Economic Model for Optimum Attrition Rate

Volume 17, Number 2 Article by Ashutosh Kulshreshtha and Krishna Kumar T June, 2005

Economic Model for Optimum Attrition Rate :

The high attrition rate is one of the most persistent problems in the BPO industry. While most experts are dismayed by the situation, the opposing view is that some degree of attrition may be necessary for the organisation. The important questions to ask therefore are: What is an optimum rate of attrition? When should one be alarmed at the attrition rates?

Opining that for an organisation a limited rate of attrition is not only acceptable but also optimal, Ashutosh Kulshreshtha and T Krishna Kumar develop a simple theoretical model for employee contribution and compensation, looking at the problem of attrition from a purely economic point of view. The model, based on the characteristics of the employee and the organisational environment, allows them to derive a time-to-stay that maximises the net payoffs for the employer, and in turn, the employee. They argue that this is the optimum and stable time-to-stay (or rate of attrition) for the employee. Generalising the employee characteristics to the set of employees working in the organisation, the optimum rate of attrition for the organisation, and further for the industry, can be estimated. The practical utility of the model is twofold. It introduces the concept of optimum attrition rate, which is a deviation from the popular belief that the attrition rate should be as small as possible, ideally zero. It provides insights into the relations between the rate of attrition and the characteristics of the organisation and the employee, which can be aligned with the business objectives of the organisation.

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