The impact of departing employees on firm performance

Originally posted on The Horizons Tracker.

While organizations have long touted employees to be their most valuable resource, many continue to be blindsided by unanticipated departures. It’s a problem that researchers¹ from INSEAD believe demands a strategic response.

There has been much research to highlight the competitive advantages human capital can provide to an organization, and so it stands to reason that much thought has been given to understanding the various factors that influence someone’s decision to depart their employer.

Chicken and egg

The INSEAD researchers ponder, however, whether it’s the poor firm performance that results in employees leaving, or employees leaving that results in firm performance declining.  The study suggests that there is a clear link between employee departures and a decline in firm performance, with this connection amplified by the strength of the relationship between the employee and employer.

The researchers examined around 9,500 data points in the United States over a six-year period that included the Fukashima nuclear disaster in the middle.  Nearly 800 firms were located within 80km of a nuclear plant in the US, with a control group of equal size located up to 240km away.

The findings illustrate how no matter how much firms invest in employee engagement and development, they can often be blindsided by unforeseen events, such as the Fukushima incident, which created significant concern among the public about the safety of the sector and indeed on the potential implications for the surrounding region.  The data revealed significant employee departures from firms in the vicinity of US nuclear plants.

Negative impact

Interestingly, while many firms experienced such departures, not all were negatively impacted by them.  There appeared to be a direct link between the amount of investment in employees and the subsequent impact of any departures on the firm’s performance.  It transpires that the more firms invest in their workforce, the more they’re impacted by their subsequent departure.

This is often as a result of firms being able to invest in human resources but largely not control it.  They cannot stop people from leaving after they have invested in them, but the hope is inevitably that investing in staff will foster a degree of loyalty.  That this investment also helps to promote engagement, innovation, motivation, and efficiency is also a positive outcome.

It can, however, also create a downward spiral for the firm in the sense that losing even a single highly valued employee can significantly disrupt established routines and make it harder for remaining employees to be as productive.  This in turn can dampen morale and cause anxiety.

While these findings perhaps shouldn’t be taken to mean that firms should not invest in their employees, they should nonetheless be aware of the potential for extreme events to undermine some of their efforts, with the authors highlighting the potential for Covid to be just such an event.

The authors argue that this risk can be mitigated if companies approach human capital more strategically so that seemingly unanticipated external risks can be evaluated and managed ahead of time and appropriate risk management strategies deployed.

Article source: The Impact Of Departing Employees On Firm Performance.

Header image source: Mohamed Hassan on Pixabay, Public Domain.

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