The $5 billion Hidden Cost of the 90 day Notice Period!

A deep dive into the fiscal losses that an organisation can face owing to a 90 day Notice Period

As a headhunter, Our work involves hand holding “candidates” through what we call a process or the recruitment journey with our clients. A search is a tedious and time-consuming activity where we first understand the context, the company, the industry, and the role specifications and then scour the market to find the best. Only a few candidates align to the role as well as the culture of our clients. We help ease out the kinks through interactions with the candidates and negotiations with the one who is found to be the best fit.

 The client, the candidates and recruiter by the end of the search process have spent significant time making this happen and the candidate accepts the offer to join the company. And lo and behold, many a times, the candidate eventually backs out. An outcome squarely attributable to a 90 day Notice Period. Here is why? – A long Notice Period means that the candidate has a great opportunity to “better the offer” she has. She shops around courting every potential employer with a sole purpose of finding out if she could bag a higher offer.

A few things to understand here:

What is a long Notice Period?  Anything over 30 days is a long Notice Period. Many organisations of repute have 2 or 3 months of Notice Period

But why do organisations have long Notice Periods? 

2 main reasons:

•  Deter other potential employers from seeking out their employees due to the wait time
•  Ensure there is enough time to transition and not disturb the ongoing work

Is a long Notice Period effective? 

Not really. It actually fails on multiple accounts:

• No Change in Employee Attrition Rate : Employee attrition has not significantly dipped for organisation with longer Notice Periods
• Productivity Loss : in fact, “unproductive” time for organisation has increased because the 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. Employees in a Notice Period are also a source of distraction for other active employees. And no, managerial supervision, systems and process do not keep this in check.
•  Encourages more associates to leave : It is also no secret that most outgoing Employees share their new compensation details (typically 20-50% hike), and this is consumed with much delight by colleagues in India. The longer the Notice Period, the more time he gets to inadvertently influence other colleagues. So, the outgoing employees and his new ‘hiked’ salary range serve as an example or the new salary benchmark to the others. This signals that there are greener pastures outside the walls of the company, and which are within the reach of those inside.    
•  Adverse Impact on Organisational Morale : In many cases the outgoing employees are known to also seed discontent and disharmony, a localised phenomenon over which neither the “management” nor the human resources can exercise much control.

Does it make it difficult for organisations to hire due to a 90 day Notice Period? 

Yes, it does in so many detrimental ways!  

I) Reduced Probability of selected Candidate Joining : When a candidate has a 3-month notice period, the candidate shops around for offers. Most candidates with multiple offers in hand, especially technology professionals, are fairly comfortable speaking to recruiters trying to get an offer which beats their current ones.

II) Disruption in planned activities with Increase in Last Minute Back-outs : Most candidates do not inform the other companies till the very last week of their notice period that they would not be joining. This leads to a huge disruption in the planned activities at the ‘new’ company and the resulting business impact.

III) Disruption in Hiring Costs by another 20-30%: Now incidentally, last minute back-out triggers the recruiter to now prioritise candidates who are currently on notice period and can join within the next 3-4 weeks. What this entails is that the position that could have been filled by giving a candidate say a 25-30% hike over the current salary, ends up being filled by giving additional hike of 20-30% on top of his current offer.

IV) Difficulty in retaining the current employees : Yes, it is almost impossible. The original employer has very little chance of retaining the employee by making a counteroffer because the compensation inevitably has gone out of the whack, due to multiple increments that successive offers bring. Also, even if the employer were to give a counteroffer, superseding all other offers, the employer risks disturbing the morale of the peers of the employee in question (as we already know, salary movements are transparent despite the said confidentiality around them).

Net-net, long notice periods leads to a) Poor predictability of offered candidates joining, b) Increase in hiring costs, c) Decrease in Retention, d) Increase in overall salary levels for the same role and 3) even worse degeneration of hiring to such an extent that most recruitment companies only target candidates on their notice period (i.e the reduce-time-to-join premium rather than the skill & role fit premium).

Quantifying the Financial Impact to IT Services Companies and the Economy

We will use 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 INR 10 Lakhs, the unproductive time costs the company : 10,00,000 * 10 / 52 = INR 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 = INR 904 Cr. or 121 Million USD!

For the IT services industry in India with a 4.36 million workforce this would come to INR 8384 Cr. or $ 1.1 bn!

1.  Additional cost to produce equivalent work – Here let us assume that the fair wage for producing the work is 30% more than the candidate’s current salary of 10 Lakhs, at 13 Lakhs. Now assuming the candidate gets 3 offers, with the first being a substantial 30% and the other 2 a mere 10% over the last, the final offer then stands at 15.73 Lakhs, a good 21% premium over 13 Lakhs, or the fair wage! While the original employer may not be directly impacted by this standalone hike, no employer can remain isolated because:

• Job changes cause a chain reaction and market numbers tend to inflate for all employers
• Sets an eye-catching precedent for other employees, keeping in mind that the outgoing employee now has 3 months to ensure that her good fortune is well advertised.

For TCS, assuming the impact is restricted to only 10% of its workforce (equivalent to its attrition rate), the additional 21% wage bill translates to INR 2,73,000 x 47,000 = INR 1283 Cr. or $ 176 Mn!

Extrapolating this to the IT services industry, this would mean a wage bill increase of INR 11,902 Cr. or $ 1.63 bn!

1. Increased Bench Cost : Business decisions are taken at faster pace than they used to be a decade ago. IT services projects are awarded to companies who can staff immediately and deliver. To be able to compete, win and deliver projects, all players are now forced to carry a substantial bench strength because a 3 month delay in hiring just doesn’t cut it. Typically, such a bench would entail 10% of the organization. For TCS, Let us assume only 50% of this bench strength is attributable to increased notice periods. Assuming an average salary of 10 Lakh INR/, TCS’s outlay increased by 23,500 x 10 Lakhs = INR 2350 Cr or $ 321 Mn. The math can be repeated for every IT services company. India’s IT services alone employs 4.36 million people, which would then translate to an increased cost of $ 3 bn, by the 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 actually joining.
• Loss in predictability in staffing for projects inevitably resulting in loss of reputation for company and country (Contrast this with a 2 week notice in the US, UK or Singapore).

In short, large IT Services Companies have a hidden cost of at least $400-$600 Million dollars 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 dollars annually.

Why are organisations persisting with a 90 day Notice Period? 

Not sure. But most likely the increase in notice periods must have given a one-time attrition reduction benefit, probably decades ago. Also, the HR teams (who typically own the Notice Period related guidelines) are not always challenged to do the attrition and overall impact analytics due to longer notice period. This lack of objectivity has led to a very poor understanding by business leaders of the detrimental effects (Financial, Morale, Business Impact et al) due to this abnormally long notice periods followed in Indian IT industry.

I urge organisations like NASSCOM, TCS, Infosys and others to consider this and review & discard the archaic need for a lengthy notice period. All organisations in the US, UK, Europe and Singapore have very rational 2 to 4 week notice periods, and they still remain competitive and efficient. In fact, the short notice period has made them plan transition, recruitment, training and onboarding more effectively. There is a clear need to evolve with time. Let’s cut the notice period!

Authored by Gaurav Chattur | Managing Director APAC | Catenon| Linkedin Profile

Gaurav Chattur is the MD APAC with a leading executive search and talent consulting firm called Catenon. He has rich experience of working in Strategy, Management and IT consulting with organisations such as Cognizant and Infosys.

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