Managing Attrition In IT Sector: Through The Eyes Of Adam Smith

Published by MBA Skool Team, Published on June 13, 2012

After the inception in the late ‘90s, the history of information technology had been a fairy tale of global growth and emergence. While standing in 21st century, the accelerated momentum of growth of the industry is being accompanied by the rising rate of attrition. From the point of view of the industry, this phenomenon is important as the skilled professionals are the backbone of this knowledge intensive industry.

IT firms invest a lot on recruitment, training, personality and skill set development of the employees. Hence rise in attrition rate results in poor utilization rate, degraded service quality and a declining return on investment. The factors behind the rising attrition can be attributed to three M’s: Money, Morale, and Motivation. These factors change for every person in every organization. The problems are visible, but how to combat them? Where to look for a solution?

Managing Attrition

To find out a solution, it is needed to go beyond the boundary of the speculative science, which yields necessary, universal, and non-contingent truths [1]. Further analysis in the present note has been carried out on the basis of the intersection between corporeal and mental aspects of human, which can be defended only by practical science, i.e. economics. According to Adam Smith (1776), the economic growth is always rooted by the division of labour [2]. The labours become specialized in their respective areas by virtue of decomposition of the job into small pieces. The isolated areas of production results in increase in efficiency and decrease in lead time and switching cost [3]. The same and repetitive job germinates dissatisfaction among the labour force.


Figure 1: Learning Curve and firm switching

Division of labour also implies assigning the best suitable job to every labour, which will in turn create the Productive labours [4]. Keeping the problem of IT sector in mind, job rotation and incorporation of more challenges in the job provide a learning opportunity for the employees. The learning curves of the employees become horizontal after a certain period of time [Figure 1]. Job rotation, challenging job description restricts the learning curve from being horizontal. This can attribute to lower the rate of attrition.

Adam Smith argued about pursuing the self-interest of an individual for self-upliftment in a free trade economy [5]. Self serving bias arises due to the classic tradeoff between equity and efficiency. For Smith, rise in living standards is the measurement of prosperity [6]. Employees in the IT sector always look for the better opportunities as they feel that the equitable position provided to them by the employer, does not commensurate their perceived level of efficiency. This in turn reduces their motivation, followed by reduction in their efficiency level. So it becomes a tendency of the employees to look for better opportunities.

Figure 2

Figure 2: Equitable positions offered By various firms

They can avail better equitable positions by switching the job [Figure 2], resulting in an attrition. They try to move from position A to B, then B to C, and so on. As greater efficiency can be achieved by losing greater amount of equity, the firms should concentrate on the efficiency / equity payoff [7]. Considering the employees as the factor of production [8], they are freely mobile in a free trade regime.

Figure 3

Figure 3: Efficiency levels of employees In various firms

However, the employees can’t be satisfied in the new firms for a long while, given the equitable position in the new firm does not shift. They experience lowering of their efficiency level after certain period of time [Figure 3]. This can be treated as an opportunity for the employers. Providing a competitive salary to the employees, bringing periodic changes in the remuneration structure can provide the employees a sense of motivation, and in turn making them feel more prospered in comparison with the other employees in other firms. The statement can be made assuming that the mobility of information across the industry is absolutely free.

The tradeoff between equity and efficiency has historically given rise to capitalist economy [9]. And the firms had experienced the changes in their organizational culture, in terms of accumulation of capital [10]. In IT industry, the accumulation is in the form of knowledge and information. This creates an informational gap between the employees and the top management.

The cost and consequences of less effective decision making depends on inconsistency, ambiguity, unawareness, and failure of logical omniscience [11]. These factors in turn create an environment of distrust inside the firm, resulting in lay-offs and switching of jobs. It is the duty of the top and middle management to ensure proper mobility of information inside the firm. Empowering the employees with greater access of information enhances the productivity of the employees, as well as the utilization by reducing the attrition rate to a greater extent [Figure 4].

Figure 4

Figure 4: Change in attrition rate with information mobility

In connection with the discussion, it can be concluded that there are specific microeconomic and macroeconomic parameters, which decide the performance of the firm and the productivity of the employees. The smooth running of the IT industry is inversely dependent on the attrition rate of the firms. Keeping the parameters like division of labor, efficiency/equity tradeoff, accumulation of capital in mind, the economic welfare of the industry can be controlled by the theories established by Adam Smith.


[1] Younkins, Edward W. (2005), “Aristotle and Economics”

[2] Smith, Adams (1776), “The Wealth of Nations”, B.1, Ch.1

[3] Dhamee, Yousuf (1996), “Adam Smith and the Division of Labor”

[4] Brooks, Mick (2005), “Productive and unproductive labour”

[5] Smith, Adams (1976), “The Glasgow edition”, Vol. 2a

[6] Heer, Jeet (2001), “Adam Smith and the Left”

[7] Blank, Rebecca M. (2002), “Can Equity and Efficiency Complement Each Other?”

[8] Smith, Adams (1776), “The Wealth of Nations”, B.1, Ch.6

This article has been authored by Avik Sinha and Atul Mehta from IIM Indore

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