4. When Turnover Hurts -How Employee Exit Damages Performance in the Banking Industry?

                                  

Theoretically, an outflow and inflow of people in an organization can resemble a common cycle. As a matter of fact, high turnover will nearly invariably leave a performance scar behind, in particular in knowledge- and service-intensive industries like banking. Scholarly studies in a number of decades indicate an overall negative correlation between turnover and organizational performance, whereas banking-based studies present an extremely tangible impact on customers, efficiency and competitiveness (Park and Shaw, 2013; Asamoah, 2013).

This blog considers the issue of turnover as a threat to performance, especially in the case of banks.

4.1 What the Evidence Says: Turnover and Performance Are Enemies most of the time.

Huge meta-analyses provide a big picture message. Park and Shaw (2013) analyzed more than 300 correlations and discovered that the overall turnover rates have a significant negative correlation with the organisational performance ( rho = -0.15), but voluntary turnover and reduction-in-force turnover have even a stronger negative impact than others. The conclusions made by Hancock et al. (2013) are similar because according to the author, collective turnover had a tendency to predict lower performance in various industries and measures of outcome.

Hausknecht (2017) review on collective turnover supports this image: at the group or unit level, the high turnover is usually related to the less productive performance, worse customer performance and poor financial results. Heavey et al. (2013) further contribute by stating that the negative impacts tend to be greater in cases where the proximal outcomes (such as operational efficiency and customer service) are used compared to the more distal outcomes such as long-term profitability.

Thus, although a degree of movement is a good thing, high turnover is generally a poor business concept.

4.2  Direct and Hidden Financial Costs.

 

Financial is the most obvious effect of turnover. Whenever an employee leaves, the organisation will have to pay:

•           Recruitment and advertisement.

•           Selection (screening, interviewing, testing)

•           Medicals and onboarding

•           Training and supervision in the very beginning.

These are particularly high in the banking positions where the position needs to be vetted by the regulators, have security clearance and be trained on the technical system with its complexities. Researchers always point out that high turnover increases the operating expenses since the company will always be paying to recoup the human capital invested in the organisation (Ongori, 2007; Hancock et al., 2013).

Over and above direct expenses, indirect losses exist: unfilled vacancies cause delays, current employees have to work overtime, and new employees need time to achieve full performance. Turnover in the front office will result in lost revenues within a short period, as customers lose their business with the bank because they receive slower service and delay.

4.3  Less Customer, Less Strong Service: Customer Side.

Service-profit chain claims that employee satisfaction and retention leads to improved service, which consequently leads to improved customer loyalty and profitability (Heskett et al., 1994). This chain is disrupted when the employees have a high turnover rate.

This concept receives empirical expression in banking. Research on the employees of a private banking revealed that employees felt that turnover decreased the number of clients, caused inefficiency, and adversely influenced the overall organizational performance and growth. In the study of the banks in Ghana, Asamoah (2013) reported that, the banks having low employee turnover are better and more competitive than those having a higher employee turnover, partly because the stable staff can develop stronger customer relationship and provide a stable service quality.

When a reputable relationship manager or branch officer departs, the bank will lose not only an employee, but also:

•           Trust and familiarity by the customer.

•           Cross-selling prospects.

•           Word-of-mouth promotion, which is useful.

Customers who are not satisfied, in competitive banking markets, can easily transfer to other competitive banks. Therefore, the turnover has a direct risk to the revenue and market share.

 

4.4  Directed and Interrupted Operations and Reduced Productivity.

 

High turnover is operationally destructive to efficiency. The seasoned personnel are familiar with systems,, how to deal with exceptions and how to liaise with other departments. New employees especially those who are well qualified paper wise, often lack such tacit knowledge when they leave.

Research into group turnover indicates that turnover rates are limiting overall productivity of a unit, as they must work below their potential due to a large number of exits (Hausknecht and Holwerda, 2013). In banking, this shows up as:

•           Prolonged loan and account opening process.

•           Greater number of mistakes in data entry and documentation.

•           More rework and follow-up.

•           Critical back-office process bottlenecks.

These inefficiencies are not internal issues only. They destroy customer experience and postpone revenue recognition and create operational risk.

 

4.5  Increased risk as well as compliance exposure.

 

Banks work in one of the most controlled fields of any business. Credit analysis, anti-money-laundering (AML), internal audit and operational risk are functions that need profound expertise and good judgement. Risk system may be weakened by the high turnover within these positions.

Less experienced staff may:

•           Inability to identify suspicious patterns of transactions.

•           Since it misunderstands complicated regulatory needs.

•           Late credit deterioration indicators.

The Basel Committee on Banking Supervision has reiterated on the significance of the experienced personnel and good risk culture in proper management of operational risk (BCBS, 2011). High turnover contradicts these objectives, creating the risk of fines, reputational losses, and more.

This implies in practice that turnover management is not only an HR issue but it is also a risk-management issue.

 

4.6  Morale, Culture and the “Spiral” Effect.

 

The result of turnover is also on the remaining ones. In cases where employees observe competent colleagues exit on a regular basis, the employees tend to conclude that:

•           The organization might not be an excellent place to work in long term.

•           Both their personal workload will be increased.

•           Management is not executing underlying problems.

This decreases enthusiasm and interest. According to Hancock et al. (2013), high collective turnover may undermine the team cohesion and trust, further damaging performance. The same researcher, Heavey et al. (2013) note that the adverse effect of turnover on performance is partially mediated by the decreased level of job embeddedness and poor social networking.

The outcome is a vicious circle whereby a high turnover increases stress and decreases morale which in turn makes more people contemplate leaving. In the long run, this may be very harmful to the organization climate and the brand of the employer.

 

4.7 Strategic Disruption, Projects, Innovation and Change.

In addition to the normal day to day running, turnover can sabotage strategic plans. The banks worldwide are working on significant projects: digital transformation, core system upgrades, new product launches and regulatory responsiveness. These projects also require cross-functional teams to remain long enough to design solutions, test and refine them.

In case of resignation of key team members in the middle of the project, the knowledge is lost and time lines are lost and quality of design may be compromised. Hausknecht (2017) points out that the negative impact of turnover due to the constant shifts in team composition is aggravated by dynamic member arrangements. Such instability in banking can translate to opportunities and poor execution of essential change programs because technology and regulation are changing at a high rate.

 

4.8  Is Turnover Always Bad? 

Not all turnover is harmful. There are two types of turnover according to research: functional and dysfunctional. Functional turnover is when the chronic under-performers or chronic misfits quit and this might enhance the overall performance. There are also organizations that even promote high turnover in lowest performers with the intention of sprucing up teams and improving standards. Indicatively, recent case reports on the work of the Lloyds Banking Group in the UK address the attempts to artificially raise turnover of the lowest 5 percent of the employees as one of the steps to establishing a high-performance culture.

In meta-analyses it is also implied that the turnover performance relation can be curvilinear: low turnover can restrict the introduction of new ideas, but high turnover is certainly harmful (Park and Shaw, 2013; Hancock et al., 2013).

Nevertheless, that is not the primary practical problem in most actual banking settings, where it is not too little turnover, but rather too much turnover in key and high functioning areas. The fact is that the evidence continues to be strong in that uncontrollable high turnover is a factor that affects performance in a negative way.

References

Asamoah, E.S. (2013) ‘The effect of employee turnover on the performance and competitiveness of banks in Ghana’, International Journal of Contemporary Management, 12(3), pp. 1–18.

Basel Committee on Banking Supervision (BCBS) (2011) Principles for the sound management of operational risk. Basel: Bank for International Settlements.

Hancock, J.I., Allen, D.G., Bosco, F.A., McDaniel, K.R. and Pierce, C.A. (2013) ‘Meta-analytic review of employee turnover as a predictor of firm performance’, Journal of Management, 39(3), pp. 573–603.

Hausknecht, J.P. (2017) ‘Collective turnover at the group, unit, and organizational levels: Evidence, issues, and implications’, Annual Review of Organizational Psychology and Organizational Behavior, 4, pp. 527–544.

Hausknecht, J.P. and Holwerda, J.A. (2013) ‘When does collective turnover matter? Dynamic member configurations, productive capacity, and collective performance’, Journal of Applied Psychology, 98(6), pp. 1067–1076.

Heavey, A.L., Holwerda, J.A. and Hausknecht, J.P. (2013) ‘Causes and consequences of collective turnover: A meta-analytic review’, Journal of Applied Psychology, 98(3), pp. 412–453.

Heskett, J.L., Jones, T.O., Loveman, G.W., Sasser, W.E. and Schlesinger, L.A. (1994) ‘Putting the service-profit chain to work’, Harvard Business Review, 72(2), pp. 164–174.

Ongori, H. (2007) ‘A review of the literature on employee turnover’, African Journal of Business Management, 1(3), pp. 49–54.

Park, T.Y. and Shaw, J.D. (2013) ‘Turnover rates and organizational performance: A meta-analysis’, Journal of Management, 39(1), pp. 184–214.