Written by Katie Lettie, ICIC
Last month at our Inner City Economic Summit in Detroit, a panel discussed two of the major barriers to small business growth in inner cities: access to capital and access to a skilled labor pool. However, research shows that even for businesses that are able to attract qualified workers, a third challenge remains: retention of those workers.
In July 2015, Goldman Sachs 10,000 Small Businesses published its second ever third-party assessment of the program’s impact – Stimulating Small Business Growth. Written by Babson College, this report provided an updated analysis of the program’s impacts and expanded the scope of the first report to include new data on industry breakdown, how program participants are using capital, and the program’s national model. Using the first impact report as a benchmark, Babson’s second report found that while fewer small business owners are reporting access to capital as a challenge, almost 10 percent more business owners have identified hiring and retaining qualified employees at reasonable wages as a primary business challenge. Between the first and second reports, over a span of one and a half years, hiring and retaining a qualified workforce leapt from the fourth most prevalent challenge cited by survey respondents to the second most prevalent, surpassing access to capital and building a strategic business plan.
The Bureau of Labor Statistics confirms the other side of the story in their June 2015 report, which shows that the number of people quitting jobs has increased from 1.8 percent to 1.9 percent over the past year, much higher than the rates during the last recession. This change makes sense within the greater picture of the American economy. Historically, voluntary employee turnover and unemployment have had a strong negative correlation. As unemployment decreases, voluntary employee turnover increases.
Small businesses may be at a disadvantage to larger firms when it comes to retaining employees. Data from the U.S. Census Bureau’s Workforce Indicators analyzed by the Kauffman Foundation show that the rate of employee turnover decreases dramatically as firms get older and larger. Larger corporations are frequently able to offer higher pay, structured professional development and more comprehensive benefits; in addition, employees most frequently cited lack of confidence about the future of the organization as a reason for leaving in a 2012 Hay Group study. This reason for departure may justified with small, new businesses – 50 percent of new businesses fail within the first five years of operation.
While Babson did not report on employee retention numbers for scholars of the 10,000 Small Businesses program, it did report on how many 10,000 Small Businesses graduates are adopting “big business” tactics in an effort to decrease turnover. By implementing formal job training and professional development tracks, and by taking advantage of regional co-ops to provide more expansive benefits at a lower cost to the business, small businesses can put themselves in a better position to retain talent. At 18 months after graduation from the 10,000 Small Businesses program, revenue growth is seen more often by business owners who provide written performance reviews, merit and commission bonuses, training programs and opportunities for development.
Across the board, retention of qualified employees is a barrier to growth. In addition to better leveraging resources and energy otherwise spent recruiting, businesses that successfully reduce turnover frequently benefit from increased productivity. Deloitte estimates that it can cost an employee’s annual salary to find a replacement, and sometimes the costs are even greater for managerial and executive level positions. These estimates don’t take into account the added burden on the employees who remain, cultural impact at the organization or the costs of training a new hire.
Small businesses are often plagued with perceptions that they provide less opportunity, training and compensation. In the inner city, ICIC has shown that the businesses who grow have carefully cultivated firm cultures and processes that allow them to take full advantage of their human capital. 10,000 Small Businesses and other programs work to equip small businesses with the internal structures they need to be successful in attracting and retaining a talented workforce.