You are the Vice President of Human Resources for Colossal Health System. The Chief Operating Officer (your boss) has sent you the following email, which states, Please provide details on the $1.53M budget line item. In response, you will prepare a brief memo to the COO, providing your analysis of the $1,530,000 you spent on a turnover reduction program. The basic question you need to answer is this: did the financial savings associated with a reduction in employee turnover exceed the cost of the program ($1,530,000)?

? Your analysis should be based on the attached data, which indicates that there are cash costs associated with voluntary turnover (the separation, replacement, and training costs) as well costs related to reduced productivity.

? You will need to calculate the savings, taking into account (i) the cash savings only and (ii) the cash and the productivity savings together. These calculations must be correct.

? Your final analysis of whether the result was worth the expenditure is based on your interpretation of the savings as determined by the two methods of calculating the savings (which requires that you reconcile the two figures).

Your memo must be appropriate in tone, format and content. You are writing to a senior executive; not your BFF. Your COO happens to be very detail-oriented, is very focused on results, and believes that any business argument should be backed up with facts and financials. She is also very, very busy. Your memo should make it easy for her to identify your conclusions. She should be able to easily understand your overall approach in analyzing the data, and be able to quickly check your numbers.

? You might include an attachment that allows her to visualize your analysis, including explanations that walk her through your calculations and assumptions.

? You should assume that your COO knows only that you have spent $1,530,000; whatever else she learns should be in your memo.

? If you use tables presenting information, they should be perfectly clear and self-explanatory. Your COO will not be amused if you give her a bunch of numbers and leave it to her to figure out where they came from, what they mean, or how they should be interpreted.

Hint: Before you start calculating the numbers, think very carefully about the question that you want to answer! This is the most important part of the assignment.

1

Colossal Health System

The health care industry has undergone dramatic change and restructuring during the past decade. Mergers, consolidations, and downsizing are the norm as organizations struggle to provide more cost-effective, high- quality services demanded by health insurers and corporate employers. A major response to these pressures has been the development of "integrated health care delivery systems" which typically combine multiple units of hospitals, physician practices, outpatient facilities, long-term care facilities, and insurance companies.

While the goal of these systems is to provide "seamless" care through internal referrals, shared electronic medical records, common policies and procedures, etc., the reality has not met expectations. Among the problems identified include differences in values and incentives between organizational units, lack of top management knowledge about the unique demands faced by some of the acquired entities, and an inability to integrate the different units clinically and operationally in a way that seamlessly delivers customer value.

Colossal Health System grew from Diminutive Community Hospital by acquiring various healthcare delivery sites under the direction of Christina Yang, M.D., who became CEO 15 years ago. Since her arrival, Yang and her executive team have created the largest health system in the state. Despite this success, the system remains under pressure from employers and managed-care insurers to further reduce its costs while improving clinical quality, efficiency and the patient experience.

Almost four years ago, Yang and the board of directors recognized that the organizations acquired in the consolidation phase continued to operate with varying degrees of proficiency and vastly different policies and procedures. The board agreed to create a more sophisticated, best-practice human resource function to address these issues, hiring Ms. Nancy Gonzalez from Mundane Medical System as the new vice president for human resources. Gonzalez earned an MBA with a specialization in human resources management from Michigan State and has 16 years of experience in HR. In the three years she has been with Colossal, she has added three full-time employees to handle recruitment, employee benefits, and compensation.

The board is focused on reducing the cost of service delivery across the system. As a result, the corporate office in general and the human resources department in particular have come under increased scrutiny. Gonzalez has been told she needs to justify the additional budget dollars allocated to her department over the past three years. Exhibit 1 shows the HR department's budget for Year 1 (the year prior to Gonzalez's arrival) as well as the three years since. The board has calculated "extra" costs of the Human Resources Department over the past three years (using Year I as the base) to be $1,530,000. The largest percentage cost increases were in salaries/benefits and equipment/supplies (mostly related to required upgrades in computer hardware and software).

The board has scheduled a meeting for next Monday. One of the agenda items is to examine the costs of the human resource department with the possibility of a budget cut for next year. Gonzalez has been asked to make a presentation to justify her budget and to show how expansion of her department has contributed to the system's bottom line. She believes that the changes made since her arrival have improved overall system performance; among these are the development of system career ladders to increase employee retention; in- house management training programs to improve managerial competence; development of "model" staffing ratios to reduce employee stress and burnout; quarterly performance reviews to increase employee feedback; absenteeism incentive programs, and implementation of an annual employee survey to identify problem areas.

2

After some discussion with her staff, she has decided that it would be easier to document the benefits of increased employee retention. Exhibit 2 shows the decline in employee turnover from Year 1 through the past three years.

Gonzalez and her staff have calculated the average cost of turnover per employee by personnel category; these calculations are shown in Exhibit 3. Most of these calculations are backed up by personnel records. The exception is the "reduced productivity during the learning period;" for these calculations, the HR team determined the average monthly productivity for a small sub-sample of individuals who left Colossal, and then compared that average to the average monthly productivity delivered during their replacements first three months of employment. From this average, they extrapolated the dollar amount of lost productivity (resulting from turnover) for a one-year period.

The HR teams assumption is that the replacement employees productivity will remain constant for a 12-month period and then normalize; yet it is more realistic to assume that productivity will improve over time and last somewhat longer than the initial 12-month period. That said, HR has determined that its method of calculation is a good approximation of reality since an overestimation of the productivity loss is offset by the shorter time period of their calculations.

Exhibit 3 shows that the total cost for each employee loss averages $15,858; but this varies from a high of $26.631 for physicians to a low of $7,939 for non-professional employees. These costs are divided into separation costs, replacement costs, training costs, and costs of reduced productivity (for new employees) during the (assumed) one-year learning period. all the data here.

EXHIBIT 1: Human Resource Management Department Budget for Years 1 through 4 Department Budget per Year 4 2 Budget Cost Salaries and Benefits Equipment and Supplies Communications Totals $247,500 $524,250 S648,000 $729,000 128,250 182,250 87,750 108,000 54,000 92.250 139.500164.250 $393,750 $751,500 $920,250 $1,039,500 EXHIBIT 1: Human Resource Management Department Budget for Years 1 through 4 Department Budget per Year 4 2 Budget Cost Salaries and Benefits Equipment and Supplies Communications Totals $247,500 $524,250 S648,000 $729,000 128,250 182,250 87,750 108,000 54,000 92.250 139.500164.250 $393,750 $751,500 $920,250 $1,039,500