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What is Attrition?

Robinhood LearnJune 18, 2020
Democratize finance for all. Our writers’ work has appeared in The Wall Street Journal, Forbes, the Chicago Tribune, Quartz, the San Francisco Chronicle, and more.
definition

Attrition occurs when a company deliberately doesn’t replace workers who willingly left their jobs — typically in order to reduce staffing or reallocate resources.

🤔 Understanding attrition

Attrition refers to a company choosing not to replace employees who have retired or left the company voluntarily. One reason a company may decide not to fill a vacated position is that it is undergoing financial stress. Consequently, attrition is a possible sign that a company is experiencing financial difficulty. However, economic hardship is not the only motivating force behind attrition. Companies may allow attrition to prepare for a merger or to shift resources from one department to another. A company could also replace jobs with tech solutions so that they don’t need to hire new workers. Attrition in business can also refer to when companies lose customers naturally over time and are unable to recruit as many new customers as they lost.

example

Imagine that a company has a software solution called “Product X” that is nearing the end of its lifespan. The company has already hired a team to develop and support Product X’s successor. As employees who work on Product X retire or leave the company, the company chooses not to replace them, since Product X support is winding down. Attrition occurs because the company doesn’t replace employees who leave.

Takeaway

Attrition is like a dieter trying to lose weight…

Just as a dieter cuts calories by reducing portion size, attrition occurs when a company cuts expenses by not filling open positions. How the employee leaves the company doesn’t matter. It could be voluntary or due to layoffs. However, a dieter is only dieting when they lose calories and don’t replace them. Similarly, a business only experiences attrition when it loses employees and doesn’t replace them.

illo-attrition-desktop mobile (1)

Tell me more...

What is attrition?
How does attrition work?
What are the types of attrition?
What is an attrition rate?
How is the attrition rate calculated?
What is a good attrition rate?
What is the difference between attrition and layoffs?
What is the difference between attrition and turnover?

What is attrition?

Attrition is a process in which companies decrease the total size of their workforce by not filling vacancies. Attrition is the percentage of employees who have left relative to those who are still with the company.

The causes behind attrition vary. First, for attrition to occur, employees must leave the company voluntarily. For example, employees may retire or leave to pursue new job opportunities. (Employee exits can also result through company actions such as layoffs, leaves of absence, and job eliminations — but these are not considered attrition.)

For attrition to occur, the company has to choose not to replace the departed employees. If a company makes new hires to replace those employees, then attrition does not happen.

A related use of attrition is when companies lose more customers than they gain in a certain period through natural processes — such as users of a service aging out of the target demographic. This process is known as “customer attrition” or as “customer churn.”

How does attrition work?

Generally, businesses want to replace employees who are no longer with the company. However, in some circumstances, the company may choose to leave the position open, causing attrition.

For example, companies entering into a merger can often share administrative functions. The new efficiencies reduce the number of people required to get the job done. Consequently, some tasks will be redundant when the merger finishes. So when a merger is expected, a company may not replace employees who leave positions since it is anticipating reducing the number of roles shortly.

Attrition can also occur because the company is experiencing financial difficulties, such as lower revenue or profits.

Attrition happens as long as the company doesn’t fill the positions and doesn’t add an equivalent number of jobs in a different role.

What are the types of attrition?

In staffing, voluntary attrition is caused by employees who willingly leave their jobs at the company. This category includes employees who retire, as well as those who quit.

Another type of attrition is customer attrition. Customer attrition occurs when a company sheds customers naturally at a faster rate than it gains new ones. Customer attrition can occur because the company’s dedicated users are aging out of the consumer base, and it fails to attract new customers.

What is an attrition rate?

An attrition rate is a mathematical description of how many fewer customers or employees a company has at the end of a period. It is useful for comparing a company to itself over different periods, such as years or quarters. It can also be a valuable metric for comparing different companies’ performance. A high attrition rate can indicate that a company is cutting jobs to save money.

How is the attrition rate calculated?

You can calculate the attrition rate by subtracting the number of employees at the end of a period from the number of employees at the start of a period. You then divide this number by the number of employees at the beginning of the period. Then, take the resulting number and multiply it by 100 to get the attrition rate.

Imagine a company had 100 employees at the start of a year. At the end of the year, it only had 80 employees. With those numbers, you’d calculate the attrition rate like this: formula-attrition 01 of 02 ((100-80) / 100) 100 (20 / 100) 100 20%

As a result, the attrition rate for this company for the year would be 20%.

What is a good attrition rate?

Attrition is generally a result of a company looking to streamline its operations. To achieve this goal, it may institute a hiring freeze. As a result, there is no objectively good or bad attrition rate. But, if the attrition rate is high, it may indicate a company is slimming down drastically and could struggle with productivity and performance in the future.

“Attrition” is sometimes conflated with “turnover.” Turnover, or “churn,” describes how many vacated positions the company has had to fill during a specific period of time. It also factors in new hires and compares them to the average number of employees in the company.

Since employee turnover can have high costs, it’s generally considered a good idea to keep turnover low. Many companies strive to achieve 10% employee turnover or less. However, the number is much higher in some industries.

What is the difference between attrition and layoffs?

The difference between attrition and layoffs is that attrition is generally accomplished through employees’ voluntary departures, whereas layoffs are when a company lets employees go.

Attrition is often used to reduce staffing — while avoiding layoffs.

What is the difference between attrition and turnover?

Attrition and turnover are both measurements concerned with employees leaving the company. Attrition deals only with employees who left the company and whose former positions the company hasn’t filled yet.

Turnover, on the other hand, deals with the number of employees who the company has replaced as well as new positions it filled in the same period. A company’s turnover rate can be calculated with the following formula:

formula-attrition 02 of 02

Attrition can only take place when a company ends a period with fewer employees than it had when the period began. However, turnover can happen even if a company hires more employees than it loses in a period.

Attrition often occurs because a company is looking to cut costs, which means it is often a sign of financial stress.

However, turnover happens in almost every company. Very few businesses have no employees leave. Consequently, on its own, turnover isn’t a signal that a company is experiencing financial troubles.

Still, a company’s turnover rate that is abnormally high for the industry may be a sign of other kinds of trouble at the company. A high turnover rate can be a sign that working conditions are bad, or that pay isn’t competitive. If the compensation or the working environment were better, more employees would stay with the company.

Unfortunately, businesspeople sometimes conflate the words “attrition” and “turnover” when discussing turnover. It’s important to remember that attrition occurs when the company doesn’t fill its empty positions. With turnover, the company may or may not fill the seats, or may even hire more employees.

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