their future, especially from the perspective of long term career aspirations
• Maslow’s hierarchy of needs is just as applicable to Gen Y employees as it was to their predecessors. As such, Gen Y is equally motivated to first fulfill their physiological & safety needs, before they move on to loftier goals such as esteem and self actualization. Gen Y differs however, in what it qualifies under basic needs. It is important to appreciate that what may have qualified as comforts or luxuries for earlier generations may now qualify as necessities for Gen Y

If you are with me so far, let us now analyze the income and expenses for a typical BPO employee, with say 1 year of experience. A reasonable estimate of salary for his employee would be INR 175,000 per annum. This roughly translates to INR 165,000 per annum (ie, INR 13,750 per month) as cash in hand, after reducing PF[4]. Now remember that this employee has had a college education, is probably from a tier 2/ 3 city and is now working in a tier city like Gurgaon, Bangalore or Mumbai. Even if the employee is staying in a PG and only using company provided transport, his basic living expenses will be at least INR 7,000 per month, leaving a disposable income of INR 7,000. Consider the fact that a weekend movie ticket itself costs INR 250-300 and a meal at a decent restaurant costs INR 150-200 means that 4 such outings in month consume a fourth of this disposable income. Let us not even get into the specifics of money sent home and spending on other items such as consumer electronics and clothes (which remember, may count as necessities to his generation). Will such an employee not be expected to be highly sensitive to even minor changes in compensation? Using Maslow’s theory, how can this individual be expected to remain in an organization just because his company gives him a slightly larger cubicle, organizes a quarterly picnic, has lush green lawns and trains him for 10 days more than another company?

Now let us add in the other principles I referred to in my hypothesis. Every day this employee wonders about what he really wants to do with his career. Every month he hears about at least one of the contacts in his wide social network changing jobs and he too receives more calls from placement consultants than from telemarketers. Every 3 months, he finds himself worrying about the mounting dues on his credit cards. And every 6 months, there is a new consumer electronics gadget out in the market which he really wishes he could buy. Remember that no matter how driven by values this employee may be, he doesn’t even believe that leaving his employer within a year is unethical! We don’t even need to get into the social stigma attached with the word BPO (which his family at home still probably thinks is restricted to call centre) and the irregular work timings to understand why the main thing that this employee is probably focused on is salary.

I know that my example talks only about BPO, while I am applying my argument to IT as well. But it is important to appreciate that similar circumstances apply to junior level employees in IT companies as well and even if these circumstances in BPO are much more severe, the attrition levels in BPO are also 1.5 – 2 times those in IT.

Maybe then, Indian IT Services & BPO companies will be better off in focusing their efforts in building tools, systems and processes that help them live with attrition rather than continue to look for a magical formula that will help them reduce it. The need of the hour is to be able to:

• Effectively predict how much attrition can be expected in a particular period basis internal organizational indicators and the state of the market: Almost all major organizations today conduct employee listening exercises such as e-sat or engagement surveys. The issue is that these surveys focus on the more holistic combination of what employees say about the organization, if they intend to stay employed over there and how motivated they are to put in their best efforts to make the organization succeed. In itself, such analysis is quite insightful and helps HR leaders determine what their areas of focus should be. However, these surveys don’t focus enough on the burning issue at hand – will my employees leave? If so, how many and when? It is probably the very fact that most employer of choice surveys take employee engagement/ satisfaction scores as one of the key inputs towards determining their rankings that the winners of these surveys are also bleeding due to attrition. I am not saying that organizations should do away with e-sat/ engagement surveys altogether. On the contrary, I am suggesting that some key modifications need to be made to the survey questionnaires which will then give necessary inputs to quantitatively analyze and forecast attrition. In fact, Knowledgefaber is currently working on developing these modifications and the analytical approaches required to take e-sat/ engagement surveys to the next level.
• Pro-actively implement solutions to ensure that employee exits do not lead to work disruptions: As articulated in my arguments above, HR will find it more effective to build systems and processes to cope with attrition rather than try to fight it. I know that this may sound like blasphemy coming from an HR consultant but I would assert that except for certain critical resources who cannot be easily replaced, it is a far more efficient utilization of time and money to let attriting employees go rather than try and retain them. There is a need to take an Operations Management approach to talent management and workforce planning. Organizations need to beef up their recruitment systems by understanding capacity constraints and identifying/ addressing bottle-necks. Taking this Operations Management view, Knowledgefaber has identified that in general, the biggest issue in recruitment is the inappropriateness of candidate profiles sourced by recruiters (whether internal or external). Organizations that boast of very low ratios of profiles sourced to offers made are not being highly selective; they probably just need to make sure that recruiters do a better job!
• Understand and quantitatively analyze employee preferences so that precious HR budgets are not wasted on pointlessly fighting attrition: Declining operating margins for IT Services & BPO companies are becoming a huge cause for concern. While Infosys seems to be the worst hit, with a 2.36% drop in the quarter ended June 2010, large and small companies are all feeling the pinch[5]. Yet companies continue to invest in trying to fight attrition. I believe that companies should position their employment deal at the basic/ hygiene level and use their HR budgets to optimize internal systems, especially with regard to recruitment. It is possible to pinpoint exactly how much importance employees attach to each element of the employment deal and how sensitive they are to changes in those factors (increase or reduction). Knowledgefaber has developed a tool which enables this analysis using advanced statistical techniques.

Having said this, it can still be argued that things like training & development, world class infrastructure and overall employer branding yield results in terms of attracting clients and also new hires, not just in reducing attrition. If that is the case, my humble contention is that organizations should then accept that and plan/ measure these initiatives based on their impact on revenue and improvement in ability to hire, not the ability to retain!

[1] Source: http://was2.hewitt.com/bestemployers/asia/thai/hewitt_be_india2009.htm, http://www.greatplacetowork.in/best/list-in.htm, http://www.peoplestrong.com/Downloads/PS-BT-Indicus_Best-Companies-to-Work-for.pdf

[2] Source: Hewitt India Salary Increase Surveys 2007-08 & 2009-10

[3] Source: Infosys Financial Statements available on http://www.infosys.com/investors/reports-filings/annual-report/Pages/index.aspx

Attrition is calculated as [Total Exits / ((Opening Manpower + Closing Manpower)/2) * (12 / No. of Months)], where Total Exits = Gross Additions – Net Additions

[4] Assuming Basic Salary as 40% of CTC and PF as 12% of Basic Salary

[5] Source: Times of India, 26^th August – “High attrition pinching Indian IT companies bottom line”