COSTING STAFF TURNOVER IN HOSPITALITY

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

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 5 Lashley

manager skills in the recruitment and selection, induction, training and

long term development of employees were more likely to retain staff, and
lower the levels of staff loss. Where the reverse is the case, Deery and Shaw
(1997; 1999) argue that a ‘turnover culture’ develops amongst employees
and this further feeds the growth in staff turnover.
Wood (1992) reports a strand of opinion that staff turnover is not
always bad because it enables numerical flexibility and can be a device for
replacing poorly skilled or poorly motivated employees. This and the
previous paper argue, however, that staff turnover has a largely negative
effect in a service business such as hospitality service operations. In
particular, as these businesses evolve round branded and standardised offers
to customers, consistent employee performance becomes an essential
element of business strategy. A turnover culture (Deery and Shaw, 1997;
1999), presents managerial barriers to consistency and represents a
considerable added cost. The ongoing flow of employees leaving and being
replaced by new recruits, who have to be trained to deliver brand standards,
impacts on managers’ tasks and priorities. The earlier paper reported on
one manager with a staff of fifty employees who was recruiting an average
of eleven new staff each week over a six month period. The immediate
priority was to find enough staff to run the operation while service quality,
building customer loyalty and repeat sales were likely to be opportunity
costs of staff turnover.
This paper builds a model for calculating staff turnover that can be
used to calculate the exact costs of releasing existing staff, recruiting new
employees and bring the new recruits up to optimum work levels in given
context. In this case, the model is applied to a general approach and the
figures used are consistent with other studies (Eaglen et al, 1999; IPD,
2000) and where necessary the model uses the most conservative assessment
of the cost element. However the model is sensitive to the time taken to go
through these common stages, and more elaborate recruitment and training
procedures will impact on the direct costs of replacing staff in any one
context.

CHANGING CONSUMER TRENDS IN LICENSED RETAILING

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

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6 Costing Staff Turnover in Hospitality Service Organisations

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

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 7 Lashley

streams from an array of sources require multi-skilled employees who are

far removed from the ‘nice people who serve a good pint’ of the traditional
‘boozer’.
Now-a-days unit employees have to be able to operate under high
pressure within units where annual sales turnover can be in millions. They
have to be able to understand the brand and deliver the service offer being
delivered to customers. In these circumstances high levels of staff turnover
have a significant impact on the conduct of the business. Unit managers
have to spend time recruiting, selecting, inducting and training an ongoing
stream of new recruits. The earlier paper identified one manager, with a
payroll of fifty staff, who recruited over 280 employees in just six months.
This paper is concerned to establish the direct costs of these immediate
costs of replacing employees who leave, typically after a short period of
employment with the firm. That said, these high volumes of recruitment
and replacement also represent high opportunity cost because managers
are not doing other, more developmental activities whilst they replace staff.
And, a constant stream of new faces behind the bar can be disturbing for
customers and discourage repeat business.
Although there are specific dynamics to licensed retail sector
associated with British licensing laws and the limitations placed on outlet
growth, many of these comments about the impact of staff turnover are
shared across hospitality organisations in general. The link between
employee performance, service quality and customer satisfaction is a shared
feature of all hospitality service providers. The costs of replacing staff may
vary, depending on the amount of time and effort required to recruit and
select, and train replacement staff, but the same elements of costs will be
present. So the model outlined below can be used as a means of calculating
the cost of replacing lost staff, though the precise figures will vary between
hospitality service organisations and levels of service intensity being
supplied.

LABOUR TURNOVER COSTS IN LICENSED RETAILING

Labour turnover imposes costs on employers in four areas: leaving costs,

replacement costs, transition costs and indirect costs. Leaving costs can be
thought of as payroll and personnel costs (for example, any payments made
to the leaver such as redundancy payments and the cost of personnel time

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8 Costing Staff Turnover in Hospitality Service Organisations

in administering the departure). Replacement costs are those associated

with the search for a replacement employee; these include recruitment costs,
the costs of interview time and employee selection, plus any agency fees
the company may incur (IPD, 1999).
Transition costs include training costs, both direct (e.g. courses)
and indirect (e.g. supervisors spending time teaching the new employee),
the costs of induction and the loss of productivity incurred while the new
employee is coming up to speed. Indirect costs can be seen as the loss of
customer service and/or satisfaction as a result of labour turnover.
Furthermore, no matter how sophisticated the selection procedure, any
recruitment decision involves some risk on the part of the employer (Low
Pay Commission, 1998). Often described as the ‘hidden problem, hidden
cost’ (Lashley and Chaplin, 1999), staff turnover has both direct and indirect
costs for the organisation. In the case of the direct costs it is possible to
calculate the direct expenditure relating to filling a vacancy. There is the
cost of advertising for replacement staff; overtime costs paid to other staff
to cover, and perhaps the use of agency staff. Furthermore, if the employee
who left is fully trained there is also the cost of training the replacement to
be considered (IPD, 1999; 2000).
However it is difficult to assess the value of a trained employee to
an employer because frequently the employer sees only the training cost
and not the benefit that the company gains (Eaglen et al, 2000). Moreover,
the actual training costs can be considered as direct costs because the
employer will know how much has been spent on the employees training.
How valuable that training is to the company is more difficult to assess. At
this point we move into the realm of indirect costs, how much is good
quality service worth to the business? How much does training contribute
to good customer relations, how does training add to the customers perceived
retail experience? This is perhaps the best definition of indirect costs, costs
that licensed retail managers and leading academics agree exist but differ
on how or if these costs should or can be measured, and the value contributed
to the ‘bottom line’ by attempting to do so. Indirect costs then can be
identified as ‘soft issues’ on which it is often difficult to put an actual
monetary cost on. However, these indirect costs do represent a genuine
cost to the business. For instance, the time the unit manager spends on
recruitment and selection of replacement employees, that opportunity cost
needs to be considered and furthermore, time spent on staff induction plus

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 9 Lashley

the further cost of retraining is both an opportunity cost and a direct cost to
that unit (see Table 1).

Table 1: Some Direct and Indirect Costs of Staff Turnover

Direct costs Indirect costs

Advertising for replacements Lost investment in training
Management time spent Lost staff expertise
Recruiting Reduced service quality
Interviewing - Selecting Reduced productivity
Inducting Increased wastage and costs
Training Customer dissatisfaction
Recruitment agency fees Negative impact on remaining staff
Travel expenses for interviews Opportunity cost of lost
Postage and stationery management time
Induction and orientation training
Training
Over-time cover
Agency staff cover
Processing new recruits documents
Processing ex-employees documents
Uniforms
Source: Lashley, 2000

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
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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

This paper stems from research commissioned by The British Institute of

Innkeeping (BII). Its aim was to investigate and establish management
methods that might be used to improve and control staff retention in the
licensed retail sector. This research primarily focused on a case study
approach. The benefits of which allow the study to contribute to the study
of staff turnover in a wider business context (Hartley, 1994). It also allowed
researchers to explore a multivariate approach to the study, and this is
important because previous studies show that staff turnover is rarely caused
by one single factor. The literature review section in the earlier paper showed
the causes are likely to be due to cluster factors, both internal and external
to the business unit.

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 11 Lashley

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

In each survey, organisation two senior managers were interviewed

to establish the corporate position on staff retention and to identify what
action if any the organisation was taking to address this problem.
Furthermore, the survey aimed to identify senior managers, attitudes towards
staff retention whilst bearing in mind the current debates that high staff
turnover is a positive thing and to refresh the unit staff on a regular basis
adds value to the business vis-a-vis the counter argument that retaining
good quality staff with a high level of training provided better service quality.
Following this survey, interviews were conducted with twelve unit managers
and again the focus was on staff retention. The interviews included questions
about how the managers themselves measured staff turnover, had they
received any training to help them deal with the problem, was the lack of
staff retention seen as a problem, and if so what measures were the company
putting in place to deal with it.

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12 Costing Staff Turnover in Hospitality Service Organisations

Table 2: Research Methods Used in the Study

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

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 13 Lashley

in the organisation. Ultimately to gain an insight into how the organisation

was attempting to deal with staff retention and turnover at corporate level.
The second interview schedule was aimed at the unit managers
and was designed to find out if, and how they measured staff turnover in
their unit. What training they had received to help them deal with recruitment
and selection. Moreover, a section of the questionnaire asked them to assess
the cost in either time or money of recruiting replacement staff that are the
direct and indirect costs of staff turnover. This include such issues as
induction costs, training wastage, business disruption, customer disruption,
and the lost opportunity cost of unit managers, time being spent on recruiting
when it could have been spent on the business in a more positive manner.
The third set of interviews involved unit employees and the aim
was to identify issues that they liked and disliked about their jobs. Questions
were asked in relation to the ‘push and pull’ factors which often either push
staff to move or pull them away by offering better terms and conditions.
Finally a staff satisfaction survey was conducted at the same time to get a
‘feel’ for how the unit employees felt about their present terms and conditions
of employment, hours worked, pay, satisfaction with their job, and how
they viewed their jobs and future prospects within the organisation.
The interviews took place within the brands of two leading licensed
retailers, one who showed staff turnover to be above the national average,
and the other who had staff turnover well below the national average. That
said, our estimates of the national average at that point were based on
conversations with leading practitioners. The published national figure from
the 1996 ‘Training Who Needs It?’ surveys (HTF, 1996) is unhelpful because
it seems unrealistically optimistic. In each of the two selected companies
the research involved visits and interviews in 6 units within each brand, 3
units with higher than the company’s average and 3 units below this average.
This allowed a brand comparison to be made between units. To be able to
identify the different brands both were assigned a coding Alpha brand
(supposedly high), and Beta brand (supposedly low). Two senior managers
from each brand were interviewed followed by six unit managers, and unit
staff. The numbers of unit staff varied from the research proposal, as it was
difficult to always be able to see the required number of staff at the time of
the interviews.

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14 Costing Staff Turnover in Hospitality Service Organisations

Table 3: The Sample Included in the BII Survey

Category Alpha Organisation Beta Organisation
Executive 2 2
Unit Manager 6 6
Unit Staff 17 22

Wherever necessary the interviewees took the more conservative estimates

of the time or costs associated with staff replacement. As stated above, the
calculations were chiefly concerned with the direct cost that could be
accounted for directly. Typically these were costs associated with
termination, the time spent seeking applicants and sifting through application
forms, and all the costs associated with getting the new recruit up to speed.
Where possible, interviewers also wanted to gain a sense of the relative
importance of the indirect or hidden costs of staff replacement.

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

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 15 Lashley
cost of a unit manager’s time was made at £10 per hour and unit staff at £5
per hour. These rates include total on-costs for National Insurance
Contributions, pensions and other costs such as holiday entitlements.
In an effort to err on the side of caution, the survey of managers
estimated that £500 per head was a reasonable estimate of direct costs for
recruiting ‘routine unskilled staff’. This compares with an earlier study
using the same cost elements (Eaglen et al, 1999), that estimated direct
costs of replacing staff in McDonald’s Restaurants as £450 per head
approximately. However, this calculation does not fully cover all the costs
involved by service disruption, and customer dissatisfaction, and the total
cost might easily be close to the IPD’s estimate. As we have seen the IPD
put the total cost of staff turnover for this category of staff (routine unskilled)
at £735 per head. Given the estimates established in this and the earlier
study, the IPD figure is not unreasonable and may be on the low side. For
more skilled staff, a more conservative estimate might put direct cost at
£900 per head and the IPD estimated the total cost of replacing this type of
employee as being £1,441 per head. The calculations of the costs of staff
turnover given in subsequent tables are based on the most conservative
estimate of £500 per head. The true cost of staff turnover in both units
would be higher when the indirect costs are added.
Table 4: Estimating the Costs of Replacing
Staff in the Two Groups of Units
Element Average Direct Average Direct
Cost Alpha Units (£) Cost Beta Units
(£)

Advertising 5.00 50.00

Time sifting applications 13.00 10.00
Time interviewing 18.00 19.00
Induction employee time 11.00 57.00
Induction manager time 36.00 33.00
Employee training materials,
and other employee time 150.00 200.00
Employee training time 110.00 233.00
Manager time for training 25.00 50.00
Lost productivity learning job 145.00 194.00
Added wastage and mistakes 5.00 48.00
Lost uniforms 10.00 125.00
P45 and other documents for each
severance and replacement 50.00 50.00

Average Direct Cost 578.00 1,069

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16 Costing Staff Turnover in Hospitality Service Organisations

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

1 128 1,169 160 935,200

2 96 1,214 158 959,060
3 484 6,841 203 6,943,615
4 162 2,953 208 3,071,120
5 115 1,631 123 1,003,065
6 53 1,200 232 1,392,000
7 99 1,631 193 1,573,915
8 68 280 93 130,200
9 64 855 188 803,700
10 87 940 163 766,100
11 50 623 235 732,025
12 300 3,624 192 3,478,040
13 820 ? 106 ?
14 87 1,325 175 1,159,375
15 103 1,196 200 1,196,000
16 52 582 150 436,500
17 794 10,740 155 8,114,250
18 1,910 22,923 180 20,030,700
19 34 467 220 513,700
20 32 ? 150 ?
21 32 412 236 486,160
22 40 463 200 463,000
23 37 ? 200 ?
24 55 486 90 218,700
25 31 412 280 576,800
26 42 531 155 411,525
27 115 1,200 305 1,830,000
28 51 698 206 718,940
29 33 400 170 340,000
30 39 610 218 664,900

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 17 Lashley

It is interesting to note that the total cost of staff replacement in

these different organisations is sensitive to both size and volume variations.
Thus it is possible to have an organisation with high levels of staff turnover
but a low total cost because the units are smaller and there are fewer
employees. Clearly the whole organisation manifests obscure variations in
units size, because there are variations amongst the different brands. There
are some larger units that employ more staff whilst others employ fewer
people per unit. The example in Table 6 features a sample of units from two
firms. Beta had a larger number of employees, on average per unit. The
Alpha brand had an average higher labour turnover than Beta, though there
is considerable overlap between the rates at the top and bottom in both
firms in the sample. The key differences is that the larger units incur a
larger total cost because there are more recruits involved.

Table 6: Staff Turnover Costs Per Survey of Sample Unit

Case no. Total employed Total of Staff turnover Total direct

per unit leavers per unit rate (%) cost (£)
per unit

Alpha 1 16 5 31.2 2,500

Alpha 2 8 1 12.5 500
Alpha 3 8 10 125.0 5000
Alpha 4 13 5 38.4 2,500
Alpha 5 8 1 12.5 500
Alpha 6 12 19 158.3 9,500
Beta 1 50 78 156.0 39,000
Beta 2 45 15 33.3 7,500
Beta 3 22 24 109.0 12,000
Beta 4 40 43 107.5 21,500
Beta 5 35 33 94.2 16,500
Beta 6 30 18 60.0 9,000

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

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18 Costing Staff Turnover in Hospitality Service Organisations

across the estate in different labour market conditions. Similarly it could

be argued that different employment policies between the organisations in
Table 5 explain the wide range of levels between organisations. Without
denying the potential impact of both these sets of issues, it was the contention
of the earlier paper that unit management style and the treatment of
employees creates conditions that ‘push’ or ‘pull’ employees from one
employer to another. The figures supplied in Table 7 compare the levels
and costs of staff turnover in just one organisation and in one region in that
organisation. The area covers one Area Manager’s region, in a medium
sized licensed retailer, stretching from Leicester in the South to York in the
North.
As with the organisations featured earlier, the level of costs is a
function of the number of employees and the levels of staff turnover as a
flow of people moving into and out of the organisation. At an estimated
fixed cost per head the number of people leaving and being replaced, the
higher the charge. That said, there are some interesting comparators, for
example unit 18 has an establishment with just eight employees yet fifty
four recruits in the year it has cost the unit £27,000 to replace employees
who have left. Although the unit is one of the smallest it has one of the
highest spends on staff replacement. Only unit 16 with three times as many
employees on the payroll has a higher spend on staff turnover. The rate per
post provided in the final column shows how these variations in size and
volume of turnover can obscure some very wide variations in the extent of
the added costs at unit level.
Table 7: Staff Turnover by Unit in One Region
Unit Employees Recruits Annual Cost per unit Cost per
per unit over 12 months staff @ £500 post*
turnover (£)
rate* (%)
1 13 29 224 14,500 £1,115
2 18 30 167 15,000 £833
3 9 16 178 8,000 £889
4 19 17 89 8,500 £447
5 11 16 145 8,000 £727
6 8 14 175 7,000 £875
7 28 45 160 22,500 £804
8 17 24 141 12,000 £706
9 12 18 150 9,000 £750
Contd...

Journal of Services Research, Volume 1, Number 2 (October, 2001)

 19 Lashley

Unit Employees Recruits Annual Cost per unit Cost per

per unit over 12 months staff @ £500 post*
turnover (£)
rate* (%)
10 15 26 173 13,000 £867
11 10 19 190 9,500 £950
12 10 35 350 17,500 1,750
13 22 43 194 22,500 1,023
14 11 16 145 8,000 727
15 11 35 318 17,500 1,591
16 24 69 287 34,500 1,438
17 17 36 211 18,000 1,059
18 8 54 675 27,000 3,375
19 13 18 138 9,000 692
20 6 7 117 3,500 583
21 20 19 95 9,500 475
* rounded to nearest whole number

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

Journal of Services Research, Volume1, Number 2 (October, 2001)

20 Costing Staff Turnover in Hospitality Service Organisations

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

Journal of Services Research, Volume 1, Number 2 (October, 2001)

 21 Lashley

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.

Journal of Services Research, Volume1, Number 2 (October, 2001)

22 Costing Staff Turnover in Hospitality Service Organisations

The earlier paper suggested that staff turnover varies within

organisations to such an extent that attempts to manage it downwards need
to focus on the actions that will avoid people being pushed out from one
business to another. In particular it suggested that the training and actions
of unit managers was particularly influential. It is our view that any attempt
to manage the cost of staff turnover needs to look at unit manager training
and accountabilities as mentioned above.

CONCLUSION

This paper is informed by research undertaken by the British Institute of

Innkeeping into the levels and costs of staff turnover in pubs and bars directly
managed by pub operating companies. An earlier paper reported that
numbers of staff leaving and being replaced in the sector is high when
compared with other industrial sectors, though in line with many other
firms in the hospitality retailing sector. The retailing service sector generally
encounters high levels of staff turnover.
This paper has focused on the costs of staff turnover to the firms
and units involved in the survey. The research highlighted the direct costs
of replacing staff covering three key phases in the severance of an existing
employee, the costs associated with finding a replacement; and the cost of
bringing the new recruit into the organisation and their development to full
effectiveness. These phases lend themselves to some reasonable cost
estimation because they incur direct costs associated with expenditure, either
direct spending or labour time. More difficult to calculate are the indirect
costs of lost custom, poor quality, missed sales or wastage, etc. Like the
direct costs associated with staff replacement they are real enough but hard
to estimate.
Based solely on our conservative estimates of the direct costs of
staff turnover, the paper has shown that the organisations in the survey
were incurring an additional cost bill that, in one case, was estimated to
exceed £20,000,000. Even at local level the unit’s costs were several
thousand pounds higher than would be the case with a reduced level of
staff turnover. One unit was estimated to be spending £27,000 per year
replacing staff when it only employed an establishment of 8 people. An
added cost that averaged over £3,000 per post. At an industry level it was
suggested that staff turnover was costing the sector over £300 million per
annum.

Journal of Services Research, Volume 1, Number 2 (October, 2001)

 23 Lashley

This paper has focused exclusively on developing a picture of the

costs of staff turnover in just one sector of the hospitality industry. However,
the model developed and observations can be applied across all hospitality
service organisations. A targeted and planned strategy could reduce the
level of staff loss and the costs associated with it. Managers need to be
accountable for the levels and costs of staff turnover so that they manage it
as an important performance indicator, and they need to be supported with
appropriate levels of training, particularly at unit level.

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Conrad Lashley is Professor & Chair in Hospitality Retailing at The School

of Tourism and Hospitality Management, Leeds Metropolitan University,
United Kingdom.

Journal of Services Research, Volume 1, Number 2 (October, 2001)

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission.