The Impact of Organisational Churn

Much of modern organisations makes them almost unrecognisable in comparison to those of the last century. That said, the basis of organisational churn remains mostly unchanged. To some, the word churn is used interchangeably with concepts such as turnover and attrition; in reality, they are subsets within churn. 

What is organisational churn?

In the late 1960s, MIT Professor Mason Haire declared that the shifts for a worker were limited to people moving into the organisation from outside, people moving out of the organisation, people moving up and people moving laterally to an equivalent job. He also accepted that, in some cases, people would move down or be demoted.

We will look at each of these concepts: turnover (inside to outside); recruitment (outside to inside), and internal mobility (up, lateral and down).organisational churn

Turnover

The universal truth of the workforce is that, over time, workers will leave the organisation. There are finite ways for a worker to leave an organisation: resignation, dismissal, mutual severance, end of contract, retirement, and death in service.

  • Resignation is where the worker chooses to terminate a contract of employment.
  • Dismissal is the opposite of resignation, where the organisation chooses to terminate a contract of employment. Dismissal requires cause in most jurisdictions, typically this cause is poor performance of the individual, or layoffs where the organisation is getting rid of roles and either unable or unwilling to accommodate a worker elsewhere.
  • Mutual severance is a hybrid of resignation and dismissal, where both the worker and the organisation agree to sever the contract of employment. It tends to be typified by a disbursement from the organisation, hence the term severance pay. Mutual severance is often found in what is termed voluntary redundancy, where layoffs are announced, and a worker volunteers for dismissal. It is also found where an organisation may wish to dismiss a worker, but either lacks cause (or sufficient evidence of cause) or the worker has leverage (consider employees who have witnessed impropriety and leave with a payoff and a non-disclosure agreement). Despite the term mutual, the initiator is typically the organisation.
  • End of contract most often relates to temporary workers who are employed on a contract basis. An organisation may have the ability to either renew or extend a contract and may choose not to (or a worker may choose to reject the offer of an extension or renewal), that circumstance would be a revision of an agreement with a specified end date. This categorisation can also apply to workers who would be considered permanent, such as the military, who will have specified engagement durations to either compulsory or voluntary active service.
  • Retirement is multi-faceted and can have hallmarks of resignation, mutual severance or end of contract, but differentiated by provisions that allow access to pension benefits. The main type of retirement is age-related; in many countries, such retirement was mandatory at a retirement-age but has since become a voluntary choice for many workers with the proliferation of legislation against age-based discrimination. Even where such legislation exists, certain professions may still have mandatory retirement; these are often military, law enforcement and airline pilots. Ill-health can often result in retirement if it is sufficiently chronic to warrant access to pension benefits, otherwise ill-health may lead to mutual severance instead.

Recruitment

Recruitment is a catch-all term that covers the myriad ways that a worker may join an organisation. It is an activity that results from one of two causes: firstly, a vacancy in an existing base of supply that occurs when the incumbent leaves a role either through turnover or internal mobility; secondly, a new demand that results in the creation of a new role. This recruitment bucket also includes the act of workforce inheritance, triggered by mergers and acquisitions. 

Internal Movement

Internal movement is a change in either a worker’s role or their position within the organisational structure and is either vertical or horizontal. Vertical movements are promotions and demotions.

  • A promotion is a movement to a role of greater seniority and may involve an application for a more senior role and/or an organisation-wide process to determine a cohort for promotion.
  • A demotion, on the other hand, is a movement to a more junior role and likely triggered by the underperformance of a worker. Two further common types of a demotion are as a result of a role being made redundant and a worker choosing to accept a more junior, and usually lower-paying role as an alternative to a layoff. The final type is usually driven by a change in personal circumstances, for example a desire to spend more time with the family. By moving to a more junior role, a worker may perhaps reduce their overseas travel commitments or otherwise achieve a less demanding schedule. Common instances of this may be an element of partial retirement, where a worker at retirement age takes a step back from a senior role but remains in the organisation.

Horizontal, or lateral movement, takes place where a worker takes a role of similar seniority in a different part of the organisation. This is typical when applying for a vacancy in another part of the organisation, but may also result from a restructuring exercise, for example the closure of a department and the redeployment of workers to another department.

How do we use organisational churn in workforce planning?

We use the model of organisational churn as a basis to forecast how our workforce will evolve over time.

Recruitment and Internal Movement Modelling: Recruitment and internal movement are organisational choices. Without recruitment, the impact of turnover will gradually whither the organisation; without internal movement, the rate of turnover would likely increase. On this basis, the modelling and forecasting of recruitment and internal movement are completed assuming either of two things. First, that there is no recruitment and/or internal movement; second, that the planned level of recruitment and/or internal movement is maintained. Including recruitment and internal movement at the planned rate can help articulate where the organisation will go if it continues on the current trajectory. Therefore, the basis of this model would either be a continuation of the existing trends or the inclusion of a new planned level.

Modelling recruitment is straightforward in that we are adding new heads to the organisation at our chosen rate:

organisational churn

For example, 100 new workers every 30 days. Modelling internal movement is a little more complicated and I recommend a stochastic model 1, 2, 3 due to the simplicity it can provide. At any given time, each worker has a propensity to move internally; these propensities can be seen as trends in any of our workforce segments.

Creating a model without recruitment and internal movement is the most critical version as these are controllable actions. As a result, modelling the workforce without controllable actions provides the clearest view of our workforce supply and the greatest options for action planning.

Turnover Modelling: There are a variety of options for turnover modelling that trade speed and ease for accuracy. According to the standards for human capital reporting 5, the recommended calculation for the turnover rate is:

organisational churn

The benefit of this approach is that it avoids the outflow of workers being watered down by new hires. Though this approach is highly effective for monthly and even quarterly reporting to support modelling for first and second horizon planning, it becomes problematic beyond then. A study of nearly a quarter of a million workers, found that nearly thirty eight percent of all turnover was attributable to those leaving within their first year . This means that between the start and end of an annual reporting period, over a third of workers will both join and leave the organisation. Using the ISO approach on an annual basis effectively counts the terminations of workers that are not recorded at the start. As a result, I recommend the most common method of calculation:

organisational churn

For a quick model, we can extrapolate the turnover trends and project them forward over the planning horizon. To increase our accuracy, particularly over a longer period, then we need to model based on the correlations of the specific segments. Resignations are probably our largest group of exits and consistent across the workforce. The starting point lies in the existing trends and the rates of resignations for the workforce segments we are examining; this rate can serve as a baseline for resignations in the model. The same approach can also be taken with death in service, unless there has been an outlier incident that has impacted the trend. Dismissals, mutual severance and end of contract data needs to be abstracted from those that result from redundancies, restructures and layoffs. That will calibrate the figures to account for a normal base of workforce performance. The modelling of retirement requires a different approach as, except for ill-health retirement, it is a choice tied to the characteristic of age. To ensure an accurate approach, it is important to segment those workers by age and gender to understand the retirement rates at a more granular level. By applying those rates to the baseline workforce over time, an accurate forecast can be made.

Written by Adam Gibson

Chartered FCIPD FCMI, Strategic Workforce Planning Leader

Click here and use the discount code AHR20 to get 20% off the purchase of Adam Gibson's new book - ‘Agile Workforce Planning.’

References

  1. Haire, M (1967) Managing management manpower, Business Horizons, 10 (4), pp 23-28. Available from doi.org/10.1016/0007-6813(67)90004-3
  2. Merck, J W (1965) A Markovian Model for Projecting Movements of Personnel Through a System, Air Force Systems Command, Texas.
  3. Dill, W R, Gaver, D P & Weber, W L (1966) Models and modelling for manpower planning, Management Science, 13 (4), pp B142-B165. Available from https://doi.org/10.1287/mnsc.13.4.B142
  4. Vroom, V H & MacCrimmon, K R (1968) Toward a stochastic model of managerial careers, Administrative Science Quarterly, 13 (1), pp 26-46. Available from www.jstor.org/stable/2391260
  5. International Organisation for Standardization (2018) ISO 30414:2018 Human resource management - Guidelines for internal and external human capital reporting, ISO, Geneva
  6. Mahan, T F, Nelms, D A, Jeeun, Y, Jackson, A, Hein, M & Moffett, R (2020) 2020 Retention Report: Trends, reasons & wake up call [online], Work Institute. Available from www.workinstitute.com/retention-report/

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