By Tarun George
Employee churn, or attrition, is one of the most controversial issues in Latin American offshoring. With varying opinions on how it’s calculated, how much it affects the sourcing relationship, and how it should be dealt with, there tends to be a lot of misinformation out there.
Fortunately we at Nearshore Americas thrive on topics like this, and we are taking a deep dive into the topic here hoping you come away with better tools to assess your partner relationships.
Read more to hear how key Americas sourcing leaders tackle churn.
Churn is a touchy subject because customers have relatively little control over it as compared to other aspects of their outsourcing operation. Labor costs, infrastructure, language proficiency, access to talent – these can all be factored into the decision to set up in a new location. But with attrition, companies are often operating with imperfect data, or have a superficial understanding of how it will affect their business. They find out the real story about the churn rate six months into a new venture. It doesn’t help that government attrition rates are often deflated either. Sometimes the only accurate information comes from the people on the ground.
We spoke with Enrique Cortes, Vice President of Dell Services for Latin America. He’s based in Guadalajara, Mexico, where he runs one of Dell’s new development centers. We asked him what his numbers were like. “My voluntary attrition is 4% annually”, he says. “Even better, my voluntary attrition at the lowest level (in functions like service desk or administration) is zero”. In a region where average attrition for operations like his is 12% or more, that’s very good. Cortes believes that companies must define at the outset what their acceptable churn rate is, and have clear strategies to keep it at that level.
The Reality Behind Churn
We all know the basic calculation for annual attrition (number of employees who left, divided by the average number of employees). But in today’s changing BPO scene, that doesn’t cut it anymore. Providers and even governments determine churn in all sorts of ways; it’s crucial to know what the number being quoted at you really represents. “The game some vendors play is to give you their attrition, but exclude freshers with less than six months of service. Of course the rate is low”, says Cortes. “You as the customer should define churn specifically, and make sure you’re getting those stats in your due diligence”.
While it’s good to know overall turnover, Cortes urges companies to go specific and distinguish between voluntary and involuntary attrition. Voluntary attrition is employees who leave of their own accord; involuntary occurs when management itself decides to end the relationship. Clearly the first is worse, while the second may be a valid source of churn. Ideally both would be minimized, but it’s really the voluntary churn that you should focus on – workers who depart for better prospects or because they aren’t happy, leaving you struggling to fill the gaps.
Attrition does have the potential to kill your business. It drives up training, recruiting and productivity costs, which are sometimes high enough to override the benefits of lower wages in a country.
When Should I be Worried?
A high churn rate is never a good thing, but the extent to which it impacts the client’s experience at the end of the line depends on the industry you’re in. “The more complex the service being performed, the more attrition matters”, says Rodolfo Salazar, Americas Marketing Director at Stream Global Services. “Sometimes basic sales reps need to be ‘refreshed’, and that has no impact on performance. But for upper end value-added services a high attrition rate can cripple you”.
Brad DeMent, leader of LATAM shared services at ScottMadden Consulting, adds that due to technology the industries in which churn matters are not the ones you would think. “HR outsourcing is in theory a very interactive high-touch position, but I can put word-for-word scripts in front of the employee and he’ll be fine. But 15 years ago if I lost that worker, I’d have to find someone who knew a lot about HR, or train a new guy”.
So before you lose sleep over your churn rate, stop to consider how much it really affects your business. The general LATAM range we’ve seen is 8-25%, and that higher churn may in fact be acceptable depending on the service you’re providing. There is such a thing as a healthy churn rate – it’s important to come up with your expectations and stick to them.
Impact on the Relationship
Attrition does have the potential to kill your business. It drives up training, recruiting and productivity costs, which are sometimes high enough to override the benefits of lower wages in a country. “Companies spend a lot of time and money finding the right people and transferring knowledge of BPO, skills and financial structures”, says Ricardo Asse, Market Development Director at Brasscom. “If you then lose those people, you may need two or three months to get back to where you started”. He also mentions security and intellectual property concerns, especially in financial services.
For Cortes, it’s all about customer satisfaction. “Churn creates customer anxiety because there is no continuity in the service you provide. And if you’re not careful, costs to the provider are passed on to the customer”. Especially for long term projects, attrition increases customer service complaints and quality issues, and permanently damages the sourcing relationship.
“Sao Paulo, Buenos Aires, Monterrey and Santiago all have a high concentration of IT companies, large demand for skilled workers, and so also high churn” – Brad DeMent, ScottMadden
Cortes says that he achieves a low churn by encouraging workers to build a career instead of just a job. “We tell them, ‘You are beginning your career with Dell. If you stay committed, we’ll move you up’. We make it a good place to work, so even if they’re offered a better wage elsewhere, they stay with us”. Brad DeMent also points to low employee morale and decreased productivity as telltale signs of increased churning – “These are things that don’t show up on a spreadsheet. But we need to be aware of them”.
In terms of site selection, there are also warning signs. On a macro-level, look at how developed a country’s BPO market is. For countries newer to the scene like Nicaragua or El Salvador the job-creation potential of an outsourcing company is huge, and workers tend to see it as a real career opportunity. But countries like Brazil or Mexico that have been in the market for years have higher churn rates because workers have more choice of workplace. High wage inflation is definitely a cause of job-hopping workers with only superficial loyalties to a team or a vendor.
Since churn rates vary enormously within countries, it’s often constructive to look at specific cities. “Sao Paulo, Buenos Aires, Monterrey and Santiago all have a high concentration of IT companies, large demand for skilled workers, and so also high churn”, says DeMent. Cities with very educated workers like San Jose and Bogota are the same. The close proximity of employers going after the same skill set leads to intense competition with higher wages, a shrinking talent pool and ultimately, employees jumping from company to company.
When it comes down to it, attrition is just one aspect of your outsourcing decision. As in India (the Land of the Churn), it may be balanced out by other factors that still give you a good profit margin. “I lived in India”, says Cortes. “Churn there is managed. But in Latin America, churn is minimized. We understand our vendors’ attrition rates, and find strategies to keep them in check.”