Economic model for optimum attrition rate

Abstract

In the Indian BPO and IT industry, the high attrition (employee initiated separation) rate is considered one of the most alarming problems. Job market dynamics, geographically clustered industry and ease of movement, restrictions imposed by client countries, opening of branch offices in India by foreign companies and effecting intra-firm transfer of services, the laws of demand and supply and the immaturity of young professionals (and their managers) are the primary reasons for the high rates of attrition1 . While most experts are dismayed by the situation, the opposite view is that some degree of attrition may be necessary for the organisation, as it brings fresh ideas and removes the rust that sets in with staying for a long time in the same job function. In a dynamic industry, attrition also helps the organisation cope better with the changing environment. The important questions to ask therefore are: ‘What is an optimum rate of attrition?’ and ‘When should one be alarmed at the attrition rates?’ In this paper we develop a simple theoretical model for employee contribution and compensation and look at the problem of attrition from a purely economic point of view. The model, based on the characteristics of the employee and the organisational environment, allows us to derive a time-tostay that maximises the net payoffs for the employer, and in turn, the employee. We argue that this is the optimum and stable time-to-stay (or rate of attrition) for the employee. Generalising the employee characteristics to the set of employees working in the organisation, we can estimate the optimum rate of attrition for the organisation, and further for the industry. The practical utility of the model is twofold. One, it introduces the concept of optimum attrition rate, which is a deviation from the popular belief that the attrition rate should be as small as possible, ideally zero. Two, it gives us insight into the relations between the rate of attrition and the characteristics of the organisation and the employee, which can be aligned with the business objectives of the organisation.