$6 billion - the hidden cost of 90-day notice period to companies, economy

The pandemic has turned the talent market more competitive than ever before. Organisations are battling for the top available talent. They want to hold on to industry expertise as long as possible and have sufficient time to search for a replacement if a top employee decides to leave. This situation has led to excruciatingly long notice periods, often unproductive, becoming increasingly common among varied sectors.

Although there is no universal rule as to when you should give a notice period and for how long, high-level leadership positions and highly technical jobs often see a notice period of more than 30 days which can definitely be considered long.

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But why do organisations have long notice periods?

Many organisations believe that long notice periods deter other potential employers from seeking out their employees due to the wait time. Secondly, they also believe a long notice period ensures enough time for work transition. The beliefs have endured because no one has really quantified the impact of these archaic policies, which in reality is quite adverse.

Is a long notice period effective?

A long notice period fails on multiple accounts:

• No change in employee attrition rate: Many organisations often hope to control their retention rates by buying or holding back with a longer notice period. However, this has not shown to have any impact on employee attrition for organisation with longer notice periods.
• Loss of employee productivity: An outgoing employee has very little motivation to contribute to the organisation. Even the most conscientious employees will contribute productively for at most a month, after which they are bound to lose interest. During their notice periods, employees can also be a source of distraction for other active employees.
• Encourages peer departure: Most outgoing employees will share their new compensation details (typically 20-50% hike). So, the outgoing employees and his/her new 'hiked' salary range serve as a new salary benchmark to the others. As more employees get motivated to seek greener pastures, longer notice periods inadvertently end up giving more time to exiting employees to influence other colleagues.
• Adverse impact on organisational morale: Once an employee has decided to leave, they tend to emotionally disconnect. In many cases the outgoing employee may not be exiting on the best note and may thus seed discontent and disharmony. Unfortunately, there is no existing system for the management or the human resources team to exercise much control in such a situation.

Breaking down the financial impact of a long notice period

Let's take the example of an IT services company, say TCS, with a 3-month long notice period, as against a typical 2-week notice period for IT services in the US.

1. Cost of unproductive time: -

• Average unproductive time during the notice period: 10 weeks out of the 12 weeks' notice.
• Assuming average salary of Rs 10 Lakh, the unproductive time costs the company : 10,00,000 X 10/52 ( no. of weeks in a year ) = Rs 1,92,307
• Total cost of unproductive time: Assume 10%, attrition rate, for TCS alone, this translates to 47,000 employees attrited x 192,307/employee = Rs 904 crore or $121 million.

For the IT services industry in India with a 4.36 million workforce this would come to Rs 8,384 crore or $1.1 billion.

Job changes cause a chain reaction and market numbers tend to inflate for all employers. This sets an eye-catching precedent for other employees, keeping in mind that the outgoing employee has three months to ensure that his/her good fortune is well advertised.

Also Read: Unemployment rate rises to 14.5% in week ending May 16: CMIE

Increased bench cost

Business decisions are made at a faster pace than they used to be a decade ago. To be able to compete, win and deliver projects, all players are now forced to carry a substantial bench strength because a three-month delay in hiring just doesn't cut it.

50% of this bench strength is attributable to increased notice periods. Assuming an average salary of Rs 10 lakh, TCS's outlay increased by 23,500 x 10 lakh = Rs 2,350 crore or $321 million. The math can be repeated for every IT services company. India's IT services sector alone employs 4.36 million people, which would then translate to an increased cost of $3 billion.

Typically, such a bench would entail 10% of the organisation. India's IT services sector alone employs 4.36 million people, which would then translate to a mammoth cost by way of direct costs alone (indirect costs such as payroll, engagement, training, management, and seat costs would be over and above this).

Other losses to the company and economy include:

• Increase in recruitment effort by several multiples, given that only 1 out of 2/3 candidates who accept the offer, ends up joining.
• Loss in predictability in staffing for projects inevitably resulting in loss of reputation for company and country (contrast this with a two-week notice in the US, UK or Singapore).

In short, large IT services companies have a hidden cost of at least $400-600 million annually on account of this antiquated concept of long notice period. Similarly, the IT services industry in India is estimated to lose $5-6 billion annually.

In conclusion

Ideally, there is no rationale as to why Indian companies need to have a 90-day notice period. The same organisations that have 90 days as their notice period expect candidates to join within a few weeks which doesn't really add up. There is a critical need for industry bodies and individual players to go back to the whiteboard and relook at the existing notice period rules.

All organisations in the US, UK, Europe and Singapore have a two to four-week notice period, and they remain competitive and efficient. In fact, the short notice period has made them plan transition, recruit, train and onboard more effectively. There is a clear need for Indian organisations to evolve now.

(The author is Managing Director APAC, Catenon.)