Understanding attrition in business

Part of building a robust, productive workforce is understanding how to anticipate and respond to attrition. Employee attrition describes a reduction in staff and customer attrition describes a shrinking customer base – knowing how to identify and measure both, understanding why it happens, and managing attrition proactively will help your organisation identify its weaknesses and maintain its strengths.

What does attrition mean?

Employee attrition is a term used in business to describe a reduction in staff through natural progression like retirement, redundancy, or resignation, wherein the departing employees are not replaced. This is different to employee turnover where an employee either voluntarily chooses to leave the organisation or is terminated from their position, with the organisation intending to find a replacement.

Attrition might also refer to the loss of customers or clients without a new customer base developing.

Attrition can sometimes be less an effect and more a cause – a strategy used by businesses to reduce labour costs and tighten the workforce without having to lay people off. This intentional, strategic kind of attrition is typically initiated through a hiring freeze. An organisation will pause any new recruitment, knowing that a number of employees are due to retire or resign in the near future.

Organisations are willing to let attrition happen because it can help cut costs in a way that has less of a negative impact on morale.

Attrition isn’t necessarily only a result of employee resignation or retirement – it can occur as a result of layoffs, but only if the organisation doesn’t immediately replace the departed employees with new hires. If the newly vacant position is filled, this is turnover, not employee attrition.  

Attrition as a result of layoffs may be because an organisation is facing financial issues and must reduce its workforce to survive – in other words, downsizing.

What is attrition rate?

An attrition rate is a calculation used by businesses, typically HR departments, to measure an organisation’s ability to retain staff or customers. It is also known as churn rate.

Customer attrition rate is calculated by taking the number of customers lost by the end of a designated period and dividing it by the total number of customers at the beginning of the period. Customer attrition and retention rates are often presented as percentages.

For example, if an organisation had 1,000 customers at the start of the month and ended the month with 750 customers, you’d first want to subtract 750 from 1,000 to find the number of customers lost: 250. You’d then divide 250 by 1000 – 0.25 – and convert this to a percentage, so the customer attrition rate is 25%.

Adding customer attrition rate, customer retention rate and customer acquisition rate would give you 100%.

Customer attrition rate can be an important figure for organisations to assess their success. For most businesses, keeping your current customers is just as, if not more vital, than gaining new ones. Keeping track of customer attrition is a good way to help identify weaknesses and provides a good metric to help define or reinforce company goals.

It’s important to measure staff attrition rate so you can gain a better understanding of why people are leaving, and devise retention strategies based on real data.

The calculation for employee attrition is similar to customer attrition rate.

1. First work out the number of employees who have left in a month (‘separations’).

2. Then, work out the average number of employees by adding the number of employees at the start of the month and the number of employees at the end of the month, and dividing the result by 2.

3. Then, take the employee average and divide it by number of separations, and multiply this figure by 100.

This doesn’t need to be calculated based on a month-long period, in fact measuring annual attrition rate likely paints a more useful picture.

Suppose a company had 320 employees at the start of the year, and over the course of that year, 12 employees left and 4 were hired. First, subtract 12 from 320, which gives you 308. Then, add 4 to get 312. This is the number of employees at the end of the year. Add 312 to 320 and divide by 2 to get the employee average, which is 316. Divide the number of separations, 12, by the employee average, 316, and multiply the result by 100. The result is an employee attrition rate of 3.79%.

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