What Is Attrition?
Attrition in business describes a gradual but deliberate reduction in staff numbers that occurs as employees retire or resign and are not replaced. The term is also sometimes used to describe the loss of customers or clients as they mature beyond a product or company’s target market without being replaced by a younger generation.
- Attrition is a process in which the workforce dwindles at a company, following a period in which a number of people retire or resign, and are not replaced.
- A reduction in staff due to attrition is often called a hiring freeze and is seen as a less disruptive way to trim the workforce and reduce payroll than layoffs.
- Attrition can also refer to a company losing its customer base, often as a result of older customers aging or moving on and fewer newer customers opting in.
How Attrition Works
This type of reduction in staff is called a hiring freeze. It is one way a company can decrease labor costs without the disruption of layoffs.
Reducing staff by attrition naturally is less devastating to company morale. However, it can still have a negative impact on the remaining employees if it leads to an increase in their workload. It also can limit promotional opportunities and movement within the company, resulting in an unhappier workplace or more attrition than was intended.
About Customer Attrition
Attrition can also refer to a shrinking customer base. This, of course, is not deliberate. The word is most pertinent when used to describe a product whose customer base is shrinking because its loyal customers are aging and younger consumers are not taking their place.
Customer attrition is usually found when a company has failed to adapt its product to changing trends. The Sears department store chain and the Oldsmobile car brand might be examples of products that failed to capture a younger generation of customers.
Because attrition is voluntary, as opposed to layoffs, it is seen as a less disruptive way for a company to decrease labor costs.
Attrition Versus Layoffs
Changes in management, company structure, or other aspects of a company’s operations can cause employees to leave voluntarily, resulting in a higher attrition rate.
Laying off employees results in attrition as long as the company doesn’t immediately hire as many new employees as it laid off. For example, a company might reduce its administrative staff by six in order to create a new internet team of six.
Turnover occurs in a company for many reasons. It can only be called attrition if the company decides not to fill the vacated position.
When a company is faced with a financial crisis, it must make tough calls and cut back its workforce in order to stay afloat. In these cases, the company might implement a layoff with no intention of filling those positions again.
In less drastic cases, such as changes in the company structure or business model or a merger, certain departments are trimmed or eliminated. This usually requires layoffs rather than attrition.
Unlike layoffs, a reduction in staff due to attrition is voluntary. The employee has decided to take a new job, retire, or move to another new city. An attrition policy takes advantage of this inevitable changeover to reduce overall staff.
Compete Risk Free with $100,000 in Virtual Cash
Put your trading skills to the test with our FREE Stock Simulator. Compete with thousands of Investopedia traders and trade your way to the top! Submit trades in a virtual environment before you start risking your own money. Practice trading strategies so that when you’re ready to enter the real market, you’ve had the practice you need. Try our Stock Simulator today >>« Back to Glossary Index