Page 5 - MS Perspectives 2014 YIR

The Hidden Cost of a Dysfunctional Culture

Dr. Eric Flamholtz
President & Founder, Management Systems

Corporate culture is a critical variable for organizational performance. It has many
dimensions and affects several aspects of performance1.

Culture and Turnover Cost

One aspect of organizational performance that is affected by culture is turnover.
When people leave an organization, the investment made to recruit, hire, orient
and train them is lost. The company must also incur an out of pocket replacement
cost.

A positive culture can help preserve valuable human capital. A positive (functional)
culture should result in retention of human capital and reduced turnover. A
negative (dysfunctional) culture can result in increased turnover and the loss of
human capital.

Since turnover is costly, if turnover is reduced it should result in a benefit to a
company and vice versa2. A reasonable estimate of turnover cost is one year's
compensation (salary plus benefits).3

Since human capital is costly to acquire, a dysfunctional culture can create a hidden
cost. The greater the degree of turnover experienced by an organization, the
greater the cost of turnover.

Data from a Recent Culture Management Project

"Culture assessments" are one of the core managerial tools offered by our firm,
Management Systems. See MS Culture Management Tools for fast and easy
reference.

Our culture assessments assist our clients in indicating:

1) The extent to which people employed have embraced the company's culture,
2) The extent to which that stated culture is being practiced, and
3) The extent to which there are "gaps" between the stated and actual practiced

culture.

Findings

1 See Eric Flamholtz and Yvonne Randle, Corporate Culture: The Ultimate Strategic Asset, Stanford
University Press, 2011.
2 See Eric Flamholtz, Human Resource Accounting, Kluwer Academic Publishers, 1999, Chapters 2-3.
3 Ibid.

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