Some attrition is healthy. Managers want under-performers to leave; often creating conditions to encourage them to leave or simply releasing them. In an ideal situation, managers are able to predict how much money to allocate for recruiting, hiring and training new workers.

Yet, at the current levels in India, attrition gives cause for alarm. Attrition levels in the Indian BPO industry today hang in the 30%–60% range. The Hay Group, in its recent report titled Managing Attrition in BPO Companies: A Strategic Priority, states, “Some [BPO] companies [in India] would see their entire employee base being replaced over a single year.” The results can have a devastating impact on customer costs, quality, schedules and the knowledge base of your company. Of course, it also hurts the service provider because the worker churn undermines both profit margin and quality of service.

The report breaks down attrition rates by processes, citing a 60% attrition level in voice-based BPO companies, 28% in non-voice low-end BPO companies and 28% in non-voice high-end BPO companies. The picture, though, is much better in the IT outsourcing industry. Still, these numbers indicate that service-provider companies have to constantly invest in recruitment and training, which eventually gets passed into the price of the service. In the case of a captive setup, this churn factor is a direct expense.

The cost of high attrition is staggering. According to the Hay Group study, voice-based BPO companies spend as much as 76% of an employee’s annual salary or 27% of their annual operating expense to ensure business as usual by recruiting, hiring and training new workers. The corresponding numbers for non-voice high-end BPO companies are 93% and 9%.

The other equally important, though less tangible, impact of turnover is how it affects customer satisfaction, delivery schedules, productivity and process knowledge. Any new hire faces a learning curve before he reaches an acceptable productivity rate. So, each time workers assigned to an account leave, there’s a dip in the productivity level of the offshore team.

“You can’t have people constantly churning,” says Mukesh Mehta, SVP, Director of Global Services at Wachovia. “It’s like your own staff constantly leaving.”

Peter Nag, VP and member of the Global PMO, Lehman Brothers, gives a specific example of loss of knowledge. “After about one year, employees acquire domain skills, and become very marketable,” says Nag. “That’s when managers have to watch out for attrition. For example, if a database administrator who has learned the fixed income or equity business leaves, then it becomes an issue.”