Decoding Attrition of Indian Start-ups

Start-ups that fail to understand that importance of employee retention face a high attrition rate.


American author Jim Collins rightly sums up the struggles of an early-stage start-up. In his bestselling book Good to Great: Why Some Companies Make the Leap and Others Don’t, he writes: get the right people on the bus, and then ensure they are in the right seats. This is where most start-ups seem to falter. They think that their job is done once they have hired the right talent. But the actual work starts at keeping them engaged in the right role. And more often than not, companies that fail to do so face a high attrition rate.

Attrition rate is the rate of employees leaving an organisation over a specified time frame. In order to determine whether your organisation is doing good or bad, the attrition rate is compared with the industry standard. Is there a sure shot way to reduce attrition rate? Well, one of the ways to do it is to hire better. That’s what most start-ups are focussed on currently. Take Bengaluru-based Chumbak for example. It has specially dedicated people to scan applicants just to understand their cultural bent of mind, their motivations, interests, etc. This helps them gather insightful details about their potential employees which in turn helps them judge their fit for the company better. So, don’t be surprised if you get questions like “If money were not an object, what would you be doing instead?” in one such interview at a start-up. These questions are not unnecessary but rather a far-fetched effort by the company to lower its attrition rate.

As per Deloitte India’s 2020 Workforce and Increment Trends Survey, attrition at an all India level in the current fiscal year is about 15%. Involuntary attrition (layoffs, restructuring, etc.) has increased to 20% of the total attrition which is likely to go up further. This brings us back to the question: how to recruit right?

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Involuntary attrition (layoffs, restructuring, etc.) has increased to 20% of the total attrition which is likely to go up further.

Getting recruitment right

There’s one thing that can significantly improve a company’s employee retention. Getting the right recruitment process is on top of the list. This is what Collins calls ensuring that people are in the right seats and the process starts with defining the job description well. The job description should have a clear-cut mention of qualification requirements, skills, experience, qualities, interview process, conducting background checks, technical soundness and anything and everything that the job entails. Some start-ups don’t take this stage seriously and end up hiring in an ad-hoc manner. This is what goes on to bite them at a later stage.

The IT problem

The IT sector is one of the worst performing sectors when it comes to attrition rates. The KPMG India’s Annual Compensation Survey 2017-18, found that while India’s average voluntary attrition rate dropped down from 15.6% to 13.4% in FY 2016-17, the attrition rate shared by the IT and ITeS industry was still the highest at 20.4% in the e-commerce sector. And the situation is not any better in 2021.

Around 30% employees at mid-level positions in tech startups change their jobs every year. This means that every one in four junior-level employees in the same line of work, is quitting their job each year. Despite several efforts of the industry to retain their employees, IT companies continue to be a part of the problem. But due to COVID-19, the situation has improved by just about a margin. During this time, there was an uncertainty in the market and not too many companies were hiring in a bid to save costs. That’s why the IT industry reported one of the lowest attrition rates during the pandemic. Once the businesses are back in full swing, this trend might reverse soon but till then, there’s relief for the industry.

In India, the overall voluntary attrition reduced from 14.4% in 2019 to 12.1% in 2020, while the involuntary attrition (layoffs, restructuring, etc.) grew from 3.1% in 2019 to about 4% in 2020. Industry experts point out that involuntary attrition increased the most in the IT and services sectors, whereas voluntary attrition reduced across sectors.

Reasons for high attrition rate

Around 71% people leave their jobs seeking higher compensation while 47% respondents say that they do it to look for better working conditions. Reports suggest that 32% employees leave to search for a more responsible role while 26% seek more opportunities to express creativity. These are the broad reasons why companies have high attrition rates. Is there any way one can reduce it?

Ways to reduce attrition rate of the company

Having the right data touch points helps. It is important for the company to have a very well specified data set in order to create an analytics report on employees. This data should reflect an overall satisfaction level of employees, irrespective of their hierarchy in the company. It should also ideally have a happiness index. To reflect the happiness levels of the entire workplace. Many factors like age, monthly income, time since last promotion/pay hike, marital status, job involvement, gender, compatibility with the reporting manager, work-life balance, job involvement, etc. can help in narrowing down this index. Date is the key. This data will help companies analyse the emotional levels of an employee and may indicate the possible attrition frequency and time. This can also go a long way in taking corrective measures by the company.

Employee history also makes a huge difference. Although not full proof, it is possible to gauge patterns in an employee’s work culture, ethics and career. This can help predict if he or she would be the right fit for the organisation for the long-term.

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82% of startups pay more than the market median and 83% generally resort to stock options as the most popular form of long-term incentives, as per a study.

Employee’s emotions quotient matters

During his working hours, if an employee is bogged down by concerns related to home, family, relationships, EMIs, etc, it will obviously hamper his/her morale and confidence. Companies are starting to invest in mental health programmes. This is a good way to ensure that employees are valued and recognised. Also, the HR should understand and take into consideration that employee satisfaction and attrition are not always connected to pay hikes and promotions.

There are many values that go beyond them. It has been noted that emotional and personal wellbeing can also affect attrition levels. It is also advisable for the HR to prepare a data analytics report based on departments. This will help recognise better insights on which department has more attrition, and if at all any patterns can be spotted in those particular departments. This can make the job of the company easier in recognising problems and addressing it faster. Breaking down these crucial insights will help you come up with distinct results that will be a step forward in taking predictive and preventive measures for every department.

ESOPs an option?

Start-ups across India have offered Employee Stock Ownership Plans (ESOPs) to their employees as a way to reduce attrition by offering their staff a stake in the company. ESPOs are a great way to ensure that the employees are hired without having to shell out fat salaries. At the early stages, when the start-up is not that well-funded, it is a good way to attract bright talent.

In 2014, Indian startups faced an attrition rate of as high as 21% despite being good paymasters. According to the study by global management consultancy Hay Group, in partnership with global venture capital firm Canaan Partners, 82% of startups pay more than the market median and 83% generally resort to stock options as the most popular form of long-term incentives, and their prevalence is largely in top management levels, the study said.

While not being the only reason, pay was found to be one of the top reasons for attrition by 34% participants. This was seven years back. Some industry experts believe that in 2021, the attrition rate has grown to 50-80%. Consultants also say that attrition rates at firms that are rapidly changing business models are much higher. This is probably why, over the last few years, India’s largest e-commerce firms like Flipkart, Snapdeal, Ola, Myntra and Housing.com have seen several exits at the senior and junior level.

Take a few examples: the HR head of Flipkart, Mekin Maheswari and Myntra, Pooja Gupta have quit their positions to take up advisory roles. Even Snapdeal saw Chief Technology Officer Amitabh Misra quit his position to set up his own company. The former Chief Design Officer of real estate website Housing.com Chatterjee, too resigned a few years back. The list is endless. But many in the start-up industry believe that the attrition rates will continue to rise because the pressure to increase valuations forces management to discard underperformers. They also believe that in start-ups, there’s an unpredictability of career progression and an absence of a proper organisational structure. These are some of the factors that have contributed to a higher attrition in start-ups.

Start-up Approach

While hiring, the HR needs to make the candidates well aware of the start-up culture and the trade-offs that start-ups have as compared to traditional corporate houses. One of the reasons why there is a high attrition rate among start-ups is that there is a mismatch of expectations between the employer and the employee. And this communication seldom takes place before or during the hiring process.

Very few startup employees in India are actually passionate enough about building the next Google or Flipkart. They often treat these companies as a stepping stone for bigger ones. It is important for the HR to tell the ones with this approach in mind from those who genuinely believe in the company and want to make a difference. It is difficult to survive in a start-up environment for someone who is either used to a ‘corporate culture’ or unwilling to adapt to a new environment. In many corporates, there is enough time and money invested for employees to learn on the job.

Many places also provide training to acclimatise the employees to the culture of the company. But start-ups generally neither have the luxury of time nor money. They are expected to be an expert of their domain and sometimes it is difficult to take that kind of pressure for both the employer and the employees. Moreover, young firms lack up-skilling resources and rely on last-minute hiring of required skills, instead of training their existing staff. This can prove counterproductive when it comes to dealing with high attrition rates.

It can be overwhelming for freshers to join an environment like this especially if they are unaware of the dynamic nature of a start-up industry. That is why they feel they are checking out of the ecosystem within the first few months of joining.

The high level of commitment required to stay on the ball at a startup is not always rewarded handsomely. Some start-ups are so low on cash reserves and revenues that they struggle to even maintain regular salary cycles. Another factor that leads to high attrition rates is that start-ups often fail to ensure basic employee benefits such as insurance, which is a given in any large corporate firm. People working at start-ups are either prepared or enter with a mindset that it’s a risk and there’s no job security as compared to traditional firms. Although, start-ups do give employees more autonomy and freedom to experiment. But everything comes with a trade-off.  Over 40% of startups in India shut down within two years of founding, owing to unprofitability and funding crunches, among other reasons. In the early stages, even start-ups put little to no effort in retaining talent. This is because they are not able to afford them in most cases.

Usually, start-ups hire for a short-term based on an instant need and employees are well aware of that. That is why employees try to leave at the very first instant. If this needs to change, then either start-ups need to start giving employees that level of respect and establish trust right in hiring stages or employees need to enter with a mindset that the start-up by nature demands an employee who is dynamic in nature and willing to learn on the go while giving up on all the benefits that a tradition job offers. To be fair to the employees, it’s a tough ask.

DU Desk
DU Desk
Stories from DU Desk are the collective efforts of our in-house authors, guest authors and subject matter experts who collate and distill their ideas and thoughts to bring out actionable insights for our readers.

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