425 | How to Calculate the Cost of Retention with Stephen King

The cost of retention is massive for companies that have employees leaving before you are ready for them to go. To calculate the cost of retention you want to make sure you include the direct and indirect costs. My guest today is Stephen King, CEO of Growth Force. Growth Force is an outsourced accounting company that has done extensive research on the cost of retention. We talk about how you can calculate it for yourself and what you can do about it to make sure it is not an issue for you. Discover your cost of retention in today’s interview.

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Target Audience: He is CEO of Kingwood-based GrowthForce, one of the nation’s largest cloud-based client accounting services practice. He learned how an enterprise accounting system at Ernst & Young where he spent another seven years building global management accounting systems as manager of accounting system design.

Stephen King: The Transcript

Disclaimer: This transcript was created using YouTube’s translator tool and that may mean that some of the words, grammar, and typos come from a misinterpretation of the video.

Listen, leaders in the trenches and your host today is Gene Hammett.

Gene Hammett: Hi, my name is Gene Hammett. I’m the host of leaders in the trenches. My big question for you today is what is your real cost of retention? What does it cost you when someone leaves before you’re ready for them to leave? What does it cost you when someone has been trained, they have to know the processes, they know the people and the relationships and they actually leave to go find another job or do something else. Well, that cost of retention is something that is hidden. There’s not a line item on your p and l about what the cost is so that you can see how expensive retention is. The cost of retention to something I’ve been looking at and studying. So I’ve got an expert that wants to bring on just for you to help you walk through some of the very specific elements of cost.

Gene Hammett: That is, we have Stephen King here, Stephen is with growth force, that is an outsource accounting company for-profit companies and they do a lot of analysis on what is the real cost of retention. So we talk about the day. One of the things I like most about this is uncovering some of those hidden areas, some of the things that you haven’t thought of as a leader about what actually goes into replacing someone, getting them back up to speed. Once you have someone that leaves, a lot of experts will say that it costs you one time or two times your salary. Well, we dive into the cost of retention and today’s episode with Stephen King. Here’s the interview.

Gene Hammett: Hi Stephen. How are you?

Stephen King: I’m good Gene.

Gene Hammett: Well, it’s good to have you here at leaders in the trenches.

Stephen King: Thank you. Thanks for having me.

Gene Hammett: Well, I wanted to start off with, tell us a little bit about you and who you serve. So growth, one of the nation’s largest outsourced bookkeeping, accounting and controller services for companies that use QuickBooks or Netflix. Our ideal client is a service business who makes money on its people because we’ve really focused on helping to do project accounting and time-driven activity-based costing, job costing. So you can see where your people spend their time and the cost of that time. And compare it against the revenue that generates. You can see profitability by customer, by the job, by a team, by any way. You want to see profitability.

Gene Hammett: Now I guess I’m curious, I know I’m using QuickBooks right now as QuickBooks have that capability to do that level of reporting.

Stephen King: It does and it’s all and it all could be automated so you can integrate your time tracking with your payroll and allocate your labor costs based on your time sheets. Literally with a click of a button where we have a QuickBooks consulting division that specializes in unleashing the power of QuickBooks. Like you probably use QuickBooks, the way people use excel, right to add, subtract, multiply and divide and never think about pivot tables. Well, there’s a lot more to QuickBooks then paying bills, making deposits and reconciling bank accounts and we know how to do that.

Gene Hammett: Well, I wanted to have you on here because I work a lot with service-based businesses and I think a lot of people tuning in here probably have employees are in the service world and there’s one big, big issue that goes on. We talked about it briefly a couple of weeks ago. And that’s retention. So why is retention such an important issue from your perspective?

Stephen King: Well, it’s one of the biggest costs in a business and it’s a hidden cost. You don’t see one line item that says, you know, cost of turnover on your p and l. Yet since our businesses are run by tribal knowledge, when a member of the tribe leaves, so does the knowledge and the Ai Cpa, I’m a CPA and the AI CPA through its CGMA did a report on valuing the human dimension. And what they suggested was that publicly traded companies should have a footnote disclosure of employee turnover. And even further they said 68% of the value in a business is its people, which is why that turnover cost is so important. And the value is in the tribal knowledge of the processes and the intellectual property, the technology, it’s the relationships with the customer and the vendors and it’s understanding the vision of the business and how do you execute it. And the companies that are wildly profitable and successful and that really succeed are the ones that build high performing teams that stay together for 10 years and the ones that struggle like that 80 % of businesses that don’t make it in five years. Well that’s because they really don’t get to keep that knowledge in the business.

Gene Hammett: I studied the fastest growing companies out there that the top 1% these are the ones on the ink 5,000 years over year and I work with them as an advisor and the number they’re most proud of is not their revenue growth. It is their retention number.

Stephen King: Yeah.

Gene Hammett: Cause I see the value just like you’re talking about the, you know the tribal nature of this and passing on relationships and knowledge and the companies that do that well, we’ll continue to outperform those others. Have you seen that as well?

Stephen King: 100% we have people’s scorecard that we do deliver to our clients, which shows you the revenue per hour paid and you can watch when someone walks out the door, that revenue number drop and then it takes 90 to 120 days after that person has been replaced and then trained to get the revenue back to the same level. And what we did, because you know, we really specialized, we believe strongly that you need a financial management strategy and the human capital strategy in order to make, build a high performing team and a profitable business. And so…

Gene Hammett: Let’s look at some of the hard costs of that cause I, I’d love for our audience to be able to look at this for themselves. Where do we start to understand the cost of retention?

Stephen King: You know, this is something that we have really spent a lot of time focusing on. And actually we did the math, I looked at it for growth force. Our number one metric for success is employee turnover. It’s not top-line revenue. Just like you said, Gene. And I’m glad to be in the peer group of your colleagues. The cost of turnover, when we look at actual that goes out the door, we studied an average $60,000 staff accountant and looked at when a staff accountant or degreed accountant walks out the door, how much does it cost us? And it’s a minimum of 50% of their salary. If the worst case happens, which it does, it can be as much as 200% of the salary. So the first direct out of pocket cost is in the agency fee. You’ve got to hire somebody to help you with that recruiting.

Stephen King: There’s going to be somewhere around a 20% fringe. I mean, I’ve commissioned to the agency, so on a $60,000 salary, that’s $12,000 right out the door. There is a 12% premium when you make an external hire according to the statistics. So if you’re going to promote from within, you’ll have been able to pay a little bit less. But if you don’t, because there’s such a shortage of knowledge workers, it costs $10,000 more of how higher salary when you have to replace that person. Then the big thing that was surprising to me is when you have to do recruiting, who was doing the recruiting for you, it’s your most valuable people. The most senior people, the one who is doing the work the best. See now you’re taking them out of production, out of billable time and you’re putting them in a windowless conference room to do recruiting.

Stephen King: We found that costs $3,750 out of pocket that I’m spending on salaries. That’s not the opportunity costs. It’s just the cost of having them not be billable, paying their salaries and then you’ve got to have some when somebody leaves, you’ve got moral issues and you’ve got to pay PTO. When somebody walks out the door, you got to place an ad in the paper. You got to have some spot bonuses for the people who are working overtime, where who will lose morale goes down. All that ended up to $32,000 of pure cash walking out the door. That’s just the direct cost. Now you take the indirect costs and when you look at that, I have taken those people out of billable time and we have a 60-day training program. I’ve now lost $25,000 of billable work with one manager now having to train a new staff account.

Stephen King: Then we actually have training staff who and coursework that we have to get people up to speed over 90 days. That cost me $30,000 to have the most senior people in the company doing the training of the new staff and if they lose one client because people buy from people, right? You don’t buy from companies. They were the opportunity to lose. One client would cost us $30,000 and when you add up those clubs, that’s another 60 to $90,000 when you add that up with the $32,000 out of pocket cost, you can be as much as 200% of somebody’s salary. In this case, $120,000 of lost profits.

Gene Hammett: That’s incredible. And I know that I’ve seen this happen firsthand, but you added a few more things I haven’t thought of. And I know you could put in there the recruiting fee like and someone’s got to interview them and usually, they’re going through five different interviews, right? Or in some cases, it might be 10 and then that just takes time. And in a smaller company, the owner of the founder’s going to do their time with them. That might be another 30 minutes, whatever that time is worth. There’s a lot of things we could probably keep adding onto this. That’s the reason it’s so complex.

Stephen King: Right, and you know what’s interesting is that people join companies and they quit bosses. And the reason why people, there’s turnover and most businesses because they were a person was hired wrong in the first place. And there are two factors there. Number one, most small businesses recruit for skills to pay the bills. And what you need to do is you have to have the skills, but you want to hire for cultural fit. You want to find out what are the behaviors that are successful in the business and recruit for those behaviors. The second reason why people quit is that they don’t have a career development opportunity. They’re not going to be able to grow. We have this innate need and Maslow’s hierarchy of needs for self-actualization and so if you recruit somebody for behaviors and cultural fit and then you invest in their career path, you’re going to see a significant reduction in your turnover costs.

Stephen King: We the accounting industry, I have the president of the Houston CPA society and share the strategic planning committee, so I saw a lot of nationwide data on the cost of turnover and the average small business in America has 19% turnover. We were able to get it down to just over 6% by hiring correctly and then by investing in people’s skills, not necessarily giving them promotions because a lot of small businesses you can’t promote by everybody, but if we teach them new skills, if we give them challenges, if we give them an opportunity to contribute their god given talents, then you find that people wake up in the morning looking forward to doing that, but the secret sauce here and we wrote this Ebook, the CEO’s guide to increasing profits and we identified the five steps to doing this in deployed turnover as a big part of it. The secret was step five, recognition and reward. We all want,

Gene Hammett: I was going to ask you about that because I was working with a client on recognition and reward and you’ve seen a lot of companies and I reminded these leaders. I said sometimes it doesn’t take a lot of money. Sometimes it’s just a little bit of intentional thought. What are you seeing his works in retention or the reward and recognition side of this?

Stephen King: Well, I’ll start with what’s the one thing not to do? If your listeners take one thing is if, you know, I keep coming back to Maslow and the hierarchy of needs and we all want to be loved, right? We want to feel like we’re part of something bigger than ourselves. So how do you accomplish that? Well, First Harvard did a landmark case study shows that 82 companies that have written goals, I have an 82% higher chance of success. And what was surprising to me when I read this study was you expect you’re going to get increased alignment. But what was surprising was how much Dysport discretionary effort you get from people because they want to be part of a team and if they understand how their team fits into the success of the department and the department’s success fits into the company goals and why it’s good for them.

Stephen King: If the team, the department in the company succeed, you’re going to get people who are more motivated at work. The second thing is that when you want to if you recognize and reward the people who contribute the most profits, that speaks to that highest level, which is self-actualization and esteem. We want to feel good about ourselves. You want to feel like you’re making a difference. And so the simple act of, you know, we’re an Insperity client and we learn from them to the simple act of having your teaching your managers to catch someone doing something right instead of doing something wrong. It makes a big difference. Pay attention to me. And so we have this, [email protected] is a great idea where you send an email out anytime anyone catches something doing something right. And then at our company meetings, we recognize those people and we reward them not with cash. Gene, just like you said, it’s not about the cash about making them feel important among their peers.

Gene Hammett: Yeah. And everyone begins to pay attention to what those things are. They get them there. And so I’m a very competitive person so I would be like, how do I get my name on that board? How do I get recognized their backward and similar types of responses there?

Stephen King: You know? But man, Gino Wickman in his book, traction talks about how what management monitors gets done. So what do you want to get done? Well, if you want people to, if we have a core value of teamwork, if you want to have all your team working together, then you need to reward people who demonstrate those core values. And by sharing that with the management team, and then, of course, every time I see a kudos email, I immediately respond thanking them for being so great.

Stephen King: That’s a dopamine challenge or chart, right? That’s where somebody gets up that feedback loop that we’re all craving. And so we see it, you know, a price Waterhouse Coopers did a study that showed that the median return on investment for people who invested in, in performance coaching, which is different from performance reviews, was 700% and Gallup study showed that when you invest in recognition systems, you’re going to increase your, decrease your employee turnover by 58% it’s big.

Gene Hammett: Yeah. And Go back to that. I mean you’re looking at the line items here. If you do provide some recognition, it’s very small compared to the impact that it’s happening. You know, maybe it’s a hundred dollar gift certificate or it’s a trophy that cost you 17 now that you’ve asked around because I’ve seen this happen just like they’re just so little in the amount of money for the value that it brings back.

Stephen King: It’s 100% right is a really big Roi from investing in and recognition. Now performance we use I think is an important part of this because you know this is all in the context of helping you lower your employee turnover and we put that at the top of our people’s scorecard. So you look at a company scorecard to show you your top line revenue, your bottom line, net income and you’re on the line, the gross profits and what drives that. And it’s people that drive profits. And so when you, you look at the performance review process, what we suggest is that shouldn’t be a trip to the principal’s office. That, I mean if their performance is not where you want it to be, you, of course, that’s the first thing you want to be discussing. But that should be happening every day. Performance review processes and about a chance to get each individual’s career goals aligned with the company goals and that alignment and understanding of why your, how the line of sight between how your activities or behaviors each day drive success for the company and for you is a game changer.

Stephen King: Because then people start acting like owners, they start giving you the discretion of air. They’re not gonna want to let the team down. And so that performance review shouldn’t just be once a year. Canned questions with weak goals that are not measurable and you know, no training for the supervisor on how to do those goals. If you have simple things like, you know, stop, start, continue, what should I supervisor asking the employee, what should I stop doing because it makes it hard for you to achieve your personal goals. What should they start doing to help you be more successful and what would you like me to continue doing? You’re going to find that people like their boss and if you like your boss, you’re less likely to quit. And that’s what are the other big secrets here is get trained on how to do a performance review process because people join companies and they quit bosses and if your boss is don’t know how to motivate, you’re going to lose people.

Gene Hammett: You know? It’s like you’re reading my notes that I’m putting together for my next book. We’ve talked, we touched on so many different issues today. One of the big ones is ownership. I don’t know how familiar you are with at work, Stephen, but I have studied over 300 companies around what’s making them grow and it’s not specific marketing or sales strategies. It is a leadership that inspires people to feel like owners. And you mentioned that and that everything kind of stems from that that we’re talking about in retention. If you’re going to lose the people who don’t feel like they’re a part of that tribe and don’t have ownership in what they’re doing and not getting their skills and whatnot. So I really appreciate you being here. I know you do so much for other service-based companies. I’d love you to take just a couple of minutes to share with us about the key needs for having the right outsource accounting and maybe even why you shouldn’t be doing it with your own internal team and you should have a complete team that you hire.

Stephen King: Well this, you know, I grew this business out of my frustration as a CPA serving my small business clients to try and do their tax return 30 years ago and realized that most of our small businesses there are bookkeepers self-taught and they don’t know what they don’t know and there’s so much wasted effort by their staff. And then as the business owner, all they’re getting is the basics. They get an income statement and a balance sheet for last month or last quarter that is not actionable. They can’t do anything with it. And so what we do is we have a menu and al a carte menu of services of advanced bookkeeping, management, accounting and controller and services to help you to be able to pick and choose what you need when you need it. And it can go up and go down on a monthly basis. What that does is it’s designed to help you have actionable financial intelligence to make decisions that drive profits.

Stephen King: Are you pricing your jobs right? Do you know what your least profitable clients and should be fired? How do you spend money on sales and marketing? What’s going to give you the biggest ROI? How do you increase the productivity of your people through this manager report? And we combine this by working with the in house staff, the bookkeeper or the controller that you already have and compliment them with this smart back office, a QuickBooks centric ecosystem that automates the entire back office. And the nice part is it’s typically 30 to 40% less than what it costs you to do it yourself. And so when you get a team of a bookkeeper, a staff accountant, and a controller, so you reduced the risk of fraud on top of all of that. So it’s all about, we call, I call the growing force in order to be a force to help businesses run better, grow faster, and most importantly make more money.

Gene Hammett: Well, Stephen, I appreciate you sharing that with us today. I think it’s been very insightful and many levels. We added a few new touches to the cost of retention and we actually talked a little bit about how do you actually impact that cross the new hires and across retaining everyone who the right rewards and recognition. So thanks for being here at leaders in the trenches.

Stephen King: Thanks for having me, Gene.

Gene Hammett: Well that was really powerful. A lot of things that I didn’t even realize should go into the cost of retention is included inside that interview. So when you think about your retention rate, you want to make sure that you are doing everything possible. When I talked to Matt Schuyler, the CHRO for Hilton over 400,000 employees, they knew that a 1% increase in retention rate would actually benefit the company by millions and millions of dollars. It really took my breath away. I did a quick calculation on average salary times 1% of their workforce and just it was astronomical. So I don’t know how many employees you have, but the cost of retention is something you need to pay attention to. If you have any questions about that. Part of the work I do with my wife was a millennial expert, Amanda Hammett I actually go into companies, are we going to companies and determine what the cost of retention is, and we look at strategies to help you improve that. So we do this all around their recruiting and retaining rockstars in your company. So if you have any questions about that, make sure you reach out to [email protected] Well, this wraps up this episode as always, lead with courage and I’ll see you next time.

Disclaimer: This transcript was created using YouTube’s translator tool and that may mean that some of the words, grammar, and typos come from a misinterpretation of the video.

In this episode we’ll cover:

• Investing in and Recognition
• Drive Success
• Right Source Accounting
• Leadership in Basic Principles
• Create Self-actualization in your Life
• Process from Greatness
• Internalization of a way to enhance the value of your Core Base

Resources 

• Best of Leaders in the Trenches Podcast Episodes
• Share the LOVE and TWEET about this episode.

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