How much does labor turnover cost? A case study of Kenyan Small and Medium Tour Operators
1Dr. Angeline Wambui Wambugu
1Management University of Africa
Email: angiekinuthia@yahoo.com
Abstract
The hospitality industry is a service-based industry, which is highly dependent on a customer-focused approach, and a motivated and knowledgeable workforce. Any shift in human capital therefore is viewed as detrimental as its long term success. Research postulates that employee mobility is a major cost and leakage of human capital. In addition, studies have shown that labor turnover affects organizational performance, customer quality and employee productivity. Despite the adverse effect of labor turnover on growth, survival and sustainability of organizations in the hospitality industry, there is limited research on turnover costs. This paper provides an understanding of the turnover rates and direct financial costs of labor turnover in small and medium tour operators. A descriptive research design was used. Primary data was collected using a self- administered questionnaire. Stratified sampling and simple random sampling technique were used to select 30 respondents. The target populations comprised of human resource managers and owner/managers of small and medium tour operators, which are registered with the Kenya Association of Tour Operators and operating in Nairobi and its environs. The study findings indicated that tour operators experienced acute turnover rates, which are much higher than the average turnover rate in service industries. The study findings also revealed substantial replacement costs are attributed to labor turnover in small and medium tour operators. The implications of these findings for managerial practice and suggestions for further research are discussed.
Keywords:- Labor turnover, turnover costs, tour operators, SMEs, Kenya
Introduction
The hospitality industry is a service-based industry, which is highly dependent on a customer-focused approach, and a motivated and knowledgeable workforce (Choi & Dickson, 2009). The industry relies heavily on employees in order to achieve its competitive advantage, and any shift in human capital can be detrimental as its long term success (Ton & Huckman, 2008; Chand & Katou, 2007; Harris, Tang & Tseng, 2002). Research studies suggest that a certain amount of labor turnover is necessary, however an excessive turnover is considered a hindrance to competitiveness and efficiency (Long, Perumal & Ajagbe, 2012). Sut and Chad (2011) found that labor turnover increases economic losses and reduces job efficiency. A study by Deery and Iverson (1996) suggests that labor turnover reduces organizational effectiveness and productivity due to loss of valuable skills, experience, knowledge and “corporate memory”. Furthermore, labor turnover compromises the quality and high standards of customer service, which negatively impacts on an organization’s profitability and long term sustainability (Tracey & Hinkin, 2008).
Hospitality Industry in Kenya
The Kenyan hospitality industry is a bustling industry comprised of various private and public players in various sub-sectors, which ensure that tourists’ needs are catered to in a holistic manner. These sub-sectors include: food and beverage services, transportation, accommodation (hotels), tourist attractions and luxury services. All these sectors are connected by the tour operators and travel agents (Bennett & Schoeman, 2005). Thus, tour operators play an important role in the hospitality industry as they influence tourist flows to Kenya from different destinations (Saffery, Morgan, Tulga & Warren, 2007). The main tasks of tour operators include: negotiation of rates with suppliers, booking accommodation for tourist, assisting in itinerary planning and providing local tour services (Bennett & Schoeman, 2005). Tour operators in Kenya are classified according to their owners, that is, foreign owned, locally owned by Kenyans of foreign origins and locally owned by indigenous entrepreneurs. Majority of the tour organizations are SMEs, earning less than $140,000 per annum (UNCTAD, 2008).
The hospitality industry has experienced significant growth since independence. In 2009, the industry recorded the highest growth rate of 18.6% (ROK, 2009).The continued growth of the hospitality industry is attributed to strong participation and encouragement in commercial ventures, pursuit of policy objectives and attention to non-economic ramifications of tourism and the innovations in major source markets by individual tour operators (Dieke, 1992). Various policy initiatives have been formulated in an effort to actualize flagship projects under Vision 2030. Vision 2030 identifies the hospitality industry as one of the top priority sectors with the tasks of making Kenya one of the top ten long-haul tourist destinations globally (ROK, 2008). Apart from developing the Sessional Paper No. 1 of 2010 on Enhancing Sustainable Tourism in Kenya, the Kenyan government has also developed the Tourism Act 2011 which provides for development, management, marketing and regulation of sustainable tourism and tourism related services.
Statement of the Problem
The National Tourism Strategy 2013 -2018 posits that the hospitality industry which is dominated by SMEs experiences acute labor turnover (ROK, 2013). If high labor turnover is allowed to continue, it will negatively impact SMEs through loss of highly skilled workforce, and ultimately widespread skill gaps among existing staff (Kuria, Wanderi & Ondigi, 2011). This not only results in additional direct and intangible costs for the employer, but also negatively affects the service quality, reputation and the long term survival of SMEs in the hospitality industry (Wafula, Ondari & Lumumba, 2017). The critical shortage of high qualified staff resulting from high labor turnover has prompted considerable research on the causes of high labor turnover and possible solutions for retaining skilled workers (Kuria & Ondigi, 2012).
Cheruiyot, Kimutai and Kemboi (2017) on the effects of employee engagement factors on staff turnover in the Hospitality industry found that organizational justice, leadership and high performance work practices affected employee turnover in hotels within Uasin Gishu County. Korir (2018) in her study on the expected outcome of human resource practices on labour turnover in restaurants in Kenya found that human resources practices (recruitment procedures, promotion and career development, training and development, rewards and benefits, management culture) and socio-demographic factors (age, gender, marital status and level of education) affect labor turnover. Kuria and Ondigi (2012) in a study on assessment of causes of labor turnover in three and five star rated hotels in Kenya found that lack of work-life balance, lack of staff involvement in decision making and creativity, increases of pay in other industries, strong local and regional economy as well as low unemployment on regional economies. Studies on labor turnover amongst tour operators and SMEs are limited (Cavagnaro, Staffieri & Ngesa, 2015; Kim, 2012; Gamage, 2014) and most of these studies in the hospitality industry have been conducted in the accommodation sector, that is, hotels, resorts and restaurants (Hinkin & Tracey, 2006; Derry and Iverson, 1996; Wasmuth & Davis, 1983; Kuria, Ondigi & Wanderi, 2012).
The purpose of this study was therefore to establish the direct costs of labor turnover amongst small and medium tour operators in Kenya. The findings of this study will be critical in shaping HRM practices and the management of labor retention in the hospitality industry. The research findings will also contribute to the development of a policy agenda of the tour and travel operators and the overall Kenyan hospitality industry.
Specific Objectives of the Study
The specific objectives of this study were to:
Assess the extent of labor turnover rate in small and medium tour operators in Kenya.
Establish the direct costs of labor turnover in small and medium tour operators in Kenya.
Concept of Labor Turnover
Labor turnover is defined as “the movement of people into and out of employment within an organization” (Denvir & McMahon, 1992). Labour turnover refers to the proportion of employees who leave an organization over a set period, expressed as a percentage of total workforce numbers (CIPD, 2014). The term “ turnover” is defined by Price (1977) as the ratio of the number of organizational members who have left during the period in consideration divided by the average number of people in that organization during the period. A zero percent labour turnover rate in any industry is rare, and it should not be the priority of management (Reigel, 1995). Researchers argue that regardless of good retention strategies, organizations cannot retain ‘all their employees, all the time’ due to death, ill health, changes in an employee’s personal circumstances or for other reasons that have little to do with the employer organization. However, a high labor turnover may be detrimental to the survival and long term sustainability of an organization (Armstrong, 2009).
Labor turnover in the hospitality industry is mainly voluntary where employees leave employment at their will (Wright & Bonett, 2007). Voluntary turnover is either functional or dysfunctional. Functional turnover occurs when non-performers, relatively expensive employees and those with obsolete skills quit the organization. Some level of functional turnover is desirable as it allows organizations to bring in “new blood” with new innovative ideas and knowledge. In addition, labor turnover creates opportunities for career advancement for existing employees as they grow into roles of greater responsibilities. Dysfunctional turnover, on the other hand, represents an exodus of human capital investment from the organizations as it refers to the exit of effective performers, key individuals, innovators and individuals whose skills are difficult to fill with new hires (Walsh & Taylor, 2007).
Calculating the Labor Turnover rate
The rate of turnover is a good indicator of the morale of the employees. Mercer (1988) suggested the following formula for calculating the rate of turnover:
Fluctuation rate = number of leavers during the calculation period X 100
Average number of employees
Tangible Costs of Labor Turnover
Labor turnover has wide cost ramifications (Davidson, Timo & Wang, 2009). The cost of turnover varies based on complexity of the jobs, experience, skills, location of the organization, employee relations, HR practices and organizational culture (Fair, 1992). Every time an employee leaves and has to be replaced, an organization incurs a number of direct and indirect costs: costs of separation, cost of replacement staffing, hiring costs, lost sales, low employee morale, pressure on remaining staff and loss of social capital (Hinkin & Traacey, 2006; Dess & Shaw, 2001). In addition to these costs, the organization incurs intangible costs associated with productivity costs (Lashley & Chaplain, 1999). Productivity costs are more difficult to quantify and usually accounf for more than two-thirds of the total turnover cost (Hinkin & Tracey, 2008). This study was based on the turnover costs components model adapted from Cascio (2000) modified as shown in Figure 1. The theoretical model distributes the cost of turnover into several categories: costs of the employees leaving the organization, costs of replacement and costs for employee training and development.
Separation costs included administration costs associated with processing resignations, and dismissals, time taken up with conducting exit interviews, severance pay, benefits and gratuities. Recruitment costs constituted the cost of advertising, employment of job search agencies, time and resources spent in processing applications, staff time, travel costs and re-location for successful applicants; training and start-up costs (Cascio, 2000). Selection costs included HR interview, medical examination, applicant’s travel, and background or reference checks. Hiring costs included costs of induction, relocation, orientation, training, uniforms, security, information and literature necessary for new applicant. Productivity costs are defined as costs incurred when “the replacement worker has a lower skill level or needs to learn the job in order to reach the level of productivity of the original worker”. Literature on the turnover cost reveal that the cost of replacing workers is high, and that it can unambiguously reduce profits if not managed properly (Kersley and Martin, 1997; Denvir & Mcmahon, 1992). Tziner and Birati (1996) found that it costs at least 30 per cent of annual salary to replace a “base level” employee, rising to 150 per cent of annual salary for professional and managers. A study by Abel-Hamid (1989) found that labor turnover can extend a project’s cost and duration by as much as 60 per cent. Hinkin and Tracey (2008) found that lost productivity resulting from labor turnover may account for more than two-thirds of the total turnover cost.
Conceptual Framework of Labor Turnover Costs
Figure 1: Conceptual Framework. Adapted from Cascio (2000) Costing Model of Employee Turnover
Research Methodology
For purposes of this study, tour operators are defined as intermediaries who organize and put together holiday packages which include: arranging travel services, transport and accommodation booking (Bennett & Schoeman, 2005). The study considered both voluntary turnover and involuntary turnover of employees who left during the period of one year. The study adopted a descriptive research design. The target population included owner/managers and human resource (HR) managers of small and medium tour operators registered with Kenya Association of Tour Operators (KATO) operating within Nairobi and its environs. Stratified sampling and simple random sampling were used in the study. Stratified sampling was done on the basis of number of employees, that is, small and medium. Simple random sampling was used to select a representative sample of 30 respondents. The sampling frame consisted of 300 tour operators who were active KATO members.
Primary data was collected by means of a self – administered, semi structured questionnaire. The respondents were assured of utmost confidentiality of their responses and anonymity of the source of the information (Kothari, 2004). The questionnaires were pre-tested on 10 enterprises through convenience sampling technique. After the pre-test, any items in the questionnaire that could cause bias were modified or omitted (Mugenda & Mugenda, 2003). The study employed descriptive statistics to analyze the data. Primary data was coded, edited and then analyzed using the Statistical Package for Social Sciences (SPSS) version 20. The findings were presented in form of frequency tables and percentages.
Research Findings and Discussion
Assessment of the labor turnover levels in small and medium tour operators
The study sought to find out the labor turnover rate in small and medium tour operators in Kenya for a period covering 12 months. The study findings revealed that the majority (63%) of the respondents had experienced high levels of labor turnover, while 27% had experienced medium levels of turnover, another 10% had low levels of labor turnover. The study findings also indicated a turnover rate of 66.7% for employees at operational level and a rate of 33.3% for employees at managerial level. The study findings demonstrated that most of the small and medium tour operators in Kenya experienced high labor turnover. In addition, that the turnover rate of employees at operational level was higher than the turnover rate of employees at managerial level. The result is in agreement with the findings in a study by Davidson, Timo and Wang (2009) which found that labor turnover rate of 50.74% in Australian accommodation industry was higher than expected, and that the turnover rate was lower amongst executives, supervisors and departmental managers than in other employment categories.
Employee Turnover Cost Analysis
The study sought to establish the direct costs of the small and medium tour operators within a period of one year. The study findings as shown in Table 1 revealed that replacement costs constituted 57.8% of the total turnover cost compared to separation costs which constituted 22.4% of the total turnover costs. Training costs comprised only 19.8% of the total turnover costs. The study findings showed that the average total cost of turnover was Kshs 57,710,000/=. Finally, the study findings indicate significant difference in two costs: screening and entrance interviewing (17.4%) and formal training (5.2%).
The findings revealed that the average direct cost of labour turnover was substantial which may lead to an increase in administrative costs of small and medium tour operators in Kenya. In addition, the results revealed that small and medium tour operators were spending more money in testing the knowledge, skills and abilities of employees to ensure that a qualified candidate was hired and less money is being invested in formal training of newly hired employees. The study results are inconsistent with the findings of a study by McKinney, Bartlett and Mulvaney (2007) which found that separation costs were higher than replacement costs of employees in Illinois Public Park and recreation offices.
Table 1: Average cost of replacing employees per annum
|
Type |
Expense |
Costs per annum in KES |
Percentage |
|
Replacement costs |
Advertisement |
6,000,000 |
10.4 |
|
Screening and entrance interviewing |
10, 050,000 |
17.4 |
|
|
Interview expenses |
4,700,000 |
8.1 |
|
|
Reference/background checks |
3,450,000 |
6.0 |
|
|
Pre-employment testing |
5,575,000 |
9.7 |
|
|
Appointment procedures for new hires |
3,585,000 |
6.2 |
|
|
Separation costs |
Severance pay |
5,300,000 |
9.2 |
|
Exit interview costs |
3,400,000 |
5.9 |
|
|
Administrative costs |
4,200,000 |
7.3 |
|
|
Training costs |
Informative literature |
3,600,000 |
6.2 |
|
Formal training |
3,000,000 |
5.2 |
|
|
Informal training |
4,850,000 |
8.4 |
|
|
Total |
57,710,000 |
100 |
Conclusion and Recommendation
From the study findings, it can be concluded that the overall cost of labor turnover small and medium tour operators is high. It can also be concluded that employees in the operational level are more likely to quit their organizations than employees in the managerial level. Finally, it can be concluded that high replacement costs are attributed to labor turnover in small and medium tour operators in Kenya. It is recommended that small and medium tour operators need to calculate the costs of labor turnover and deal with wastage levels through reforming internal HR practices.
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How much does labor turnover cost? A case study of Kenyan Small and Medium Tour Operators