Case studies hrm

SAIL'S VOLUNTARY RETIREMENT SCHEME

Case Code-HROB002Published-2003

INTRODUCTION

At a meeting of the board of directors in June 1999, the CEOs of Steel Authority of India's (SAIL) four plants - V. Gujral (Bhilai), S. B. Singh (Durgapur), B.K. Singh (Bokaro), and A.K. Singh (Rourkela) made their usual presentations on their performance projections. One after the other, they got up to describe how these units were going to post huge losses, once again, in the first quarter[1] of 1999-2000. After incurring a huge loss of Rs 15.74 billion in the financial year 1998-99 (the first in the last 12 years), the morale in the company was extremely low. The joke at SAIL's headquarters in Delhi was that the company's fortunes would change only if a VRS was offered to its CEOs - not just the workers.

BACKGROUND NOTE

SAIL was the world's 10th largest and India's largest steel manufacturer with a 33% share in the domestic market. In the financial year 1999-2000, the company generated revenues of Rs. 162.5 billion and incurred a net loss of Rs 17.2 billion. Yet, as on February 23, 2001, SAIL had a market valuation of just Rs. 340.8 billion, a meager amount considering the fact that the company owned four integrated and two special steel plants. SAIL was formed in 1973 as a holding company of the government owned steel and associated input companies. In 1978, the subsidiary companies including Durgapur Mishra Ispat Ltd, Bokaro Steels Ltd, Hindustan Steel Works Ltd, Salem Steel Ltd., SAIL International Ltd were all dissolved and merged with SAIL. In 1979, the Government transferred to it the ownership of Indian Iron and Steel Company Ltd. (IISCO) which became a wholly owned subsidiary of SAIL.

SAIL operated four integrated steel plants, located at Durgapur (WB), Bhilai (MP), Rourkela (Orissa) and Bokaro (Bihar). The company also operated two alloy/special steel plants located at Durgapur (WB) and Salem (Tamil Nadu). The Durgapur and Bhilai plants were pre-dominantly1ong products [2] plants, whereas the Rourkela and Bokaro plants had facilities for manufacturing flat products[3] .

THE JOLT

In February 2000, the SAIL management received a financial and business-restructuring plan proposed by McKinsey & Co, a leading global management-consulting firm, and approved by the government of India (held 85.82% equity stake).

The McKinsey report suggested that SAIL be reorganized into two strategic business units (SBUs) - a flat products company and a long products company. The SAIL management board too was to be restructured, so that it should consisted of two SBU chiefs and directors of finance, HRD, commercial and technical. To increase share value, McKinsey suggested a phased divestment schedule. The plan envisaged putting the flat products company on the block first, as intense competition was expected in this area, and the long products company at a later date.

Financial restructuring envisaged waiver of Steel Development Fund[4](SDF) loans worth Rs 50.73 billion and Rs 3.8 billion lent to IISCO. The government also agreed to provide guarantee for raising loans of Rs 15 billion with a 50% interest subsidy for the amount raised. This amount had to be utilized for reducing manpower through the voluntary retirement scheme. Another guarantee was given for further raising of Rs 15 billion, for repaying past loans.

Business restructuring proposals included divestment of the following non-core assets:

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Power plants at Rourkela, Durgapur & Bokaro, oxygen plant-2 of the Bhilai steel plant and the fertilizer plant at Rourkela.

Salem Steel Plant (SSP), Salem. Alloy Steel Plant (ASP), Durgapur. Visvesvaraya Iron and Steel Plant (VISL), Bhadravati. Conversion of IISCO into a joint venture with SAIL having only minority shareholding.

THE DILEMMA

The major worry for SAIL's CEO Arvind Pande was the company's 160,000-strong workforce. Manpower costs alone accounted for 16.69% of the company's gross sales in 1999-2000. This was the largest percentage, as compared with other steel producers such as Essar Steel (1.47%) and Ispat Industries (1.34%). An analysis of manpower costs as a percentage of the turnover for various units of SAIL showed that its raw materials division (RMD), central marketing organisation (CMO), Research & Development Centre at Ranchi and the SAIL corporate office in Delhi were the weak spots.

There was considerable excess manpower in the non-plant departments. Around 30% of SAIL's manpower, including executives, were in the non-plant departments, merely adding to the superfluous paperwork.

Hindustan Steel, SAIL's predecessor, was modelled on government secretariats, with thousands of "babus" and messengers adding to the glory of feudal-oriented departmental heads. SAIL had yet to make any visible effort to reduce surplus manpower.

A senior official at SAIL remarked: "If you walk into any SAIL office anywhere, you will find people chatting, reading novels, knitting and so on. Thousands of them just do not have any work. This area has not even been considered as a focus area for the present VRS, possibly because all orders emanate from and through such superfluous offices and no one wants to think of himself as surplus." With a manpower of around 60,000 in these offices and non-plant departments like schools, township activities etc, SAIL could well bring down to less than 10,000. Reduction of white-collar manpower required a change in the systems of office work and record keeping, and a very high degree of computerization. Officers across the organization employed dozens of stenographers and assistants. Signing on note sheets was a status symbol for SAIL officers.

Another official commented: "Systems have to be result oriented, rather than person oriented and responsibilities must match rewards and recognition. There is a need to change the mindset of the management, before specific plans can be drawn out for reduction of office staff."From the beginning, SAIL had to contend with political intervention and pressure. Many officials held that SAIL had to overcome these objectives: “Many employees do not have sufficient orders or work on hand to justify their continuance, and yet political pressures keep them going. It is time that the top management takes a tough stand on such matters. One does not have to call in McKinsey to decide that many SAIL stockyards and branch offices are redundant.”

THE VOLUNTARY RETIREMENT SCHEME

As a part of the restructuring plan, McKinsey had advised Pande that SAIL needed to cut the 160,000-strong labor force to 100,000 by the end of 2003, through a voluntary retirement scheme. Pande was banking on natural attrition to reduce the number by 45,000 within two years, but GOI's decision to increase the retirement age to 60 further delayed the reduction. Subsequently, SAIL had requested GOI to bail it out with a one-time assistance of Rs 15 billion and another subsidized loan of the same size for a VRS, to achieve the McKinsey targets.

In a bid to 'rationalize' its huge workforce, SAIL launched a VRS in mid 1998, for employees who had put in a minimum service of 20 years or were 50 years in age or above. The scheme provided an income that was equal to 100 per cent of the prevailing basic pay and DA to the eligible employees.

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About 5,975 employees opted for the scheme. Of them, 5,317 were executives and 658 non-executives. Most of those who opted were above 55 years.

On March 31, 1999, SAIL introduced a 'sabbatical leave' scheme, under which employees could take a break from the company for two years for studies/employment elsewhere, with the option of rejoining the company (if they wanted to) at the end of the period. The sabbatical allowed the younger members of the SAIL staff to leave without pay for "self-renewal, enhancement of expertise/knowledge and experimentation," which broadly translated into higher studies or even new employment.

On June 01, 1999, SAIL launched another VRS for its employees. Employees who had completed a minimum of 15 years of service or were 40 years or above could opt for the scheme. The new VRS, which was opened to all regular, permanent employees of the company, would be operational till 31st January 2000. Its target groups included: 

Those who were habitual absentees, regularly ill and those who had become surplus because of the closure of plants and mines;

Poor performers.

Under the new package, employees who opted for the scheme, depending on their age, would get a monthly income as a percentage of their prevailing basic salary and dearness allowance (DA) for the remaining years of their services, till superannuation. Employees above 55 years of age would be given 105 per cent of the basic pay and dearness allowance (DA) every month. Those employees who were between the age of 52 and 55 years would receive 95 per cent of the basic pay and DA while those below 52 years would get 85 per cent of the basic pay and DA. The new scheme, like the old one was a deferred payment scheme, with extra carrots like a 5% increase in monthly benefits for each of the three age groups.

By September 1999, over 4,000 employees opted for the new scheme. About 1,700 employees opted for VRS in the Durgapur steel plant while in the Bhilai, Bokaro and Rourkela steel plants. The number varied between 400 and 700.

In September 2000, SAIL announced yet another round of VRS, in a bid to remove 10,000 employees by the end of March 2001. The company planned to approach financial institutions for a credit of Rs 5 billion. Pande said: "We are awaiting the government nod for the VRS scheme, drawn on the pattern of the standard VRS by department of public enterprises. We expect to get the clearance by the end of the month."

On February 08, 2001, SAIL ended its four year recruitment freeze by announcing its plans to fill up more than 250 posts at its various plant sites in both technical and non-technical categories. According to a senior SAIL official: "This recruitment is being done to ease the vacancies created due to natural attrition and those that arose after the previous VRS."

THE PERSUASION

In mid 1998, in a bid to convince its employees to accept VRS, SAIL highlighted six 'plus' points of VRS, in its internal communique, Varta. They were as follows:

During the next 4-5 years, SAIL has to reduce its workforce by 60,000 for its own survival. Employees with chronic ailments, and habitual absentees, who add to low productivity, have to go first - maybe, with the help of administrative actions.

The employees may have to be transferred to any other part of the country in the larger interest of the company.

For those who started their career as healthy young men 25-30 years ago, the VRS will take care of their financial worries to a great extent, and they can discharge their domestic duties more comfortably.

VRS can be used for special purposes like paying huge sum of money for getting

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one's son admitted to a professional course.

VRS will give many individuals the money and time on pursuing personal dreams.

It can be a good opportunity to do social service.

On December 27, 1999, SAIL initiated a company-wide information dissemination program to educate the staff on restructuring. The company drafted an internal communication document entitled "Turnaround and Transformation" and a special team of 66 internal resource persons (IRP) had been assigned the task of preparing a detailed plan to take this document to a larger number of people within the company. The 66-member team was constituted in September 1999 and was stationed in Ranchi to undergo a detailed briefing-cum-training course. A generalized module was presented to the IRP team during the course, which then summarised the root causes of SAIL's crisis and the strategies to overcome it. According to an official involved with the program: "Initiatives like the power plant hive-off or the Salem Steel joint venture will hinge on employee concurrence, particularly at the shop floor level, and therefore there has to be an intensive communication program in place to reassure employees that their interests will be protected."

The 66-member IRP team conducted half-day workshops across plants and other units based on three specific modules:A video film conveying a message from the chairman of the company.

A generalized module of the recommendations of the turnaround plan focusing on restoring the financial foundation, reinforcing marketing initiatives and regaining cost leadership.

A module covering plant-specific or unit-specific issues and strategies for action.The exercise was expected to cover at least 16,000 SAIL employees by the end of March 2000. A senior official at SAIL said: "The idea is that the employees covered in this phase would take the communication process forward to their peer group and fellow colleagues."

The staff education exercise was stressed upon, particularly in view of the power plant hive-off fiasco, which could not take off as scheduled due to stiff resistance from central trade unions. The problem, at the time, was that the SAIL top brass had failed to convince the employees that jobs would not be at risk because of the hive-off.

THE REACTION

The trade unions were on a warpath against the recommendations of McKinsey. Posters put up by the Centre of Indian Trade Unions (CITU) at SAIL's central marketing office said that the McKinsey report was meant, not for the revival or survival of SAIL, but for its burial. A senior TU leader said: "SAIL TUs so far have been extremely tolerant and exercised utmost restraint. Even in the face of scanty communication by the management of SAIL, they have not lost patience in these trying times."

The TU leaders felt that SAIL would try to bolster support for the financial restructuring proposal based on the recommendations of McKinsey. But being a government-owned company, SAIL cannot take decisions on such recommendations as the privatization of SAIL or breaking it up into two product-based companies. Even in relatively small matters the like hiving off of power plants to a subsidiary company, with SAIL being the major partner, the government had not cleared SAIL's proposal, even after months of gestation. Therefore, it was futile to think that SAIL would secure the permission of the government to sell off Salem Steel Plant (SSP) in Tamil Nadu or close down Alloy Steels Plant (ASP) at Durgapur in West Bengal.

At SSP, all the TUs had joined hands to form a 'Save Salem Steel Committee' and observed a day's token strike on June 24, 1999, demanding investment in SSP by SAIL, rather than by a private partner.

Though TUs had no objection to voluntary retirements, they were not very happy about the situation. They were worried that employment opportunities were shrinking in the steel industry and that reduction of manpower would mean increasing the number of contractors and their workforce. After the Rourkela Steel Plant in Orissa absorbed contractors' workers on Supreme Court orders, fresh contractors had been appointed to fill up the vacancies.

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SAIL'S VOLUNTARY RETIREMENT SCHEME

THE PERSUASION & THE RELATION                  

SAIL TU leaders were emphatic that the McKinsey recommendations were not the last word on SAIL. They felt that foreign consultancy firms were unable to appreciate the role played by major public sector units like SAIL or Indian Oil in the growth of the Indian economy.

They alleged that since large public sector units had shown they could withstand the onslaught of the multinationals, efforts were being made to weaken them, break them into pieces and eventually privatize them.On February 17, 2000, workers at SSP went on a strike against the government's decision to restructure SAIL. The strike was called by eight unions affiliated to CITU, INTUC, ADMK and PMK. CITU secretary Tapan Sen said: "The unions are going to serve the ultimatum to the government for indefinite action in the days to come if this retrograde decision is not reversed. Demonstrations were held against the government's decision in all steel plants and workers of Durgapur would hold a daylong dharna. Steel workers all over the country, irrespective of affiliations have reacted sharply to the disastrous and deceptive decision of the government on the so-called restructuring of SAIL."

QUESTIONS FOR DISCUSSION

1. McKinsey's recommendation is that SAIL cut its workforce to 100,000 by the end of 2003. SAIL has launched various VR schemes to meet this target. Though every time the company is comes out with improved schemes there are still not many takers. What according to you could be the reasons?

2. The staff education exercise on VRS at SAIL seems to be more of a reaction to the power plant hive-off fiasco than a proactive measure. What other steps can SAIL take to educate employees about VRS? Explain.

3. According to McKinsey proposals, offering VRS to employees was the part of the restructuring plan. Do you think VRS is sufficient without restructuring or vice-versa? Comment.

4. In February 2001, SAIL ended its four-year recruitment freeze by announcing its plans to fill up more than 250 posts. Do you think this is the right move especially when a VRS is being offered to its employees? Explain.

ADDITIONAL READING & REFERENCES:

1.  Bhandari Bhupesh, SAIL sill has an appetite for equity, Business World, February 7,  1996.

2.  Sarkar Ranju, Has SAIL recast its bottomline?, Business Today, July 22, 1997.

3.  Maitra Dilip, Did SAIL smelt its profits in its furnaces?, Business Today, November 7, 1998.

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4.  Sarkar Ranju, Can SAIL rapidly (Re)Steel its future?, Business Today, July 22, 1999.

5.  Pannu SPS, Debate on AI contract labour case reopened, The Hindustan Times, August 15, 1999.

6.  Ghosh Indranil, In choppy waters, Business India, August 9, 1999.

7.  Mazumdar Rakhi, The TAO of top, Business Today, September 22, 1999.

8.  Chandrashekhar R. The case of the voluntary VRS, Business Today, September 22, 1999.

9.  SAIL: The new CEO centre, Business Today, November 22, 1999.

10.  Srinivas Alam, SAIL restructuring: the other guy blinked, Business Today, April 22,   2000.

11.  Ghosh Indranil, On the road to recovery, Business India, June 12, 2000.

12.  Chandrashekhar R. The case of effective downsizing, Business Today, June 22, 2000.

13.  SAIL to kick off retirement scheme next month, India Today Online, September 05,  2000.

14.  SAIL ends 4-year recruitment freeze, The Economic Times, February 9, 2001.

15.  Srinivasan MV, Voluntary retirement and workers' welfare, www.epw.org.in.

16.  www.indiainfoline.com.

17.  Sweet D.H., Derecruitment & Outplacement.

18.  Boller R., What Colour Is Your Parachute?

19.  R. L. Dipboye, The Older Workforce.

20.  Kaye B., Up Is Not The Only Way.

21.  Sweet D. H., A Manager's Guide To Termination.

22.  Spurgeon H. & Howbert P.A., Ready, Fire!

23.  Walker J.W. & Lazar H.L., The End Of Mandatory Retirement.

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BATA INDIA'S HR PROBLEMS

Case code- HROB001Published-2003

INTRODUCTION

For right or wrong reasons, Bata India Limited (Bata) always made the headlines in the financial dailies and business magazines during the late 1990s. The company was headed by the 60 year old managing director William Keith Weston (Weston). He was popularly known as a 'turnaround specialist' and had successfully turned around many sick companies within the Bata Shoe Organization (BSO) group.

By the end of financial year 1999, Bata managed to report rising profits for four consecutive years after incurring its first ever loss of Rs 420 million in 1995. However, by the third quarter ended September 30, 2000, Weston was a worried man. Bata was once again on the downward path. The company's nine months net profits of Rs 105.5 million in 2000 was substantially lower than the Rs 209.8 million recorded in 1999. Its staff costs of Rs 1.29 million (23% of net sales) was also higher as compared to Rs 1.18 million incurred in the previous year. In September 2000, Bata was heading towards a major labour dispute as Bata Mazdoor Union (BMU) had requested West Bengal government to intervene in what it considered to be a major downsizing exercise.

BACKGROUND NOTE

With net revenues of Rs 7.27 billion and net profit of Rs 304.6 million for the financial year ending December 31, 1999, Bata was India's largest manufacturer and marketer of footwear products. As on February 08, 2001, the company had a market valuation of Rs 3.7 billion. For years, Bata's reasonably priced, sturdy footwear had made it one of India's best known brands. Bata sold over 60 million pairs per annum in India and also exported its products in overseas markets including the US, the UK, Europe and Middle East countries. The company was an important operation for its Toronto, Canada based parent, the BSO group run by Thomas Bata, which owned 51% equity stake.

The company provided employment to over 15,000 people in its manufacturing and sales operations throughout India. Headquartered in Calcutta, the company manufactured over 33 million pairs per year in its five plants located in Batanagar (West Bengal), Faridabad (Haryana), Bangalore (Karnataka), Patna (Bihar) and Hosur (Tamil Nadu). The company had a distribution network of over 1,500 retail stores and 27 wholesale depots. It outsourced over 23 million pairs per year from various small-scale manufacturers.

Throughout its history, Bata was plagued by perennial labor problems with frequent strikes and lockouts at its manufacturing facilities. The company incurred huge employee expenses (22% of net sales in 1999). Competitors like Liberty Shoes were far more cost-effective with salaries of its 5,000 strong workforce comprising just 5% of its turnover.

When the company was in the red in 1995 for the first time, BSO restructured the entire board and sent in a team headed by Weston. Soon after he stepped in several changes were made in the management. Indians who held key positions in top management, were replaced with expatriate Weston taking over as managing director. Mike Middleton was appointed as deputy managing director and R. Senonner headed the marketing division. They made several key changes, including a complete overhaul of the company's operations and key departments. Within two months of Weston taking over, Bata decided to sell its headquarter building in Calcutta for Rs 195 million, in a bid to stem losses. The company shifted wholesale, planning & distribution, and the commercial department to Batanagar, despite opposition from the trade unions. Robin Majumdar, president, co-ordination committee, Bata Trade Union, criticized the move, saying: "Profits may return, but honor is difficult to regain."

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The management team implemented a massive revamping exercise in which more than 250 managers and their juniors were asked to quit. Bata decided to stop further recruitment, and allowed only the redundant staff to fill the gaps created by superannuation and retirements. The management offered its staff an employment policy that was linked to sales-growth performance.

ASSAULT CASE

More than half of Bata's production came from the Batanagar factory in West Bengal, a state notorious for its militant trade unions, who derived their strength from the dominant political parties, especially the left parties. Notwithstanding the giant conglomerate's grip on the shoe market in India, Bata's equally large reputation for corruption within, created the perception that Weston would have a difficult time. When the new management team weeded out irregularities and turned the company around within a couple of years, tackling the politicized trade unions proved to be the hardest of all tasks.

On July 21, 1998, Weston was severely assaulted by four workers at the company's factory at Batanagar, while he was attending a business meet. The incident occurred after a member of BMU, Arup Dutta, met Weston to discuss the issue of the suspended employees. Dutta reportedly got into a verbal duel with Weston, upon which the other workers began to shout slogans. When Weston tried to leave the room the workers turned violent and assaulted him. This was the second attack on an officer after Weston took charge of the company, the first one being the assault on the chief welfare officer in 1996. Soon after the incident, the management dismissed the three employees who were involved in the violence. The employees involved accepted their dismissal letters but subsequently provoked other workers to go in for a strike to protest the management's move. Workers at Batanagar went on a strike for two days following the incident. Commenting on the strike, Majumdar said: "The issue of Bata was much wider than that of the dismissal of three employees on grounds of indiscipline. Stoppage of recruitment and continuous farming out of jobs had been causing widespread resentment among employees for a long time."  

Following the incident, BSO decided to reconsider its investment plans at Batanagar. Senior vice-president and member of the executive committee, MJZ Mowla, said[1]: "We had chalked out a significant investment programme at Batanagar this year which was more than what was invested last year. However, that will all be postponed."

The incident had opened a can of worms, said the company insiders. The three men who were charge-sheeted, were members of the 41-member committee of BMU, which had strong political connections with the ruling Communist Party of India (Marxist). The trio it was alleged, had in the past a good rapport with the senior managers, who were no longer with the organization. These managers had reportedly farmed out a large chunk of the contract operations to this trio.

Company insiders said the recent violence was more a political issue rather than an industrial relations problem, since the workers had had very little to do with it. Seeing the seriousness of the issue and the party's involvement, the union, the state government tried to solve the problem by setting up a tripartite meeting among company officials, the labor directorate and the union representatives. The workers feared a closedown as the inquiry proceeded.

INDUSTRIAL RELATIONS

For Bata, labor had always posed major problems. Strikes seemed to be a perennial problem. Much before the assault case, Bata's chronically restive factory at Batanagar had always plagued by labor strife. In 1992, the factory was closed for four and a half months. In 1995, Bata entered into a 3-year bipartite agreement with the workers, represented by the then 10,000 strong BMU, which also had the West Bengal government as a signatory.

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On July 21, 1998, Weston was severely assaulted by four workers at the company's factory at Batanagar, while he was attending a business meet. The incident occurred after a member of BMU, Arup Dutta, met Weston to discuss the issue of the suspended employees. Dutta reportedly got into a verbal duel with Weston, upon which the other workers began to shout slogans. When Weston tried to leave the room the workers turned violent and assaulted him. This was the second attack on an officer after Weston took charge of the company, the first one being the assault on the chief welfare officer in 1996. In February 1999, a lockout was declared in Bata's Faridabad Unit. Middleton commented that the closure of the unit would not have much impact on the company's revenues as it was catering to lower-end products such as canvas and Hawaii chappals. The lock out lasted for eight months. In October 1999, the unit resumed production when Bata signed a three-year wage agreement.

On March 8, 2000, a lockout was declared at Bata's Peenya factory in Bangalore, following a strike by its employee union. The new leadership of the union had refused to abide by the wage agreement, which was to expire in August 2001. Following the failure of its negotiations with the union, the management decided to go for a lock out. Bata management was of the view that though it would have to bear the cost of maintaining an idle plant (Rs. 3 million), the effect of the closures on sales and production would be minimal as the footwear manufactured in the factory could be shifted to the company's other factories and associate manufacturers. The factory had 300 workers on its rolls and manufactured canvas and PVC footwear.

In July 2000, Bata lifted the lockout at the Peenya factory. However, some of the workers opposed the company's move to get an undertaking from the factory employees to resume work. The employees demanded revocation of suspension against 20 of their fellow employees. They also demanded that conditions such as maintaining normal production schedule, conforming to standing orders and the settlement in force should not be insisted upon.

In September 2000, Bata was again headed for a labour dispute when the BMU asked the West Bengal government to intervene in what it perceived to be a downsizing exercise being undertaken by the management. BMU justified this move by alleging that the management has increased outsourcing of products and also due to perceived declining importance of the Batanagar unit. The union said that Bata has started outsourcing the Power range of fully manufactured shoes from China, compared to the earlier outsourcing of only assembly and sewing line job. The company's production of Hawai chappals at the Batanagar unit too had come down by 58% from the weekly capacity of 0.144 million pairs. These steps had resulted in lower income for the workers forcing them to approach the government for saving their interests.

CHANGE MANAGEMENT@ICICI 

Case Code-HROB008Published-2002

"What role am I supposed to play in this ever-changing entity? Has anyone worked out the basis on which roles are being allocated today?"

- A middle level ICICI manager, in 1998.

"We do put people under stress by raising the bar constantly. That is the only way to ensure that performers lead the change process."

- K. V. Kamath, MD & CEO, ICICI, in 1998.

THE CHANGE LEADER

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In May 1996, K.V. Kamath (Kamath) replaced Narayan Vaghul (Vaghul), CEO of India's leading financial services company Industrial Credit and Investment Corporation of India (ICICI). Immediately after taking charge, Kamath introduced massive changes in the organizational structure and the emphasis of the organization changed - from a development bank [1]mode to that of a market-driven financial conglomerate.

Kamath's moves were prompted by his decision to create new divisions to tap new markets and to introduce flexibility in the organization to increase its ability to respond to market changes. Necessitated because of the organization's new-found aim of becoming a financial powerhouse, the large-scale changes caused enormous tension within the organization. The systems within the company soon were in a state of stress. Employees were finding the changes unacceptable as learning new skills and adapting to the process orientation was proving difficult.The changes also brought in a lot of confusion among the employees, with media reports frequently carrying quotes from disgruntled ICICI employees. According to analysts, a large section of employees began feeling alienated.

The discontentment among employees further increased, when Kamath formed specialist groups within ICICI like the 'structured projects' and 'infrastructure' group.

Doubts were soon raised regarding whether Kamath had gone 'too fast too soon,' and more importantly, whether he would be able to steer the employees and the organization through the changes he had initiated.

BACKGROUND NOTE

ICICI was established by the Government of India in 1955 as a public limited company to promote industrial development in India. The major institutional shareholders were the Unit Trust of India (UTI), the Life Insurance Corporation of India (LIC) and the General Insurance Corporation of India (GIC) and its subsidiaries. The equity of the corporation was supplemented by borrowings from the Government of India, the World Bank, the Development Loan Fund (now merged with the Agency for International Development), Kreditanstalt fur Wiederaufbau (an agency of the Government of Germany), the UK government and the Industrial Development Bank of India (IDBI).

The basic objectives of the ICICI were to

assist in creation, expansion and modernization of enterprises encourage and promote the participation of private capital, both internal and external take up the ownership of industrial investment; and expand the investment markets.

Since the mid 1980s, ICICI diversified rapidly into areas like merchant banking and retailing. In 1987, ICICI co-promoted India's first credit rating agency, Credit Rating and Information Services of India Limited (CRISIL), to rate debt obligations of Indian companies. In 1988, ICICI promoted India's first venture capital company - Technology Development and Information Company of India Limited (TDICI) - to provide venture capital for indigenous technology-oriented ventures.

In the 1990s, ICICI diversified into different forms of asset financing such as leasing, asset credit and deferred credit, as well as financing for non-project activities. In 1991, ICICI and the Unit Trust of India set up India's first screen-based securities market, the over-the-counter Exchange of India (OCTEI). In 1992 ICICI tied up with J P Morgan of the US to form an investment banking company, ICICI Securities Limited.

In line with its vision of becoming a universal bank, ICICI restructured its business based on the recommendations of consultants McKinsey & Co in 1998. In the late 1990s, ICICI concentrated on building up its retail business through acquisitions and mergers. It took over ITC Classic, Anagram Finance and merged the Shipping Credit Investment Corporation of India (SCICI) with itself. ICICI also entered the insurance business with Prudential plc of UK.

ICICI was reported to be one of the few Indian companies known for its quick responsiveness to the changing circumstances. While its development bank counterpart IDBI was reportedly not doing very

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well in late 2001, ICICI had major plans of expanding on the anvil. This was expected to bring with it further challenges as well as potential change management issues. However, the organization did not seem to much perturbed by this, considering that it had successfully managed to handle the employee unrest following Kamath's appointment.

CHANGE CHALLENGES - PART II

ICICI had to face change resistance once again in December 2000, when ICICI Bank was merged with Bank of Madura (BoM)[1] . Though ICICI Bank was nearly three times the size of BoM, its staff strength was only 1,400 as against BoM's 2,500. Half of BoM's personnel were clerks and around 350 were subordinate staff.              There were large differences in profiles, grades, designations and salaries of personnel in the two entities. It was also reported that there was uneasiness among the staff of BoM as they felt that ICICI would push up the productivity per employee, to match the levels of ICICI [2]. BoM employees feared that their positions would come in for a closer scrutiny. They were not sure whether the rural branches would continue or not as ICICI's business was largely urban-oriented.

The apprehensions of the BoM employees seemed to be justified as the working culture at ICICI and BoM were quite different and the emphasis of the respective management was also different. While BoM management concentrated on the overall profitability of the Bank, ICICI management turned all its departments into individual profit centers and bonus for employees was given on the performance of individual profit center rather than profits of whole organization.ICICI not only put in place a host of measures to technologically upgrade the BoM branches to ICICI's standards, but also paid special attention to facilitate a smooth cultural integration. The company appointed consultants Hewitt Associates[3]to help in working out a uniform compensation and work culture and to take care of any change management problems.

ICICI conducted an employee behavioral pattern study to assess the various fears and apprehensions that employees typically went through during a merger. (Refer Table I).

TABLE I'POST-MERGER' EMPLOYEE BEHAVIORAL PATTERN PERIOD  EMPLOYEE BEHAVIOR

Day 1 Denial, fear, no improvement

After a month Sadness, slight improvement

After a Year Acceptance, significant improvement

After 2 Years Relief, liking, enjoyment, business development activities

Source:www.sibm.edu

Based on the above findings, ICICI established systems to take care of the employee resistance with action rather than words. The 'fear of the unknown' was tackled with adept communication and the 'fear of inability to function' was addressed by adequate training. The company also formulated a 'HR blue print' to ensure smooth integration of the human resources. (Refer Table II).

TABLE IIMANAGING HR DURING THE ICICI-BoM MERGER 

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THE HR BLUEPRINT AREAS OF HR INTEGRATION FOCUSSED ON

 A data base of the entire HR structure

 Road map of career

 Determining the blue print of HR moves

 Communication of milestones

 IT Integration - People Integration -       Business Integration.

 Employee communication  Cultural integration  Organization structuring  Recruitment & Compensation  Performance management  Training

 Employee relations

Source:www.sibm.edu

EMPLOYEE DOWNSIZING

Case Code- HROB016Publication Date -2002

"Next to the death of a relative or friend, there's nothing more traumatic than losing a job. Corporate cutbacks threaten the security and self-esteem of survivors and victims alike. They cause turmoil and shatter morale inside organizations and they confirm the view that profits always come before people."

 - Laura Rubach, Industry Analyst, in 1994.

"The market is going to determine where we stop with the layoffs."

- Tom Ryan, a Boeing spokesman, in August 2002

DOWNSIZING BLUES ALL OVER THE WORLD

The job markets across the world looked very gloomy in the early 21st century, with many companies having downsized a considerable part of their employee base and many more revealing plans to do so in the near future. Companies on the Forbes 500 and Forbes International 800 lists had laid off over 460,000 employees' altogether, during early 2001 itself.

This trend created havoc in the lives of millions of employees across the world, Many people lost their jobs at a very short or no advance notice, and many others lived in a state of uncertainty regarding their jobs. Companies claimed that worldwide economic slowdown during the late-1990s had had forced them to downsize, cut costs, optimize resources and survive the slump. Though the concept of downsizing had existed for a long time, its use had increased only recently, since the

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late-1990s. (Refer Table I for information on downsizing by major companies).

Analysts commented that downsizing did more damage than good to the companies as it resulted in low morale of retained employees, loss of employee loyalty and loss of expertise as key personnel/experts left to find more secure jobs. Moreover, the uncertain job environment created by downsizing negatively effected the quality of the work produced. Analysts also felt that most companies adopted downsizing just as a 'me-too' strategy even when it was not required.

However, despite these concerns, the number of companies that chose to downsize their employee base increased in the early 21st century. Downsizing strategy was adopted by almost all major industries such as banking, automobiles, chemical, information technology, fabrics, FMCG, air transportation and petroleum. In mid-2002, some of the major companies that announced downsizing plans involving a large number of employees included Jaguar (UK), Boeing (US), Charles Schwab (US), Alactel (France), Dresdner (Germany), Lucent Technologies (US), Ciena Corp. (US) and Goldman Sachs Group (US). Even in companies' developing countries such as India, Indonesia, Thailand, Malaysia and South Korea were going in for downsizing.

TABLE IDOWNSIZING BY MAJOR COMPANIES (1998-2001)

YEAR COMPANY INDUSTRY  No. of Employees Downsized

1998  Boeing  Aerospace  20,0001998  CitiCorp  Banking  7,5001998  Chase Manhattan Bank  Banking  2,2501998  Kellogs  FMCG  1,001998  BF Goodrich  Tyres  1,2001998  Deere & Company  Farm Equipment  2,4001998  AT&T  Telecommunications  18,0001998  Compaq  IT  6,5001998  Intel  IT  3,0001998  Seagate  IT  10,0001999  Chase Manhattan Bank  Banking  2,2501999  Boeing  Aerospace  28,0001999  Exxon-Mobil  Petroleum  9,0002000  Lucent Technologies  IT  68,0002000  Charles Schwab  IT  2,0002001  Xerox  Copiers  4,0002001  Hewlett Packard  IT  3,0002001  AOL Time Warner  Entertainment  2,400

THE FIRST PHASE 

Till the late-1980s, the number of firms that adopted downsizing was rather limited, but the situation changed in the early-1990s. Companies such as General Electric (GE) and General Motors (GM) downsized to increase productivity and efficiency, optimize resources and survive competition and eliminate duplication of work after M&As. Some other organizations that made major job cuts during this period were Boeing (due to its merger with McDonnell Douglas), Mobil (due to the acquisition of Exxon), Deutsche Bank (due to its merger with Bankers Trust) and Hoechst AG (due to its merger with Rhone-Poulenc SA).

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According to analysts, most of these successful companies undertook downsizing as a purposeful and proactive strategy. These companies not only reduced their workforce, they also redesigned their organizations and implemented quality improvement programs. During the early and mid-1990s, companies across the world (and especially in the US), began focusing on enhancing the value of the organization as a whole. According to Jack Welch, the then GE CEO, "The ultimate test of leadership is enhancing the long-term value of the organization. For leaders of a publicly held corporation, this means long-term shareholder value." In line with this approach to leadership, GE abandoned policy of lifetime employment and introduced the concept of contingent employment. Simultaneously, it began offering employees the best training and development opportunities to constantly enhance their skills and performance and keep pace with the changing needs of the workplace.

During this period, many companies started downsizing their workforce to improve the image of the firm among the stockholders or investors and to become more competitive. The chemical industry came out strongly in favor of the downsizing concept in the early 1990s. Most chemical and drug companies restricted their organizations and cut down their employee base to reduce costs and optimize resources.

As the perceived value of the downsized company was more than its actual value, managers adopted downsizing even though it was not warranted by the situation. A few analysts blamed the changes in the compensation system for executive management for the increase in the number of companies downsizing their workforce in 1990s. In the new compensation system, managers were compensated in stock options instead of cash. Since downsizing increased the equity value (investors buy the downsizing company's stocks in hope of future profitability) of the company, managers sought to increase their wealth through downsizing. Thus, despite positive economic growth during the early 1990s, over 600,000 employees were downsized in the US in 1993.

However, most companies did not achieve their objectives and, instead, suffered the negative effects of downsizing. A survey conducted by the American Management Association revealed that less than half of the companies that downsized in the 1990s saw an increase in profits during that period. The survey also revealed that a majority of these companies failed to report any improvements in productivity.

One company that suffered greatly was Delta Airlines, which had laid off over 18,000 employees during the early 1990s. Delta Airlines realized in a very short time that it was running short of people for its baggage handling, maintenance and customer service departments. Though Delta succeeded in making some money in the short run, it ended up losing experienced and skilled workers, as a result of which it had to invest heavily in rehiring many workers.

As investors seemed to be flocking to downsizing companies, many companies saw downsizing as a tool for increasing their share value. The above, coupled with the fact that senior executive salaries had increased by over 1000% between 1980 and 1995, even as the layoff percentage reached its maximum during the same period, led to criticism of downsizing.

In light of the negative influence that downsizing was having on both the downsized and the surviving employees, some economists advocated the imposition of a downsizing tax (on downsizing organizations) by the government to discourage companies from downsizing. This type of tax already existed in France, where companies downsizing more than 40 workers had to report the same in writing to the labor department. Also, such companies had liable to pay high severance fees, contribute to an unemployment fund, and submit a plan to the government regarding the retraining program of its displaced employees (for their future employment). The tax burden of such companies increased because they were no longer exempt from various payroll taxes.

However, the downsizing tax caused more problems than it solved. As this policy restrained a company from downsizing, it damaged the chances of potential job seekers to get into the company. This tax was mainly responsible for the low rate of job creation and high rates of unemployment in many European countries, including France.

THE SECOND PHASE

By the mid-1990s, factors such as increased investor awareness, stronger economies, fall in inflation, increasing national incomes, decrease in level of unemployment, and high profits, reduced

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the need for downsizing across the globe. However, just as the downsizing trend seemed to be on a decline, it picked up momentum again in the late-1990s, this time spreading to developing countries as well.

This change was attributed to factors such as worldwide economic recession, increase in global competition, the slump in the IT industry, dynamic changes in technologies, and increase in the availability of a temporary employee base. Rationalization of the labor force and wage reduction took place at an alarming rate during the late 1990s and early 21st century, with increased strategic alliances and growing popularity of concepts such as lean manufacturing and outsourcing .

Criticism of downsizing and its ill-effects soon began resurfacing. Many companies suffered from negative effects of downsizing and lost some of their best employees. Other problems such as the uneven distribution of employees (too many employees in a certain division and inadequate employees in another), excess workload on the survivors, resistance to change from the survivors, reduced productivity and fall in quality levels also cropped up. As in the early 1990s, many organizations downsized even though it was not necessary, because it appeared to be the popular thing to do.

Due to the loss of experienced workers, companies incurred expenditure on overtime pay and employment of temporary and contract workers. It was reported that about half of the companies that downsized their workforce ended up recruiting new or former staff within a few years after downsizing because of insufficient workers or lack of experienced people. The US-based global telecom giant AT&T was one such company, which earned the dubious reputation of frequently rehiring its former employees because the retained employees were unable to handle the work load.

AT&T frequently rehired former employees until it absorbed the 'shock' of downsizing. It was also reported that in some cases, AT&T even paid recruitment firms twice the salaries of laid-off workers to bring them back to AT&T. A former AT&T manager commented, "It seemed like they would fire someone and [the worker] would be right back at their desk the next day." Justifying the above, Frank Carrubba, Former Operations Director, AT&T, said, "It does not happen that much, but who better to bring back than someone who knows the ropes?" Very few people bought this argument, and the rationale behind downsizing and then rehiring former employees/recruiting new staff began to be questioned by the media as well as the regulatory authorities in various parts of the world.

Meanwhile, allegations that downsizing was being adopted by companies to support the increasingly fat pay-checks of their senior executives increased. AT&T was again in the news in this regard. In 1996, the company doubled the remuneration of its Chairman, even as over 40,000 employees were downsized. Leading Internet start-up AOL was also criticized for the same reasons. The increase in salary and bonuses of AOL's six highest paid executive officers was between 8.9% to 25.2% during 2000. The average increase in salary and bonus of each officer was about 16%, with the remuneration of the CEO exceeding $73 million during the period. Shortly after this raise, AOL downsized 2,400 employees in January 2001.

Following the demand that the executive officers should also share in the 'sacrifice' associated with downsizing, some companies voluntarily announced that they would cut down on the remuneration and bonuses of their top executives in case of massive layoffs. Ford was one of the first companies to announce such an initiative. It announced that over 6,000 of its top executives, including its CEO, would forgo their bonus in 2001. Other major companies that announced that their top executives would forgo cash compensations when a large number of workers were laid off were AMR Corp., Delta, Continental and Southwest Airlines. In addition to the above, companies adopted many strategies to deal with the criticisms they were facing because of downsizing.

TACKLING THE EVILS OF DOWNSIZING

During the early 21st century, many companies began offering flexible work arrangements to their employees in an attempt to avoid the negative impact of downsizing. Such an arrangement was

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reported to be beneficial for both employees as well as the organization. A flexible working arrangement resulted in increased morale and productivity; decreased absenteeism and employee turnover, reduced stress on employees; increased ability to recruit and retain superior quality employees improved service to clients in various time zones; and better use of office equipment and space. This type of arrangement also gave more time to pursue their education, hobbies, and professional development, and handle personal responsibilities.

The concept of contingent employment also became highly popular and the number of organizations adopting this concept increased substantially during the early 21st century. According to the Bureau of Labor Statistics (BLS), US, contingent employees were those who had no explicit or implicit contract and expected their jobs to last no more than one year. They were hired directly by the company or through an external agency on a contract basis for a specific work for a limited period of time.

Companies did not have to pay unemployment taxes, retirement or health benefits for contingent employees. Though these employees appeared on the payroll, they were not covered by the employee handbook (which includes the rights and duties of employers and employees and employment rules and regulations). In many cases, the salaries paid to them were less than these given to regular employees performing similar jobs. Thus, these employees offered flexibility without long-term commitments and enabled organizations to downsize them, when not required, without much difficulty or guilt. Analysts commented that in many cases HR managers opted for contingent employees as they offered the least resistance when downsized.

However, analysts also commented that while contingent employment had its advantages, it posed many problems in the long run. In the initial years, when contingent employment was introduced, such employees were asked to perform non-critical jobs that had no relation to an organization's core business. But during the early 2000s, contingent employees were employed in core areas of organizations. This resulted in increased costs as they had to be framed for the job. Not only was training time consuming, its costs were recurring in nature as contingent employees stayed only for their specified contract period and were soon replaced by a new batch of contingent employees. Productivity suffered considerably during the period when contingent employees were being trained. The fact that such employees were not very loyal to the organization also led to problems.

Analysts also found that most contingent employees preferred their flexible work arrangements and were not even lured by the carrot (carrot and stick theory of motivation) of permanent employment offered for outstanding performance. In the words of Paul Cash, Senior Vice President, Team America (a leasing company), "It used to be that you worked as a temp to position yourself for a full-time job. That carrot is not there any more for substantial numbers of temps who prefer their temporary status. They do not understand your rules, and if they are only going to be on board for a month, they may never understand." With such an attitude to remain outside the ambit of company rules and regulations, contingent employees reportedly failed to develop a sense of loyalty toward the organization. Consequently, they failed to completely commit themselves to the goals of the organization.

According to some analysts, the contingent employment arrangement was not beneficial to contingent employees. Under the terms of the contract, they were not eligible for health, retirement, or overtime benefits. Discrimination against contingent employees at the workplace was reported in many organizations. The increasing number of contingent employees in an organization was found to have a negative effect on the morale of regular employees. Their presence made the company's regular employees apprehensive about their job security. In many cases regular employees were afraid to ask for a raise or other benefits as they feared they might lose their jobs.

Though contingent employment seemed to have emerged as one of the solutions to the ills of downsizing, it attracted criticism similar to those that downsizing did. As a result, issues regarding employee welfare and the plight of employees, who were subject to constant uncertainty and insecurity regarding their future, remained unaddressed. Given these circumstances, the best option for companies seemed to be to learn from those organizations that had been comparatively successful at downsizing.

LESSONS FROM THE 'DOWNSIZING BEST PRACTICES' COMPANIES

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In the late 1990s, the US government conducted a study on the downsizing practices of firms (including major companies in the country). The study provided many interesting insights into the practice and the associated problems. It was found that the formulation and communication of a proper planning and downsizing strategy, the support of senior leaders, incentive and compensation planning and effective monitoring systems were the key factors for successful downsizing.

In many organizations where downsizing was successfully implemented and yielded positive results, it was found that senior leaders had been actively involved in the downsizing process. Though the downsizing methods used varied from organization to organization, the active involvement of senior employees helped achieve downsizing goals and objectives with little loss in quality or quantity of service. The presence and accessibility of senior leaders had a positive impact on employees - those who were downsized as well as the survivors. According to a best practice company source, "Managers at all levels need to be held accountable for - and need to be committed to - managing their surplus employees in a humane, objective, and appropriate manner. While HR is perceived to have provided outstanding service, it is the managers' behavior that will have the most impact." In many companies, consistent and committed leadership helped employees overcome organizational change caused by downsizing.

HR managers in these companies participated actively in the overall downsizing exercise. They developed a employee plan for downsizing, which covered issues such as attrition management and workforce distribution in the organization. The plan also included the identification of skills needed by employees to take new responsibilities and the development of training and reskilling programs for employees. Since it may be necessary to acquire other skills in the future, the plan also addressed the issue of recruitment planning.

Communication was found to be a primary success factor of effective downsizing programs. According to a survey conducted in major US companies, 79% of the respondents revealed that they mostly used letters and memorandums from senior managers to communicate information regarding restructuring or downsizing to employees. However, only 29% of the respondents agreed that this type of communication was effective.

The survey report suggested that face-to-face communication (such as briefings by managers and small group meetings) was a more appropriate technique for dealing with a subject as traumatic (to employees) as downsizing. According to best practice companies, employees expected senior leaders to communicate openly and honestly about the circumstances the company was facing (which led to downsizing).

These companies also achieved a proper balance between formal and informal forms of communication. A few common methods of communication adopted by these companies included small meetings, face to face interaction, one-on-one discussion, breakfast gatherings, all staff meetings, video conferencing and informal employee dialogue sessions, use of newsletters, videos, telephone hotlines, fax, memoranda, e-mail and bulletin boards; and brochures and guides to educate employees about the downsizing process, employee rights and tips for surviving the situation.

Many organizations encouraged employees to voice their ideas, concerns or suggestions regarding the downsizing process. According to many best practice organizations, employee inputs contributed considerably to the success of their downsizing activities as they frequently gave valuable ideas regarding the restructuring, increase in production, and assistance required by employees during downsizing.

Advance planning for downsizing also contributed to the success of a downsizing exercise. Many successful organizations planned in advance for the downsizing exercise, clearly defining every aspect of the process. Best practice companies involved employee union representatives in planning. These companies felt it was necessary to involve labor representatives in the planning process to prevent and resolve conflicts during downsizing.

According to a survey report, information that was not required by companies for their normal day-to-day operations, became critical when downsizing. This information had to be acquired from internal as well as external sources (the HR department was responsible for providing it). From external sources, downsizing companies needed to gather information regarding successful downsizing processes of other organizations and various opportunities available for employees outside the organization. And from internal sources, such companies need to gather demographic

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data (such as rank, pay grade, years of service, age, gender and retirement eligibility) on the entire workforce. In addition, they required information regarding number of employees that were normally expected to resign or be terminated, the number of employees eligible for early retirement, and the impact of downsizing on women, minorities, disabled employees and old employees.

The best practice organizations gathered information useful for effective downsizing from all possible sources. Some organizations developed an inventory of employee skills to help management take informed decisions during downsizing, restructuring or staffing. Many best practice organizations developed HR information systems that saved management's time during downsizing or major restructuring by giving ready access to employee information.

The major steps in the downsizing process included adopting an appropriate method of downsizing, training managers about their role in downsizing, offering career transition assistance to downsized employees, and providing support to survivors. The various techniques of downsizing adopted by organizations included attrition, voluntary retirement, leave without pay or involuntary separation (layoffs). According to many organizations, a successful downsizing process required the simultaneous use of different downsizing techniques. Many companies offered assistance to downsized employees and survivors, to help them cope with their situation.

Some techniques considered by organizations in lieu of downsizing included overtime restrictions, union contract changes, cuts in pay, furloughs, shortened workweeks, and job sharing. All these approaches were a part of the 'shared pain' approach of employees, who preferred to share the pain of their co-workers rather than see them be laid-off. Training provided to managers to help them play their role effectively in the downsizing process mainly included formal classroom training and written guidance (on issues that managers were expected to deal with, when downsizing). The primary focus of these training sessions was on dealing with violence in the workplace during downsizing.

According to best practice companies, periodic review of the implementation process and immediate identification and rectification of any deviations from the plan minimized the adverse effects of the downsizing process. In some organizations, the progress was reviewed quarterly and was published in order to help every manager monitor reductions by different categories. These categories could be department, occupational group (clerical, administrative, secretarial, general labor), reason (early retirement, leave without pay, attrition), employment equity group (women, minorities, disabled class) and region. Senior leaders were provided with key indicators (such as the effect of downsizing on the organizational culture) for their respective divisions. Some organizations tracked the progress and achievement of every division separately and emphasized the application of a different strategy for every department as reaction of employees to downsizing varied considerably from department to department.

Though the above measures helped minimize the negative effects of downsizing, industry observers acknowledged the fact that the emotional trauma of the concerned people could never be eliminated. The least the companies could do was to downsize in a manner that did not injure the dignity of the discharged employees or lower the morale of the survivors.

QUESTIONS FOR DISCUSSION

1. Explain the concept of downsizing and describe the various downsizing techniques. Critically evaluate the reasons for the increasing use of downsizing during the late 20th century and the early 21st century. Also discuss the positive and negative effects of downsizing on organizations as well as employees (downsized and remaining).

2. Why did contingent employment and flexible work arrangements become very popular during the early 2000s? Discuss. Evaluate these concepts as alternatives to downsizing in the context of organizational and employee welfare.

3. As part of an organization's HR team responsible for carrying it through a downsizing exercise, discuss the measures you would adopt to ensure the exercise's success. Given the uncertainty in the job market, what do you think employees should do to survive the trauma caused by downsizing and prepare themselves for it?

ADDITIONAL READING & REFERENCES

1. Making Sense of Corporate Downsizing, www.csaf.com, April 1996. 2. Downsizing and Employee Attitudes, www.ncspearson.com, September 1995.

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3. Downsizing Strategies Used in Selected Organizations, www.c3i.osd.mil, 1995.4. The Wages of Downsizing, www.mojones.com, January 1996.5. Kirschener Elisabeth, Chemical & Engineering News, www.chemcenter.org, October 1996.6. Hickok Thomas, Downsizing and Organizational Culture, www.pamji.com, 1997.7. P.Jenkins Carri, Downsizing or Dumbsizing, http://advance.byu.edu/bym, 1997.8. L.Lester Martha and M. Hollender Lauren, Employment Law Q&A, www.lowenstein.com, February 1997.9. Hein Kenneth, Food for the Corporate Soul, www.martinrutte.com, May 1997.10. GE Knows to Roll With the Changes, www.houstonchronicle.com, June 1998.11. Jones Shannon, Job Cuts Up 53% Since 1997, www.wsws.org, October 1998.12. Grey Barry, Boeing Announcements Brings US Job Cuts to 500,000 in 1998, www.wsws.org, December 1998.13. Unkindest Cuts of All - And Not Always a Payoff in the Layoff, www.managementfirst.com, 1998.14. Grice Corey and Junnarkar Sandeep, Silicon Valley: Still a Boomtown? News.com.com, January 1999.15. Shareholders Press AT&T on Wage Gap, www.ufenet.org, May 1999.16. Baker Wayne, How to Survice Downsizing, www.humax.net, 2000.17. Duffy Tom, Downsizing with Dignity, www.nwfusion.com, 2001.18. Global Slowdown Bites I.T. Gaints, www.asiafeatures.com, July 2001.19. Bowes Barbara, Downsizing Dignity, www.winnipegfreepress2.com, October 2001. 20. Freeze Executive Pay During Periods of Downsizing, www.responsiblewealth.org, February 2002.21. Layoff and Outsourcing Update, www.erie.net, March 2002.22. Skaer Mark, Employee Mindset Is Different Today, www.achrnews.com, March 2002.23. GE to Layoff 1,000, www.wspa.com, July 2002.24. DiCarlo Lisa, US Airlines on Course with Loan Guarantee, www.forbes.com, July 2002. 25. M.Song Kyung, Boeing Tells 600 More of Layoffs Today, http://seattletimes.nwsource.com, August 2002.26. Gomez Armando, The Ups and Downs of Downsizing, www.askmen.com, September 2002.27. Carmaker Jaguar to Cut 400 Jobs, http://story.news.yahoo.com, September 2002.28. Telecom Giant Sheds Scots Jobs, http://news.bbc.co.uk, September 2002.29. Dresdner to Cut 3,000 Jobs, http://news.bbc.co.uk, September 2002.30. Leicester John, Alactel to Cut 10,000 More Jobs, http://story.news.yahoo.com, September 2002.31. Noguchi Yuki, With Sales Down, Ciena Cuts Another Round of Workers, www.washingtonpost.com, September 2002.32. www.geocities.com33. http://govinfo.library.unt.edu34. www.greylockassociates.com35. www.whatis.com36. www.shrm.org37. www.cio.com38. www.shrm.org39. www.forbes.com40. www.orst.edu41. www.humanresources.about.com42. www.business2.com43. www.businessweek.com44. www.business-minds.com45. www.themanagementor.com46. www.bpcinc.com47. http://members.aol.com48. www.doleta.gov49. www.msnbc.com 

The Indian Call Center Journey

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“The call center business appears to be going the dot-com way with a lot of big names pumping in dough. Ultimately, only the fittest will survive.”

- A Mumbai based call center agent, in 2001.

CALL CENTERS FARE BADLY

In the beginning of 1999, the teleworking industry had been hailed as ‘the opportunity’ for Indian corporates in the new millennium. In late 2000, a NASSCOM[1] study forecast that by 2008, the Indian IT enabled services business[2] was set to reach great heights.

Noted Massachusetts Institute of Technology (MIT) scholar, Michael Dertouzos remarked that India could boost its GDP by a trillion dollars through the IT-enabled services sector. Call center (an integral part of IT-enabled services) revenues were projected to grow from Rs 24 bn in 2000 to Rs 200 bn by 2010.

During 2000-01, over a hundred call centers were established in India ranging from 5000 sq. ft. to 100,000 sq. ft. in area involving investments of over Rs 12 bn. However, by early 2001, things seemed to have taken a totally different turn.

The reality of the Indian call center experience was manifested in rows after rows of cubicles devoid of personnel in the call centers. There just was no business coming in. In centers which did retain the employees, they were seen sitting idle, waiting endlessly for the calls to come.

Estimates indicated that the industry was saddled with idle capacity worth almost $ 75-100 mn. Owners of a substantial number of such centers were on the lookout for buyers. It was surprising that call centers were having problems in recruiting suitable entry-level agents even with attractive salaries being offered.

The human resource exodus added to the industry’s misery. Given the large number of unemployed young people in the country, the attrition rate of over 50% (in some cases) was rather surprising.

The industry, which was supposed to generate substantial employment for the country, was literally down in the dumps - much to the chagrin of industry experts, the Government, the media and above all, the players involved. The future prospects of the call center business seemed to be rather bleak indeed.

CALL CENTER BASICS

In 2001, the global call center industry was worth $ 800 mn spread across around 100,000 units. It was expected to touch the 300,000 level by 2002 employing approximately 18 mn people.

Broadly speaking, a call center was a facility handling large volumes of inbound and outbound telephone calls, manned by ‘agents,’ (the people working at the center). In certain setups, the caller and the call center shared costs, while in certain other cases, the clients bore the call’s cost.

The call center could be situated anywhere in the world, irrespective of the client company’s customer base. Call centers date back to the 1970s, when the travel/hospitality industry in the US began to centralize their reservation centers.

With the rise of catalog shopping and outbound telemarketing, call centers became necessary for many industries. Each industry had its own way of operating these centers, with its own standards for quality, and its own preferred technologies.

The total number of people who worked at the center at any given point of time were referred to as ‘seats.’ A center could range from a small 5-10 seat set-up to a huge set-up with 500-2,000 seats.

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The calls could be for customer service, sales, marketing or technical support in areas such as airline/hotel reservations, banking or regarding telemarketing, market research, etc. For instance, while a FMCG company could use the call centers for better customer relationship management, for a biotechnology company, the task could be of verifying genetic databases. (Refer Table I).

Call centers began as huge establishments managing large volumes of communications and traffic. These centers were generally set up as large rooms, with workstations, interactive voice response systems, an EPABX[3], headsets hooked into a large telecom switch and one or more supervisor stations. (Refer Table II). The center was either an independent entity, or was linked with other centers or to a corporate data network, including mainframes, microcomputers and LANs[4] .

The Indian Call Center Journey<<Previous

TABLE IBENEFITS OF A CALL-CENTER

Enhances the customer base and business prospects Offers an economical means of reaching diverse and widely

distributed customer group Fine-tunes offerings to specific customer groups by

specialized and focussed assistance Allows customers easy access to experts Facilitates business round the clock and in any geographical

region Allows a company to reduce the overheads of brick and

mortar branches Source: Compiled from various sources.

TABLE IICALL CENTER CLASSIFICATION

Voice call center with phones and computers. E-mail call center with leased lines and computers. Web-based call centers using internet chat facilities with

customers. Regional call centers handling calls from local clients. Global call centers handling calls from across the world.

Source: Compiled from various sources.

Call centers could either be ‘captive/in-house’ or in form of an ‘outsourced bureau.’ Captive call centers were typically used by various segments like insurance, investments and securities, retail banking, other financial services, telecommunications, technology, utilities, manufacturing, travel and tourism, transport, entertainment, healthcare and education etc.

Outsourcing bureaus were outfits with prior experience in running call centers. These helped the new players in dealing with complex labor issues, assisted in using latest technologies, helped in lowering the operating expenses and financial risks. Outsourced bureau operators were utilized by companies at various stages viz. setting up of the center, internal infrastructure revamps, excess traffic situations etc.

INDIAN CALL CENTERS – MYTHS AND REALITIES

There were many reasons why India was considered an attractive destination to set up call centers. The boom in the Indian information technology sector in the mid 1990s led to the country’s IT strengths being recognized all over the world.

Moreover, India had the largest English-speaking population after the US and had

21

a vast workforce of educated, reasonably tech-savvy personnel. In a call center, manpower typically accounted for 55-60% of the total costs in the US and European markets - in India, the manpower cost was approximately one-tenth of this.

While per agent cost in US worked out to approximately $ 40,000, in India it was only $ 5,000. This was cited to be the biggest advantage India could offer to the MNCs. Apart from these, the Government’s pro call center industry approach and a virtual 12-hour time zone difference with the US added to India’s advantages.

There were a host of players in the Indian call center industry. Apart from the pioneers British Airways, GE and Swiss Air, HLL, BPL, Godrej Soaps, Global Tele-Systems, Wipro, ICICI Banking Corporation, American Express, Bank of America, Citibank, ABN AMRO, Global Trust, Deutsche Bank, Airtel, and Bharati BT were the other major players in the call-center business.

After the projections of the NASSCOM-McKinsey report were made public, many people began thinking of entering the call center business. (Refer Table III). During this rush to make money from the call center ‘wave,’ NASSCOM received queries from many people with spare cash and space, including lorry-fleet operators, garment exporters, leather merchants, tyre distributors and plantation owners among others.

TABLE IIITHE INDIAN CALL-CENTER MILESTONES

Mid 1990s GE, Swiss Air, British Airways set up captive call center units

for their global needs.

May-99 Following increasing interest in the IT-enabled services sector, NASSCOM held the first IT-enabled services meet. Over 600 participant firms plan to set up medical transcription outfits and call centers.

Dec-99 A NASSCOM-McKinsey report says that remote services could generate $ 18 billion of annual revenues by 2008.

May-00 Venture Capitalists rush in. Make huge investments in call centers.

Sep-00 More than 1,000 participants flock to the NASSCOM meet to hear about new opportunities in remote services. Though the medical transcription business is not flourishing, call centers seen as a big opportunity.

Quarter 4 2000

NASSCOM report, indicates that a center could be set up with $ 1 million. Gold rush begins. Everyone, from plantation owners to lorry-fleet operators, wanted to set up centers.

Quarter 1, 2001

Most of the call centers are waiting for customers. New ventures still coming up: capacity of between 25 seats and 10,000 seats per company. Small operators discover that the business is a black hole where investments just disappear. They look for buyers, strategic partnerships and joint ventures. Brokers and middlemen make an entry to fix such deals.

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INDIAN CALL CENTERS – MYTHS AND REALITIES contd...

However, most of these people entered the field, without having any idea as to what the business was all about. Their knowledge regarding the technology involved, the marketing aspects, client servicing issues etc was very poor.

They assumed that by offering cheaper rates, they would be able to attract clients easily. They did not realize that more than easy access to capital and real estate, the field required experience and a sound business background. Once they decided to enter the field, they found that most of the capital expenditure (in form of building up the infrastructure[5] ) occurred even before the first client was bagged.

These players seemed to have neglected the fact that most successful call centers were quite large and had either some experience in the form of promoters having worked abroad in similar ventures or previous experience with such ventures or were subsidiaries of foreign companies. The real trouble started when these companies began soliciting clients.

As call centers were a new line of business in India, the lack of track record forced the clients to go for much detailed and prolonged studies of the Indian partners. Many US clients insisted on a strict inspection of the facilities offered, such as work-areas, cafeterias and even the restrooms. The clients expected to be shown detailed Service Level Agreements (SLAs)[6] , which a majority of the Indian firms could not manage.

Under these circumstances, no US company was willing to risk giving business to amateurs at the cost of losing their customers. Because of the inadequate investments in technology, lack of processes to scale the business[7] and the lack of management capabilities, most of the Indian players were unable to get international customers.

Even for those who did manage to rope in some clients, the business was limited. As if these problems were not enough, the players hit another roadblock - this time in form of the high labor turnover problem. Agent performance was the deciding factor in the success of any call center. Companies had recognized agents as one of the most important and influential points of contact between the business and the customer.

However, it was this very set of people whom the Indian call centers were finding extremely difficult to recruit and more importantly, retain. In 2000, the average attrition rate in the industry was 40-45%, with about 10-15% of the staff quitting within the first two months itself.

Even though attrition rates were very high in this industry worldwide, the same trend was not expected to emerge in India, as the unemployment levels were much higher. The reasons were not very hard to understand. In a eight-and-a-half hour shift, the agents had to attend calls for seven-and-a-half hours.

INDIAN CALL CENTERS – MYTHS AND REALITIES contd...

The work was highly stressful and monotonous with frequent night shifts. A typical call center agent could be described as being ‘overworked, underpaid, stressed-out and thoroughly bored.’ The agents were frequently reported to develop an identity crisis because of the ‘dual personality’ they had to adopt.

They had to take on European/US names or abbreviate their own names and acquire foreign accents in order to pose as ‘locals.’ The odd timings took a toll on their health with many agents complaining of their biological clocks being disturbed. (Especially the ones in night shifts).

Job security was another major problem, with agents being fired frequently for not being able to adhere to the strict accuracy standards. (Not more than one mistake per 100 computer lines.) The industry did not offer any creative work or growth

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opportunities to keep the workers motivated.

The scope for growth was very limited. For instance, in a 426-seat center, there were 400 agents, 20 team leaders, four service delivery leaders, one head of department and one head of business. Thus, going up the hierarchy was almost impossible for the agents.

Analysts remarked that the fault was mainly in the recruitment, training, and career progression policies of the call centers. Organizations that first set up call centers in India were able to pick and choose the best talent available.

The entry norms established at this point were - a maximum age limit of 25 years, a minimum qualification of a university degree, English medium school basic education and a preference to candidates belonging to westernized and well-off upper middle class families. The companies hence did not have to spend too much time and effort in training the new recruits on the two important aspects of a good level of spoken and written English and a good exposure to western culture and traditions.

However, companies soon realized that people with such backgrounds generally had much higher aspirations in life. While they were initially excited to work in the excellent working environment of a multinational company for a few months, they were not willing to make a career in the call center industry. They generally got fed up and left within a few months when the excitement waned.

A consistently high attrition rate affected not only a center’s profits but also customer service and satisfaction. This was because a new agent normally took a few months before becoming as proficient as an experienced one. This meant that opportunities for providing higher levels of customer service were lost on account of high staff turnover

FUTURE PROSPECTS

The Indian call center majors were trying to handle the labor exodus through various measures. Foremost amongst these was the move to employ people from social and academic backgrounds different from the norms set earlier.

Young people passing out of English medium high schools and universities and housewives and back-to-work mothers looking for suitable opportunities were identified as two of the biggest possible recruitment pools for the industry.

Such students with a good basic level of English could be trained easily to improve their accents, pronunciation, grammar, spelling and diction. They could be trained to become familiar with western culture and traditions. The housewives and back-to-work mothers’ pool could also be developed into excellent resources.

This had been successfully tried out in the US and European markets, where call centers employed a large number of housewives and back-to-work mothers. Another solution being thought about was to recruit people from non-metros, as people from these places were deemed to be more likely to stay with the organization, though being more difficult to recruit and expensive to train. Even as the people and infrastructure problems were being tackled, a host of other issues had cropped up, posing threats for the Indian call centers.

The promise of cheap, English speaking and technically aware labor from India was suddenly not as lucrative in the international markets. A survey of Fortune 1,000 companies on their outsourcing concerns showed that cost-reduction was not the most important criterion for selecting an outsourcing partner. This did not augur well for a country banking on its cost competitiveness. Also, China was fast emerging as a major threat to India, as it had embarked on a massive plan to train people in English to overcome its handicap in the language. In February 2001, Niels Kjellerup, editor and publisher of ‘Call Center Managers Forum’ came out strongly against India being promoted as an ideal place to set up call centers.

He said: “The English spoken by Indians is a very heavy dialect – in fact, in face to face conversations, I found it very difficult to understand what was said. How will this play out over the

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telephone with people much less educated that my conversation partners? The non-existent customer service culture in India will make training of reps mandatory and difficult, since such a luxury as service is not part of everyday life in India. The infrastructure is bad, no, make that antiquated: The attempts by a major US corporation to set up a satellite link has so far been expensive and not very successful. Electricity infrastructure is going from bad to worse – in fact during my stay at a 5 star hotel and at the corporate HQ of a big MNC, we had on average 7 black-outs a day where the generators would kick in after 2-3 seconds.

The telephony system is analog and inadequate. It took on average three attempts just to get a line of out my hotel. The telecom market is not deregulated, and international calls are very expensive. The business culture and the mix of Government intervention will be a cultural shock for Western business people with no previous experience. Add to this a lack of a call center industry and very few people with call center experience which makes it very hard to recruit call center managers with a proven track record.” Despite the mounting criticisms and worries, hope still existed for the Indian call center industry. Analysts remarked that the call center business was in the midst of a transition, wherein only the fundamentally strong players would remain in the fray after an inevitable ‘shakeout.’

Unlike other industries, the shakeout in this industry was not only because of an over supply of call center providers, but also because of the quality of supply offered. In spite of the downturn, the call center business was considered to hold a lot of potential by many corporates. With the US economy facing a slowdown, the need for US companies to outsource was expected to be even higher. The Reliance group was planning to open call centers in 10 cities across the country. Other companies including Spectramind and Global Telesystems planned to either enter or enhance their presence in the business. Whether the dream of call centers contributing to substantial economic growth for India would turn into reality was something only time would reveal.

QUESTIONS FOR DISCUSSION

1. Prepare a note on the functioning of a call center and comment on its necessity and viability in the Indian context.

2. India had certain inherent advantages because of which, it had been identified as the preferred destination on a global basis for outsourcing IT services. However, these very advantages were proving to be its drawbacks in the early 21st century. Critically examine the above statement giving reasons to support your stand.

3. What were the problems being faced on the human resources front by the call centers? How were the players planning to address them?

EXHIBIT ICALL CENTER TERMINOLOGY

• Automatic Call Distribution (ACD): The ACD processes all inbound telephone calls on a first come, first served basis. The system answers each call immediately and, if need be, holds it in a queue till the time an agent is available. When an agent becomes free, he/she services the first caller in the queue. A system can be configured to offer different kinds of treatment to different callers. For example, people calling long distance can be given priority handling. Or calls from customers placing orders can be taken before than those seeking technical support. By providing sequencing and uniform distribution of incoming calls among multiple agents in a call center, ACDs offer time/labor savings and enhance productivity.

• Interactive Voice Response (IVR): IVR applications support the automated retrieval of stored data. These usually took the form of pre-stored messages saying ‘Press 1 for this or Press 2 for that.’ IVR applications range from basic inquiry to the most sophisticated speech recognition applications.

• Computer Telephony (CTI): CTI is one of the most common features of call center environments. They can either be a simple screen pop-up window, a sophisticated call control algorithm that can search for the last agent that spoke

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to the caller, or a predictive dialing solution that doubles the efficiency of outbound calling. With a simple click of a mouse, a call center agent can quickly move between a customer profile, product information, customer history, order entry, fulfillment request, template cover letters and quote entry, among other fields. • Web Integration: The integration of Web technology in call centers offers personalized, time and cost effective customer service. Organizations can either have a call back button on their Web page whereby a call is automatically made to the customer or have a seamless addition of voice over IP to the web application.

• Reporting Systems: Different reporting applications are used to optimize the use of different communications platforms. Depending upon the firm’s specifications, either simple proprietary tools could be used or advanced tools that blend information from multiple communications and information systems platforms can be adopted.

• Workflow Management Tools: Coordinating telephony applications with information systems applications, workflow management tools assist call center supervisors to script and manage employee activity. For example, selecting the best agent for handling particular types of calls.

Source : ICMR

ADDITIONAL READINGS & REFERENCES

1. Mukerjea D.N. & Dhawan Radha, Teleworking - The hottest business opportunity for India, Business World, January 7, 1999. 2. Chandrashekhar S. & Lahiri Jaideep, Connecting to customers through call centers, Business Today, June 22, 1999.3. Jayaram Anup, Can I help you sir?, Business Today, November 29, 1999. 4. Carver John, Staff turnover – friend or foe?, www.callcentres.com, February 18, 2000.5. Kumar Rahul, Finding the Right Mix, Computer Today, November 1, 2000.6. Rajawat K. Yatish & Kulkarni Sangeeta, No-fuss gus, Economic Times, December 1, 2000. 7. Kjellerup Niels. Myth & Reality about Contact Centers in India, www.callcentres.com, February 20, 2001. 8. Agnihotri Peeyush, How can I help you, sir?, Tribune India, February 12, 2001.9. Singh Shelley & Srinivas Alam, Waiting for the call, Business World, May 28, 2001. 10. Sarma Uma & Ramavat Mona, Call centers attract but disappoint, The Economic Times.11. I.T Enabled Services - The Indian Scenario, www.teleworkingindia.com12. Call Centers: Not-so dreamy affair, www.indiatimes.com.13. Call centers, www.teleworkingindia.com.14. The Never Ending Search, www.voicendata.com.

Indian Airlines HR Problems

“There could scarcely be a more undisciplined bunch of workers than IA’s 22,000 employees.”

- Business India, January 25, 1999.

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FLYING LOW

Indian Airlines (IA) – the name of India’s national carrier conjured up an image of a monopoly gone berserk with the absolute power it had over the market. Continual losses over the years, frequent human resource problems and gross mismanagement were just some of the few problems plagued the company.

Widespread media coverage regarding the frequent strikes by IA pilots not only reflected the adamant attitude of the pilots, but also resulted in increased public resentment towards the airline. IA’s recurring human resource problems were attributed to its lack of proper manpower planning and underutilization of existing manpower.

The recruitment and creation of posts in IA was done without proper scientific analysis of the manpower requirements of the organization. IA’s employee unions were rather infamous for resorting to industrial action on the slightest pretext and their arm-twisting tactics to get their demands accepted by the management.

During the 1990s, the Government took various steps to turn around IA and initiated talks for its disinvestment. Amidst strong opposition by the employees, the disinvestment plans dragged on endlessly well into mid 2001.

The IA story shows how poor management, especially in the human resources area, could spell doom even for a Rs 40 bn monopoly.

BACKGROUND NOTE

IA was formed in May 1953 with the nationalization of the airlines industry through the Air Corporations Act. Indian Airlines Corporation and Air India International were established and the assets of the then existing nine airline companies were transferred to these two entities. While Air India provided international air services, IA and its subsidiary, Alliance Air, provided domestic air services. In 1990, Vayudoot, a low-capacity and short-haul domestic airline with huge long-term liabilities, was merged with IA.

IA’s network ranged from Kuwait in the west to Singapore in the east, covering 75 destinations (59 within India, 16 abroad). Its international network covered Kuwait, Oman, UAE, Qatar and Bahrain in West Asia; Thailand, Singapore and Malaysia in South East Asia; and Pakistan, Nepal, Bangladesh, Myanmar, Sri Lanka and Maldives in the South Asian subcontinent. Between themselves, IA and Alliance Air carried over 7.5 million passengers annually. In 1999, the company had a fleet strength of 55 aircraft - 11 Airbus A300s, 30 Airbus A320s, 11 Boeing B737s and 3 Dorniers D0228.

In 1994, the Air Corporation Act was repealed and air transport was thrown open to private players. Many big corporate houses entered the fray and IA saw a mass exodus of its pilots to private airlines. To counter increasing competition IA launched a new image building advertisement campaign. It also improved its services by strictly adhering to flight schedules and providing better in-flight and ground services. It also launched several other new aircraft, with a new, younger, and more dynamic in flight crew. These initiatives were soon rewarded in form of 17% increase in passenger revenues during the year 1994.

However, IA could not sustain these improvements. Competitors like Sahara and Jet Airways (Jet) provided better services and network. Unable to match the performance of these airlines IA faced severe criticism for its inefficiency and excessive expenditure human resources. Staff cost increased by an alarming Rs 5.9 bn during 1994-98. These costs were responsible to a great extent for the company’s frequent losses. By 1999 the losses touched Rs 7.5 bn.

In the next few years, private players such as East West, NEPC, and Damania had to close shop due to huge losses. Jet was the only player that was able to sustain itself. IA’s market share, however continued to drop. In 1999, while IA’s market share was 47%, the share of private airlines reached 53%.

Unnecessary interference by the Ministry of Civil Aviation was a major cause of concern for IA. This

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interference ranged from deciding on the crew’s quality to major technical decisions in which the Ministry did not even have the necessary expertise. IA had to operate flights in the North-East at highly subsidized fares to fulfill its social objectives of connecting these regions with the rest of the country. These flights contributed to the IA’s losses over the years. As the carrier’s balance sheet was heavily skewed towards debt with an equity base of Rs 1.05 bn in 1999 as against long term loans of Rs 28 bn, heavy interest outflows of Rs 1.99 bn further increased the losses.

IA could blame many of its problems on competitive pressures or political interference; but it could not deny responsibility for its human resource problems. A report by the Comptroller and Auditor General of India stated, “Manpower planning in any organization should depend on the periodic and realistic assessment of the manpower needs, need-based recruitment, optimum utilization of the recruited personnel and abolition of surplus and redundant posts. Identification of the qualifications appropriate to all the posts is a basic requirement of efficient human resource management. IA was found grossly deficient in all these aspects.”

‘FIGHTER’ PILOTS?

IA’s eight unions were notorious for their defiant attitude and their use of unscrupulous methods to force the management to agree to all their demands. Strikes, go-slow agitations and wage negotiations were common.

For each strike there was a different reason, but every strike it was about pressurizing IA for more money. From November 1989 to June 1992, there were 13 agitations by different unions. During December 1992-January 1993, there was a 46-day strike by the pilots and yet another one in November 1994. The cavalier attitude of the IA pilots was particularly evident in the agitation in April 1995.

The pilots began the agitation demanding higher allowances for flying in international sectors. This demand was turned down. They then refused to fly with people re-employed on a contract basis. Thereafter they went on a strike, saying that the cabin crew earned higher wages than them and that they would not fly until this issue was addressed.

Due to adamant behaviour of pilots many of the cabin crew and the airhostesses had to be off-loaded at the last moment from aircrafts. In 1996, there was another agitation, with many pilots reporting sick at the same time. Medical examiners, who were sent to check these pilots, found that most of these were false claims.

Some of the pilots were completely fit; others somehow managed to produce medical certificates to corroborate their claims. In January 1997, there was another strike by the pilots, this time asking for increased foreign allowances, fixed flying hours, free meals and wage parity with Alliance Air.

Though the strike was called off within a week, it again raised questions regarding IA’s vulnerability. April 2000 saw another go-slow agitation by IA’s aircraft engineers who were demanding pay revision and a change in the career progression pattern[1]. The strategies adopted by IA to overcome these problems were severely criticized by analysts over the years. Analysts noted that the people heading the airline were more interested in making peace with the unions than looking at the company’s long-term benefits.

Russy Mody (Mody), who joined IA as chairman in November 1994, made efforts to appease the unions by proposing to bring their salaries on par with those of Air India employees. This was strongly opposed by the board of directors, in view of the mounting losses. Mody also proposed to increase the age of retirement from 58 to 60 to control the exodus of pilots.

However, government rejected Mody’s plans[2]. When Probir Sen (Sen) took over as chairman and managing director, he bought the pilot emoluments on par with emoluments other airlines, thereby successfully controlling the exodus. In 1994, the IA unions opposed the re-employment of pilots who had left IA to join private carriers and the employment of superannuated fliers on contract.

Sen averted a crisis by creating Alliance Air, a subsidiary airline company where the re-employed people were utilized. He was also instrumental in effecting substantial wage hikes for the

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employees. The extra financial burden on the airline caused by these measures was met by resorting to a 10% annual hike in fares. (Refer Table I)

TABLE IIMPACT OF STAFF COST HIKE IN FARE INCREASE (%)

Date of fare increase Impact (%)

25/07/1994  16.22

1/10/1995  25

22/09/1996  36

15/10/1997  13.44

1/10/1998  8.8Source: IATA-World Air Transport Statistics  

Initially, Sen’s efforts seemed to have positive effects with an improvement in aircraft utilization figures. IA also managed to cut losses during 1996-97 and reported a Rs 140 mn profit in 1997-98. But recessionary trends in the economy and its mounting wage bill pushed IA back into losses by 1999. Sen and the entire board of directors was sacked by the government.

In the late 1990s, in yet another effort to appease its employees, IA introduced the productivity-linked scheme. The idea of the productivity linked incentive (PLI) scheme was to persuade pilots to fly more in order to increase aircraft utilization. But the PLI scheme was grossly misused by large sections of the employees to earn more cash. For instance, the agreement stated that if the engineering department made 28 Airbus A320s available for service every day, PLI would be paid.

This number was later reduced to 25 and finally to 23. There were also reports that flights leaving 30 - 45 minutes late were shown as being on time for PLI purposes. Pilots were flying 75 hours a month, while they flew only 63 hours. Eventually, the PLI schemes raised an additional annual wage bill of Rs 1.8 bn for IA. It was alleged that IA employees did no work during normal office hours; this way they could not work overtime and earn more money.

Though experts agreed that IA had to cut its operation costs. To survive the airline continued to add to its costs, by paying more money to its employees. (Refer Table II). The payment of overtime allowance (OTA) which included holiday pay to staff, increased by 109% during 1993-99. It was also found that the payment of OTA always exceeded the budget provisions.

Between 1991-92 and 1995-96, the increase in pay and allowances of the executive pilots was 842% and that of non-executive pilots was 134%. Even the lowest paid employee in the airline, either a sweeper or a peon, was paid Rs 8,000 – 10,000 per month with overtime included.

TABLE IIINCREASE IN STAFF COSTS

Year Staff cost (in Rs bn)

No. of employees

Per employee cost (in mn)

Total expenditure (in Rs bn)

Staff cost as percentage of total operational expenditur

Effective fleet size

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e

1993-94  2.85  22182  0.13  20.75  15%  54

1994-95

 3.74 (31.18%)*  22683  0.16  22.59  19%  58

1995-96

 5.71 (52.59%)  22582  0.25  26  25%  55

1996-97

 7.10 (24.35%)  22153  0.32  29.29  26%  40

1997-98

 8.17 (15.03%)  21990  0.37  32.21  27%  40

1998-99

 8.75 (7.12%)  21922  0.39  34.31  28%  41

Source: IATA-World Air Transport Statistics* Figures in brackets indicate increase over the previous year.# Excludes 4 aircraft grounded from 1993-94 to 1995-96 as well as 12 aircraft leased to Airline Allied Services Ltd. from 1996-97 to 1998-99.

In 1998, IA tried to persuade employees to cut down on PLI and overtime to help the airline weather a difficult period; however there efforts failed.

Though IA incurred losses during 1995-96 and 1996-97 and made only marginal profits during 1997-98 and 1998-99, heavy payments were made on account of PLI. A net loss of Rs 641.8 mn was registered during the period 1995-99. PLI payments alone amounted to Rs 6.66 bn, during the same period. According to unofficial reports, arrears to be paid to employees on account of PLI touched nearly Rs 7 bn by 1999.

Over the years, the number of employees at IA increased steadily. IA had the maximum number of employees per aircraft. (Refer Table III). It was reported that the airline’s monthly wage bill was as high as of Rs 680 mn, which doubled in the next three years. There were 150 employees earning above Rs 0.3 mn per annum in 1994-95 and the number increased to 2,109 by 1997-98. The Brar committee attributed this abnormal increase in staff costs to inefficient manpower planning, unproductive deployment of manpower and unwarranted increase in salaries and wages of the employees.

TABLE IIIA COMPARISON OF VARIOUS AIRLINES

Name of Airlines

 Number of aircraft in fleet

 No. of employees

 ATKm[3]

(in Million)  ATKm per Employee

 Employees per aircraft

Singapore Airlines  84  13,549 14418.324  1064161  161

Thai Airways  76  24,186  6546.627  270678  318

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International

Indian Airlines  51  21,990  2113.671  398204  431

Gulf Air  30  5,308  1416.235  245831  177

Kuwait Airways  22  5,761  345.599  92853  261

Jet Airways  19  3,722  1094.132  49756  196Source: IATA-World Air Transport Statistics

Analysts criticized the way posts were created in IA. In 1999, Six new posts of directors were created of which three were created by dividing functions of existing directors. Thus, in place of 6 directors in departments’ prior April 1998, there were 9 directors by 1999 overseeing the same functions. There were 30 full time directors, who in turn had their retinue of private secretaries, drivers and orderlies. The posts in non-executive cadres were to be created after the assessment by the Manpower Assessment committee. But analysts pointed that in the case of cabin crew, 40 posts were introduced in the Southern Region on an ad-hoc basis, pending the assessment of their requirement by the Staff Assessment Committee.

Another problem was that no basic educational qualifications prescribed for senior executive posts. Even a matriculate could become a manager, by acquiring the necessary job-related qualifications & experience. Illiterate IA employees drew salaries that were on par with senior civil servants. After superannuation, several employees were re-employed by the airline in an advisory capacity. According to reports, IA employed 132 retired employees as consultants during 1995-96 on contract basis. With each strike/go-slow and subsequent wage negotiations, IA’s financial woes kept increasing. Though at times the airline did put its foot down, by and large, it always acceded to the demands for wage hikes and other perquisites.

TROUBLED SKIES

Frequent agitations was not the only problem that IA faced in the area of human resources. There were issues that had been either neglected or mismanaged.

For instance, the rates of highly subsidized canteen items were not revised even once in three decades and there was no policy on fixing rates. Various allowances such as out-of-pocket expenses, experience allowance, simulator allowance etc. were paid to those who were not strictly eligible for these. Excessive expenditure was incurred on benefits given to senior executives such as retention of company car, and room air-conditioners even after retirement. All these problems had a negative impact on divestment procedure.

This did not augur well for any of the parties involved, as privatization was expected to give the IA management an opportunity to make the venture a commercially viable one. Freed from its political and social obligations, the carrier would be in a much better position to handle its labor problems. The biggest beneficiaries would be perhaps the passengers, who would get better services from the airline.

QUESTIONS FOR DISCUSSION:

1. Analyze the developments in the Indian civil aviation industry after the sector was opened up for the private players. Evaluate IA’s performance. Why do you think IA failed to retain its market share against competitors like Jet Airways?

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2. IA’s human resource problems can largely be attributed to its poor human resource management policies. Do you agree? Give reasons to support your stand.

ADDITIONAL READINGS & REFERENCES:

1. Sanjeev Sharma, In Air Pocket, March 27, 1995, Business Today.2. Rakhi Mazumdar & Anjan Mitra, IA, Alliance Air wage disparity issue unresolved, January 24, 1997, Business Standard.3. Sengupta Snigdha, Indian Airlines pilots call off strike, January 28, 1997, Business Standard.4. IA awaits govt decision on Kelkar committee report, February 22, 1997, Business Standard.5. Flying high, August 12, 1997, Business Standard.6. Bhargava Anjuli, Ministry finds Brar report on IA recast too hot to handle, January 7, 1998, Business Standard7. Panel seeks further study on airport privatisation, April 26, 1999, Business Standard.8. Crasta Jivitha, The battle for the skies, May 25, 1999, Business Standard9. Lahiri Jaideep, Will Even Divestment Make Indian Airlines Airworthy?, July 7, 1999, Business Today.10. Go slow, fly low, April 27, 2000, Hindustan Times.11. www.cagindia.org.12. www.indiainfoline.com.

State Bank of India - The VRS Story

“They are propagating the VRS in such a manner that the employees are being compelled to opt for the scheme.”

- V.K.Gupta, SBI employee’s union leader in December 2000.

VRS TROUBLES

In February 2001, India’s largest public sector bank (PSB), the State Bank of India (SBI) faced severe opposition from its employees over a Voluntary Retirement Scheme (VRS).

The VRS, which was approved by SBI board in December 2000, was in response to Federation of Indian Chambers of Commerce and Industry’s (FICCI)[1] report on the banking industry. The report stated that the Indian banking industry was overstaffed by 35%. In order to trim the workforce and reduce staff cost, the Government announced that it would be reducing its manpower.

Following this, the Indian Banks Association (IBA)[2] formulated a VRS package for the PSBs, which was approved by the Finance ministry. Though SBI promoted the VRS as a ‘Golden Handshake,’ its employee unions perceived it to be a retrenchment scheme. They said that the VRS was completely unnecessary, and that the real problem, which plagued the bank were NPAs[3] .

The unions argued that the VRS might force the closure of rural branches due to acute manpower shortage. This was expected to affect SBI’s aim to improve economic conditions by providing necessary financial assistance to rural areas. The unions also alleged that the VRS decision was taken without proper manpower planning.

In February 2001, the SBI issued a directive altering the eligibility criteria for VRS for the officers by stating that only those officers who had crossed the age of 55 would be granted VRS. Consequently, applications of around 12,000 officers were rejected. The officers who were denied the chance to opt

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for the VRS formed an association – SBIVRS optee Officers’ Association to oppose this SBI directive. The association claimed that the management was adopting discriminatory policies in granting the VRS.

The average estimated cost per head for implementation of VRS for SBI and its seven associated banks worked out to Rs 0.65 million and Rs 0.57 million respectively. As a result of the VRS, SBI’s net profit decreased from Rs 25 billion in 1999-00 to Rs 16 billion in 2000-01.

BACKGROUND NOTE

The SBI was formed through an Act of Parliament in 1955 by taking over the Imperial Bank. The SBI group consisted of seven associate banks:

• State Bank of Hyderabad• State Bank of Indore• State Bank of Mysore• State Bank of Patiala• State Bank of Saurashtra• State Bank of Travancore• State Bank of Bikaner & Jaipur

The SBI was the largest bank in India in terms of network of branches, revenues and workforce. It offered a wide range of services for both personal and corporate banking. The personal banking services included credit cards, housing loans, consumer loans, and insurance. For corporate banking, SBI offered infrastructure finance, cash management and loan syndication[4] .

Over the years, the bank became saddled with a large workforce and huge NPAs. According to reports, staff costs in 1999-2000 amounted to Rs 4.5 billion as against Rs 4.1 billion in 1998-99. Increased competition from the new private sector banks (NPBs) further added to SBI’s problems. The NPBs had effectively leveraged technology to make up for their size.

Though SBI had 9,000 branches, a mere 22% of those (1935 branches) were connected through Internet. In contrast all of HDFC[5] Bank’s 61 branches were connected. By 2000, SBI’s net profit per employee was Rs 0.43 million while HDFC’s was Rs 0.96 million, and SBI’s NPA level was around 7.18% as against HDFC’s 0.73% (Refer Table I).

TABLE IA COMPARISON BETWEEN SBI & SOME NPBs

BANK NPAs/NET ADVANCES

PROFIT PER EMPLOYEE (Rs in Million)

SBI  7.18%  0.43

HDFC  0.77%  0.96

UTI BANK  4.71%  0.69

ICICI BANK  1.53%  0.78

GTB  0.87%  1.2

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IDBI BANK  1.95%  1.15Source: www.bankersindia.com

Analysts remarked that the very factors that were once hailed as the strengths of SBI - reach, customer base and experience - had become its problems. Technological tools like ATMs and the Internet had changed banking dynamics. A large portion of the back-office staff had become redundant after the computerization of banks. To protect its business and remain profitable, SBI realized that it would have to reduce its cost of operations and increase its revenues from fee-based services. The VRS implementation was a part of an over all cost cutting initiative.

The VRS package offered 60 days’ salary for every year of service or the salary to be drawn by the employee for the remaining period of service, whichever was less. While 50% of the payment was to be paid immediately, the rest could be paid in cash or bonds. An employee could avail the pension or provident fund as per the option exercised by the employee. The package was offered to the permanent staff who had put in 15 years of service or were 40 years old as of March 31, 2000.

THE PROTESTS

The SBI was shocked to see the unprecedented outcry against the VRS from its employees. The unions claimed that the move would lead to acute shortage of manpower in the bank and that the bank’s decision was taken in haste with no proper manpower planning undertaken.

They added that the VRS would not be feasible as there was an acute shortage of officers (estimated at about 10000) in the rural and semi-urban areas where the branches were not yet computerized. Moreover, the unions alleged that the management was compelling employees to opt for the VRS. They said that the threat of bringing down the retirement age from 60 years to 58 years was putting a lot of pressure on senior bank officials to opt for the scheme.

In December 2000, SBI had formed a joint venture with the French insurance company Cardiff, for entering the life insurance business. The unions questioned the logic behind diversifying the business and cutting down the staff strength. They argued that this move would significantly increase workforce burden and, consequently, adversely affect customer service.

In 2000, SBI had undertaken a large-scale clientele membership drive in some states to attract more customers. The unions opined that the VRS could prove to be counterproductive as the increased business might not be handled properly.

However, despite all the protests, SBI received around 35,000 applications for the VRS. Analysts pointed out that many bank employees opted for the VRS due to the better employment prospects with the NPBs. SBI had not anticipated such a huge response to the scheme. While the VRS was mainly aimed at reducing the clerical staff and sub-staff, the maximum number of optees turned out to be from the officer cadre. The clerical staff was reluctant to go for the VRS due to the low employment opportunities for them in the NPBs. According to reports, the number of applications from officers stood at 19,295, which meant that over 33 per cent of the total officers in the bank had sought VRS.

Following huge response to the VRS from officer cadre, SBI issued a circular stating that the management would relieve only those officer cadre applicants who had crossed the age of 55 years. The bank also issued a circular barring treasury managers, forex dealers and a host of other specialized personnel, from seeking VRS. Employees who had not served rural terms were also barred from opting for the scheme. The VRS was also not open to employees who were doctorates, MBA’s, Chartered Accountants, Cost & Works accountants, postgraduates in computer applications. In another circular, SBI mentioned that any break in service (i.e. leaves availed on a loss of pay basis) would not be taken while calculating the service period. The bank also restricted the loan facilities to the personnel who had opted for the VRS. If an employee wished to continue a housing loan after accepting VRS, he was asked to pay interest at the market rate. After these restrictions were introduced, only 13.4% of the officers were left eligible for VRS instead of the earlier 33%.

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The conditions laid down by the management faced strong criticism from the officers who had opted for the VRS, but who could not meet the prescribed criteria. They alleged that the bank was practicing discrimination in implementation of the scheme and that no other banks had implemented such policies and denied the opportunity of VRS to officers who were willing to avail the scheme.

Media reports also called SBI’s decision to restrict the VRS as arbitrary, discriminatory and belying the voluntary character of the scheme. Unions argued that if the bank was so particular that only 10% of its staff leave under the VRS, it could have closed the scheme immediately after the required number of applications were received. The unions also argued that 35,000 applications (14% of the total workforce) could not be considered high when compared to the response received by other public sector banks such as Syndicate Bank (22%) and Punjab & Sind Bank (19%), where all the applications that were received were also accepted for VRS.

The officers who were denied the VRS formed an action group in March 2001. They claimed that SBI had violated the guidelines of the Government and the Indian Banks Association. According to the members of the group, any shortfall in the number of officers could easily be met by promoting suitable clerks. They also cited the example of Syndicate Bank, which promoted about 1,000 clerical staff to officer level. The group filed cases before High Courts in various parts of the country, challenging SBI’s decisions. A delegation of VRS-denied officers even met the Finance Minister and also submitted a memorandum to the SBI management.

THE POST VRS DAYS

According to reports, SBI’s total staff strength was expected to come down to around 2,00,000 by March 2001 from the pre-VRS level of 2,33,000 (Refer Table III). With an average of 5000 employees retiring each year, analysts regarded VRS as an unwise move.

By June 2001, SBI had relieved over 21,000 employees through the VRS. It was reported that another 8,000 employees were to be relieved after they attained the retirement age by the end of 2001. Analysts felt that this would lead to a tremendous increase in the workload on the existing workforce.

According to industry watchers, by 2010, the entire SBI staff recruited between mid 1960 and 1980 would retire. As a result, SBI would not have sufficient manpower to manage over 9000 of its branches. Another major hurdle was the Government’s proposal to scrap the Banking Service Recruitment Board (BSRB)[6] as the bank lacked expertise in recruitment procedures.

TABLE IICHANGE IN SBI’s STAFF STRENGTH

 31-03-01 31-03-00 % change

Officers  52,558  59,474  -11.63%

Clerical  103,993  115,424  -9.90%

Subordinate  53,729  58,535  -8.21%

Total  210,280  233,433  -9.92%Source: www.indiainfoline.com

In the post-VRS scenario, SBI planned to merge 440 loss-making branches and announced redeploy additional administrative manpower (resulting from the merger of loss-making branches) to frontline banking jobs. SBI also planned to reduce its regional offices from 10 to 1 or 2 in each circle. In

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August 2001, it was reported that a single officer had to take charge of 3 or 4 branches as the daily concurrent audit got affected.

Departments like internal audit, concurrent audit, monitoring, inspection of borrowals had hardly any staff, according to reports. It was reported that employees working in branches that had a high workload went on work-to-rule agitation, blaming the VRS for their problems. Analysts felt that SBI would have to take serious steps to reorient its HRD policy to restore employee confidence and retain its talented personnel. SBI had many strong organizational strengths and an excellent training system, but due to weak HR policies, it had lost its experts to its competitors.

The employees of almost all the new generation private sector banks were former employees of SBI. The bank’s well-defined promotion policy was systematically flouted by the framers themselves and, as a result, employees with good track records were frequently sidelined. Many analysts felt that SBI was not able to realize the critical importance of recognizing inherent merit and rewarding the performers.

The above factors were cited as the major reasons for the success of VRS in the officer cadres, who were reported to be demoralized and de-motivated. The arbitrariness and insensitivity at the corporate level had dealt a severe blow to the employees of the organization. What remained to be seen was whether SBI would be able to reorganize its HRD policy and retain its talented personnel.

QUESTIONS FOR DISCCUSION

1. The results of the SBI VRS were not in line with the management’s expectations. Comment on the above statement and discuss the effects of the VRS on SBI.

2. In most of the VRS implementation exercises in Indian PSUs, the largest number of applicants have been from the officer cadre. Was SBI wrong in not anticipating this for its VRS? Also comment whether SBI was justified in altering the eligibility criteria for the officer cadre to restrict their outflow.

3. The outcome of the SBI VRS has highlighted the need for proper manpower planning and HRD policies in Indian public sector banks. Discuss the various steps to be taken by the SBI in the post VRS scenario?

ADDITIONAL READINGS & REFERENCES

1. Mandal Kohinoor & Mukherjee Arpan, Voluntary retirement scheme by September, June 23, 2000, Indian Express.2. Ray Chaudhuri Sumanta, State Bank’s VRS likely to leave pension fund deep in the red, November 21, 2000, Financial Express.3. SBI VRS targets to shed over 25,000 staff, December 28, 2000, Indian Express4. Sahad P.V, SBI employees protest over VRS, December 28, 2000, India Today5. SBI unions to seek review of VRS, December 31, 2000, Economic Times.6. Ray Chaudhuri Sumanta, SBI staff wants VRS period extended, January 3, 2001, Indian Express.7. Ray Chaudhuri Sumanta, SBI bars treasury managers, forex dealers from VRS, January 9, 2001, Financial Express.8. SBI may amend criteria for VRS, January 23, 2001, Indian Express.9. Bankeshwar S Suresh, SBI needs to reorient its HRD policy to counter VRS fallout, January 25, 2001, Financial Express.10. Ray Chaudhuri Sumanta, VRS to cost SBI Rs 2,400 crore if all applications are accepted, January 31, 2001, Indian Express.11. 32,000 employees apply for SBI’s VRS, February 1, 2001, Indian Express.12. SBI to reject 10,000 VRS applications, February 3, 2001, Hindustan Times.

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13. SBI downplaying VRS numbers – Unions, February 5, 2001, Indian Express.14. Ray Chaudhuri Sumanta, SBI brass gets circular mania over VRS, February 8, 2001, expressindia.com15. SBI officers allege discrimination in VRS rules, February 19, 2001, Financial Express.16. Officer optees of VRS criticize SBI move, February 20, 2001, Business Line.17. SBI VRS optees may go to court, February 28, 2001, Business Line.18. VRS – denied SBI officers plan action, March 20, 2001, Business Line.19. Action plan initiated by SBI officers denied VRS, March 20, 2001, Economic Times.20. After VRS jubilation, SBI faces superannuation kick, March 27, 2001, Economic Times.21. Kumar Rishi, SBI: Rejected VRS optees may move court, April 23, 2001, Hindu Business Line.22. Kumar Himendra, Reporter’s Notebook, May 4, 2001, Business Week.23. SBI aims to hike advances by Rs 18,000 crore, June 21, 2001, Hindustan Times.24. Shetty Mayur, The big bank theory, July 18, 2001, Economic Times.25. Shukla Nimish, SBI revamp to see loss-making branches merged, July 20, 2001, Economic Times.26. Goswami Nandini, Life after VRS: Nationalized banks facing shortage of staff, August 18, 2001, Economic Times.27. www.banknetindia.com28. www.indiainfoline.com29. www.bankersindia.com30. www.equitymaster.com

Netscape's Work Culture

“It took Microsoft and Oracle 11 years to reach the size Netscape reached in 3 years, both in terms of revenues and the number of employees. Which is just cosmically fast growth.”

- Marc Andreessen, Co-founder, Netscape.

“Netscape's relaxed work environment drives up productivity and creativity. Because there aren't layers of management and policies to work through, Netscape can turn out products in a month.”

- Patrick O’Hare, Manager (Internal Human Resources Web Site), Netscape.

INTRODUCTION

On November 24, 1998, America Online[1] (AOL) announced the acquisition of Netscape Communications (Netscape), a leading Internet browser company, for $10 billion in an all-stock transaction. With this acquisition, AOL got control over Netscape’s three different businesses – Netcenter portal, Netscape browser software and a B2B e-commerce software development division.

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According to the terms of the deal, Netscape’s shareholders received a 0.45 share of AOL’s common stock for each share they owned. The stock markets reacted positively and AOL’s sharevalue rose by 5% just after the announcement. Once shareholders and regulatory authorities approved the deal, Netscape’s CEO James Barksdale (Barksdale)[2] was supposed to join AOL’s board.

Many analysts felt that this acquisition would help AOL get an edge over Microsoft, the software market leader, in the Web browser market. Steve Case, (Case) Chairman and CEO of AOL, remarked, “By acquiring Netscape, we will be able to both broaden and deepen our relationships with business partners who need additional level of infrastructure support, and provide more value and convenience for the Internet consumers.”

However, a certain section of analysts doubted whether AOL’s management would accept Netscape’s casual and independent culture. Moreover, they were worried that this deal may lead to a reduction in Netscape’s workforce, the key strength of the company. A former Netscape employee commented, “People at Netscape were nervous about the implications of AOL buying us.”

Allaying these fears, in an address to Netscape employees, Case said, “Maybe you joined the company because it was a cool company. We are not changing any of that. We want to run this as an independent culture.” In spite of assurances by AOL CEO, it was reported that people at Netscape were asked to change the way they worked. In July 1999, Netscape employees were asked to leave if they did not like the new management.

By late 1999, most of the key employees, who had been associated with Netscape for many years, had left. Barksdale left to set up his own venture capital firm, taking along with him former CFO Peter Currie. Marc Andreessen (Andreessen) stayed with AOL as Chief Technology Officer till September 1999, when he left to start his own company, Loud cloud. Mike Homer, who ran the Netcenter portal, left the company while he was on a sabbatical.

BACKGROUND NOTE

Netscape was co-founded by Jim Clark (Clark) and Andreessen. Clark was a Stanford University professor turned entrepreneur[3]. Andreessen was an undergraduate from the University of Illinois, working with the National Center for Supercomputing Applications[4]. In 1993, with a fellow student, Andreessen developed the code for a graphical Web browser and named it Mosaic.

In April 1994, Clark and Andreessen founded a company, which was named as Electric Media (See Exhibit I). The name was changed to Mosaic Communications in May 1994. In November 1994, Mosaic Communications was renamed Netscape Communications. In December 1994, Netscape introduced Navigator, its first commercial version of its browser[5] .

By March 1995, six million copies of Navigator were in use around the world. This was without any advertising, and with no sales through retail outlets. Netscape allowed users to download the software from the Internet. By mid 1995, Navigator accounted for more than 75% of the browser market while Mosaic share was reduced to just 5%.

In the same month, Netscape launched Navigator 1.0. During February-March 1995, Netscape launched Navigator 1.1. This new version could be run on Windows NT[6] and Macintosh Power PC[7]. Within three months, the beta version[8] of Navigator 1.2 for Windows 95 was launched. At the same time, Netscape announced its plans to launch the commercial version of Navigator 1.2 in the next August 1995. By launching new versions of browsers quickly, Netscape set new productivity standards in the web browser market.

Numerous Netscape servers were also launched within a short period of time. Netscape

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Communications Server, News Server, and Commerce Server were launched within a year. In total, within the first 15 months of its inception, Netscape rolled out 11 new products. Within a year of its inception, Netscape made an Initial Public Offering (IPO), which was well received by the investing public.

In 1997, Netscape broadened its product portfolio by developing Internet content services. In June 1997, Netscape launched its Communicator[9] and in August rolled out Netcaster[10]. In August 1997, Netscape also announced its plans to strengthen its presence in the browser market by forming 100 industry partnerships. In September 1997, Netscape transformed its corporate website into Netcenter website – a site featuring news and chat group services.

During 1998, Netscape faced increasing competition from Microsoft in the browser market. Netscape therefore entered new businesses like enterprise and e-commerce software development. By the fourth quarter of 1998, the enterprise and e-commerce software business accounted for 75% of Netscape’s earnings. In November 1998, Netscape was acquired by AOL, the world’s largest online services provider.

Analysts remarked that Netscape’s ability to respond quickly to market requirements was one of the main reasons for its success. The ability to introduce new versions of products in a very short span of time had made the company stand apart from thousands of startup dotcom companies that were set up during that period. Analysts said that Netscape’s culture, which promoted innovation and experimentation, enabled it to adapt quickly to changing market conditions. They also said that the company’s enduring principle ‘Netscape Time’ (See Exhibit II) had enabled it to make so many product innovations very quickly.

NETSCAPE’S CULTURE

Netscape promoted a casual, flexible and independent culture. Employees were not bound by rigid schedules and policies and were free to come and go as they pleased. They were even allowed to work from home.

The company promoted an environment of equality – everyone was encouraged to contribute his opinions. This was also evident in the company’s cubicle policy. Everyone including CEO Barksdale, worked in a cubicle. Independence and hands-off management[11] were important aspects of Netscape’s culture. There was no dress code at Netscape, so employees, were free to wear whatever they wanted.

Barksdale laid down only one condition, “You must come to work dressed.” The company promoted experimentation and did not require employees to seek anyone’s approval for trying out new ideas. For example, Patrick O’Hare[12], who managed Netscape’s internal human resources website, was allowed to make changes to any page on the site, without anyone’s approval.

Netscape’s management reposed a high degree of trust in its employees, which translated into empowerment and lack of bureaucracy. Beal[13], a senior employee said, “Most organizations lose employees because they don’t give them enough opportunities to try new things, take risks and make mistakes. People stay here because they have space to operate.” Realizing that some experiments do fail, Netscape did not punish employees for ideas that did not work out. However, to maintain discipline at work, employees were made accountable for their decisions. They were also expected to give sound justifications for their actions.

Job rotation was another important feature of Netscape’s culture. By doing so, the company helped its employees learn about new roles and new projects in the company. For example, Tim Kaiser, a software engineer, worked on four different projects in his first year of employment. The company believed in letting its staff take up new jobs – whether it was a new project in the same department or a new project in another department. Moreover, related experience was not a requirement for job rotation. Netscape played a proactive role in identifying new positions for its employees inside the company.

Employees were offered a wide range of training options and an annual tuition reimbursement of US $6,000. This opportunity to expand their skills on the job was valued by all employees. The company also helped employees learn about the functioning of other departments. There were quarterly ‘all-

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hands’ meetings in which senior managers of different departments gave presentations on their strategies. These efforts created a sense of community among employees. An employee remarked, “They really try to keep us informed so we feel like we are involved with the whole company.”

THE SETBACK

After the acquisition, AOL planned to integrate Netscape’s web-browser products and Netcenter portal site with its Interactive Services Group[17]. The company created a Netscape Enterprise Group in alliance with Sun Microsystems[18] to develop software products ranging from basic web servers and messaging products to e-commerce applications.

However, overlapping technologies and organizational red tape slowed down the process of integration. Within a year of the acquisition, Netscape browser’s marketshare fell from 73% to 36%. Andreessen, who had joined AOL as chief technology officer, resigned only after six months on the job.

His departure triggered a mass exodus of software engineering talent from Netscape. Soon after, engineers from Netscape joined Silicon Valley start-ups like Accept.com, Tellme Networks, Apogee Venture Group and ITIXS. Former Netscape vice president of technology Mike McCue and product manager Angus Davis founded Tellme Networks.

They brought with them John Giannandrea. As chief technologist and principal engineer of the browser group, John Giannandrea was involved with every Navigator release from the first beta of 1.0 in 1994 to the launch of 4.5 version in Oct. 1998. Ramanathan Guha, one of Netscape’s most senior engineers, left a $4 million salary at AOL to join Epinions.com.

He was soon joined by Lou Montulli and Aleksander Totic, two of Netscape’s six founding engineers. Other Netscape employees helped start Responsys. Some employees joined Accept.com and others AuctionWatch. Spark PR was staffed almost entirely by former Netscape PR employees.

Market watchers were surprised and worried about this exodus of Netscape employees. Some of them felt that the mass exodus might have been caused by monetary considerations. Most of the employees at Netscape had stock options. Once the acquisition was announced, the value of those options rose significantly.

David Yoffie, a Harvard Business School professor said, “When AOL’s stock went up, the stock of most of the creative people was worth a ... fortune.” Most of them encashed their options and left the company. But some analysts believed that there were other serious reasons for the exodus.

Netscape employees always perceived themselves as an aggressive team of revolutionaries who could change the world. Before resigning from AOL, Jamie Zawinski, the 20th person hired at Nescape, said, “When we started this company, we were out to change the world. We were the ones who actually did it.

When you see URLs on grocery bags, on billboards, on the sides of trucks, at the end of movie credits just after the studio logos – that was us, we did that. We put the Internet in the hands of normal people. We kick-started a new communications medium. We changed the world.” Another ex-employee said, “We really believed in the vision and had a great feeling about our company.” But the merger with AOL reduced them to a small part of a big company, with slow-moving culture.

EXHIBIT INETSCAPE – CHRONOLOGY OF EVENTS

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DATE  EVENT

1-Mar-94  Jim Clark and Marc Andreessen begin talks on forming a new company

Apr-94  The company (first named Electric Media) is founded by Clark and Andreessen.

May-94  Electric Media changes its name to Mosaic Communications

Nov-94  Mosaic Communications changes its name to Netscape Communications

Dec-94  Netscape Navigator, Netscape Commerce, and Communications Servers ship.

Aug-95  Netscape's IPO is one of the hottest stock-market debuts ever.

Dec-95  Netscape and Sun Microsystems announce Java Script.

11-Mar-96  America Online agrees to include Netscape in every copy of its Internet-access software.

12-Mar-96  AOL strikes a deal with Microsoft, giving Internet Explorer the coveted spot as the service provider's browser.

May-96  Netscape announces Netscape Navigator 3.0.

Oct-96  Netscape announces its server product, SuiteSpot 3.0.

Oct-96  Netscape becomes enterprise-software purveyor, rolling out intranet- and Internet-server software packages.

11-Jun-97  Netscape releases Communicator

Aug-97  Netscape releases Netcaster, push-media software

18-Aug-97

 Netscape announces an initiative to retain its browser share by forming 100 industry partnerships. Its new partners agree to package the Navigator browser -- unbundled from the Communicator suite -- with their products. The streamlined Navigator 4.0 includes Netcaster, basic email, and calendar software.

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3-Sep-97  It unveils the Netcenter Web site, transforming the corporate Netscape.com into a site featuring news, software, and chat groups.

22-Jan-98  It offers Communicator 5.0's source code over the Net free.

23-Feb-98  Mozilla.org launched. A dedicated internal team and the website guide the open source code to developers.

31-Mar-98  Netscape releases programming source code for its Communicator software.

10-Apr-98  Mozilla.org posts the first version of its source code, modified by outside developers.

18-May-98  The US Justice Department and 20 state attorney generals file an antitrust case accusing Microsoft of abusing its market power to thwart competition, including Netscape

29-Jun-98  Netscape debuts Netcenter 2.0.

28-Sep-98  According to a study by a market researcher, Netscape cedes browser-share lead to Microsoft's Internet Explorer.

19-Oct-98  Netscape releases Communicator 4.5, the latest version of its browser software. It features Smart Browsing, Roaming Access, and RealNetworks' RealPlayer 5.0.

22-Nov-98  AOL is involved in negotiations for buying Netscape in an all-s

EXHIBIT IINETSCAPE TIME

Netscape Time was Netscape’s most enduring principle. It was about the speed, at which the employees worked and delivered new products. It concerned the mind-set of employees than the business model of the company. Netscape Time had six core principles:

The first principle was ‘fast enough never is.’ Ever since its inception, Netscape maintained a lightening speed in whatever it did. Analysts felt that the company could move quickly because it knew what it wanted. It hired programmers from the best schools and from companies

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like Oracle, Silicon Graphics etc. The company wanted them to get used to Netscape’s code-writing culture.

‘The paranoid predator’ was the second principle. Netscape knew that even a predator could become a prey. The company’s management believed that their role was to instill urgency at all levels. They always potrayed Netscape as a startup which had to compete with industry giants like Microsoft and Oracle.

The third principle was ‘all work, all the time.’ Netscape’s employees seemed to be habituated to non-stop work. For example, to launch the company’s first product, employees worked round-the-clock for eight months. Even at 1 am, there were employees to give ideas, talk code, or discuss a problem. Jim Sha, General Manager, worked for 11 hours a day at the office, went home for dinner and then came back to office and worked till late night.

‘Just enough management’ was the fourth principle. Netscape seemed to consciously undermanage. Neither Clark nor Andreessen played major roles in the management. Andreessen said, “If you over manage software, the result is paralysis.”

Another principle of Netscape Time was doing things ‘four times faster.’ Netscape described Netscape Time as “turning out new product releases four times faster than the competition.” In less than nine months, Netscape launched three versions of its browser as well as servers.

The last and most important aspect of Netscape Time was ‘Web squared.’ Netscape placed Web at the heart of its operations. Andreessen believed that “worse is better,” and released usable software quickly, without waiting for perfection. He believed in using the Web to access the source of perfection. The company did not use any retail outlets or resellers. Interested users could download an ‘evaluation copy’ from the Internet. A fully supported version of the software was later sent to interested users. This helped increase the company’s interaction with the customers. Their feedback was utilized to design the next version.

EXHIBIT IIIBENEFITS FOR NETSCAPE EMPLOYEES

Medical Benefits The plan options include the United HealthCare Choice Plan, Choice Plus, Exclusive Provider Option (EPO), Point-of-Service (POS), Preferred Provider Option (PPO) and Kaiser HMO (available in California).

Dental BenefitsThe Dental Plan pays 100% of covered expenses for preventative care such as periodic cleanings with no deductible. After an annual US $100 deductible, the plan will pay 80% of covered expenses for basic restorative care, 50% for major care and 50% for orthodontia.

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Flexible Spending AccountsSpending accounts can offer significant tax savings. Employees can deposit up to $5,000 of pre-tax pay into a Health Care FSA and up to $5,000 of pre-tax pay in a Dependent Care FSA. They receive reimbursements when they incur eligible expenses.

Vision CareThe vision plan provides reimbursement for services such as annual exams, frames and lenses. Employees out-of-pocket cost can be as low as US $20 if you use a participating provider. There is also coverage for contact lenses.

Life InsuranceNetscape provides employees with basic life insurance as well as accidental death and dismemberment insurance at no cost to the employee. Each employee is covered at two times annual salary up to a maximum of $500,000. Employees can also buy additional employee and dependent life insurance at discounted rates.

Income ProtectionIncome protection includes disability, sick leave and workers compensation. If an employee becomes disabled and is unable to work, he will be covered by a salary continuation plan covering you at 70%-100% of your pay for up to 180 days. After 180 days of total disability, the employee may be eligible for benefits under Netscape's Long Term Disability Plan.

Disability BenefitsThe Long Term Disability Plan assures of a continuing income in the event of an employee is unable to work due to a covered accident or illness. The plan pays up to 60% of pre-disability salary, reduced by any benefits to receive from sources such as Social Security or Workers Compensation.

Business Travel Accident InsuranceNetscape provides an additional three times your annual earnings in accidental death benefits up to $900,0000 to employees while traveling on company business (excluding every day travel to and from work).

VacationFull-time employees earn up to ten days of vacation during their first year of service, increasing to fifteen days after three years of service, and twenty days after six years of service. (Part-time employees accrue one-half that of a full-time employee).

Paid HolidaysNetscape observes nine scheduled company-designated holidays and up to two employee-designated personal holidays per year.

401(k) Retirement Savings PlanThe 401(k) Retirement Savings Plan provides employees an opportunity to save for retirement on a tax-deferred basis. With payroll deductions, employees can direct up to 15% of their pretax earnings (8% for employees earning $80,000 in 2000) into the savings plan. The Plan offers 16 investment alternatives through Fidelity Investments and includes loan, rollover, and hardship options. Employees have on-line access to their accounts.

EXHIBIT IIIBENEFITS FOR NETSCAPE EMPLOYEES contd...

Employee Stock Purchase Plan (ESPP)The Employee Stock Purchase Plan provides employees with the opportunity to purchase shares of AOL common stock at discounted prices through payroll deductions. Subject to IRS guidelines, you may invest up to 15% of your

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compensation through after-tax payroll deductions. Employees may only enroll in the Plan twice a year, on specified offering period dates.

Tuition Assistance ProgramNetscape is committed to the short and long-term professional development of its employees. As part of this commitment, Netscape offers a Tuition Assistance Program to aid those employees who are pursuing job-related degrees or participating in professional development courses.

Hyatt LegalNetscape offers a group legal program through Hyatt Legal Plan on a voluntary basis through payroll deduction. This plan gives you and your dependents easy access to professional legal representation at an affordable price.

Employee Services Life@Work ProgramsNetscape has developed a variety of programs to assist employees with a broad-range of work-life issues. The health and welfare of our employees is of tremendous importance to us. The program has been designed to assist employees in balancing some of the responsibilities of everyday life.

Employee Assistance Program (EAP)A team of professional master level counselors and experienced registered nurses are available 24 hours a day at a toll-free number. The EAP can help you and your family with medical, work, family, financial, legal, and personal issues that can impact your life and health.

Concierge ServiceLesConcierges puts a team of service professionals at your fingertips to meet any need that will make your life easier. The LesConcierges team can save you time and energy through services to support your work and home responsibilities.

Onsite ServicesServices onsite such as a florist, massages, dental care, photo processing, dry cleaning, oil changes and more!

ClubNetPrograms that help you maximize your health and fitness through a variety of programs ranging from fitness workout and recreational sports to exhilarating outings. Sports and recreational activities that include basketball, volleyball, in-line skating, golf, soccer, softball, rock climbing and much, much more! Activities vary by location. (Fitness centers are also available at some Netscape site locations).

Child & Elder Care Referral ServiceAssists employees with finding dependent care resources with information from LifeCare.com.

Credit Unions and BankingSelect from a variety of different employer-sponsored credit unions for low rates on loans and CDs. Some Netscape locations have onsite ATMs for employee banking convenience.

Source: www.netscape.com

EXHIBIT IV NETSCAPE CONSOLIDATED STATEMENT OF OPERATIONS

(in US$ thousands)  1994  1995  1996  1997  1998 (Oct

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31) Revenues

Product  3337  77489  291183  383950  261457

Service  801  7898  55111  149901  186352

Total  4138  85387  346294  533851  447809Cost of Revenues:

Cost of Pdt Rev  186  9177  36943  50232  27313

Cost of Ser Rev  247  2530  13124  31557  90717

Total  433  11707  50067  81789  118030

Gross Profit  3705  73680  296227  452062  329779Operating Expenses

R&D  4146  26841  83863  129928  123238

Sales & Mktg.  7750  43679  154545  272110  213004

Gen & Admn  3389  11336  30981  50356  42715

Property rights agmt and related charges  2487  500  250  --  --

Purchased in-process R&D  --  --  --  103087  --

Mergers related charges  --  2033  6100  5848  --

Restructuring charges  --  --  --  23000  12000

Goodwill Amortization  --  --  --  --  5088

Total  17772  84389  275739  584329  396045

Operating Income (Loss)  -14067  -10709  20488  -132267  -66266

Interest Income  251  4898  --  --  6873

Interest Expense  -14  -304  --  --  --

Net Income (Loss)  -13830  -6613  19517  -115496  -51417Source: www.sec.gov

ADDITIONAL READINGS AND REFERENCES

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1. Birchard Bill, Hire Great People Fast, www.fastcompany.com, November 1995. 2. Steinert Tom, Can You Work at Netscape Time?, www.fastcompany.com, November 1995.3. Brown Janelle, Start-Up-Cum-Goliath Works Hard to Get Help, www.wired.com, August 22, 1997.4. Netscape through the Ages, www.wired.com, November 23, 1998.5. Katz Jon, The Netscape Tragedy, www.slashdot.org, November 23, 1998.6. Tsuruoka Doug, America Online must prove that East Can Meet West, www.loyaltyfactor.com, November 25, 1998.7. Geeks Vs Suits, www.nua.ie, November 30, 1998.8. Kornblum Janet, Can Aol And Netscape Make It Work?, CNET News.com, November 30, 1998.9. Schneider Polly, Inside Netscape, The Renaissance Company, www.cnn.com, January 5, 1999.10. Zaret Elliot, The Rise and Fall of Netscape, www.msnbc.com, March 8, 1999.11. Swartz Jon, AOL-Netscape: One Year Later, www.forbes.com, December 1, 1999.

Johnson & Johnson's Health and Wellness Program

“Top management is recognizing physical fitness as a prudent investment in the health, vigor, morale and longevity of the men and women who are any company’s most valuable asset.”

- Dr. Richard Keller, Ex-President of the Association for Fitness in Business[1]

“We believe our Health & Wellness Program can continue to achieve long-term health improvements in our employee population.”

- Dr. Fikry Isaac, Director, Johnson & Johnson, Occupational Medicine, Health &Productivity[2]

INTRODUCTION

In 1998, the American College of Occupational and Environmental Medicine conferred Johnson & Johnson (J&J)[3] the Corporate Health Achievement Award (CHAA)[4] . J&J was one of the four national winners[5] selected for having the healthiest employees and workplace environment in the US.

The award was decided on the basis of four parameters[6] – Healthy People, Healthy Environment, Healthy Company and Overall Management (Refer Exhibit I). These parameters were considered crucial for developing and deploying a comprehensive corporate health program.

In 2000, the New Jersey Psychological Association presented J&J with the Psychologically Healthy Workplace Award for its commitment to workplace well-being and developing a psychologically healthy work environment for its employees. According to analysts, these prestigious awards were given to J&J in recognition for its continuous efforts to create a healthy work environment.

The company not only offered employee assistance programs and benefits packages but also introduced several family-friendly policies and offered excellent professional development opportunities to its employees. All this was done under the Health and Wellness Program (HWP) that the company introduced in 1995.

The program benefited both J&J and its employees. The company saved $8.5 million per annum in the form of reduced employee medical claims and administrative savings. Moreover, within two years of implementing HWP, J&J witnessed a decline of 15% in employee absenteeism rate. Peter Soderberg, President, J&J explained the rationale behind implementing the program[7] , “Our research time and time again confirms the benefits of healthier, fitter employees.

They have fewer and lower long-term medical claims, they are absent less, their disability costs are lower and their perceived personal productivity and job/life satisfaction levels are higher.” Ron Z. Goetzel (Goetzel), Vice-President, Consulting and Applied Research, MEDSTAT Group[8] added, “There’s a growing body of data indicating that corporate wellness programs lower medical costs for employees.”[9]

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BACKGROUND NOTE

The US industry spent approximately $200 bn per annum on employee health insurance claims, on-site accidents, burn-out and absenteeism, lower productivity and decreased employee morale due to health problems.

Moreover, according to the estimates of Mercer[10] , the US industry expenditure on the medical and disability bills of employees was rising significantly. In 1998, companies had paid an estimated $4000 per annum per employee as healthcare costs, and that rose to $5,162 in 2001 and around $5,700 in 2002. Apart from other health related problems (Refer Table I), stress at workplace was considered to be one of the main reasons for this high expenditure.

Work stress led to problems like nervousness, tension, anxiety, loss of patience, inefficiency in work and even chronic diseases like cardiac arrest and hypertension. As a result of these health problems, absenteeism increased and productivity of employees declined.

TABLE IANNUAL AVERAGE COST PER EMPLOYEE DUE TO VARIOUS HEALTH PROBLEMS

Nature of Health ProblemAnnual average cost per employee

Heart disease  $236

Mental health problems  $179

High blood pressure  $160

Diabetes  $104

Low back pain  $90

Heart attacks/Acute myocardial blockages  $69

Bi-polar disorders/Maniac depression  $62

Depression  $24 Source: www.news.cornell.edu

In 1997, the Whirlpool Foundation[11] , the Working Mother magazine[12] and the Work and Family Newsbrief[13] carried out a survey in the US, which involved about 150 executives. The survey discovered a close connection between employee wellness programs[14] (which included flexi work options, employee care, employee assistance programs) with 16 key result areas including enhanced efficiency, low absenteeism, low turnover, high employee satisfaction, high morale and reduced health-care costs of employees.

This signified that a company which had a good health and wellness program had to offer less in terms of monetary assistance to its employees. Elaborating the benefits of these programs, DW Edington[15], Professor at the University of Michigan said[16] , “Wellness programs in general, and fitness programs in particular may be the only employee benefits which pay money back. When more people come to work, you don’t need to pay overtime or temporary help; when people stay at

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the job longer, training costs go down; lower health care claims cost you less if you’re self-insured and health care insurers as well as some companies are already beginning to create premiums based on fitness levels.”

Philips India - Labor Problems at Salt Lake

“They (unions) should realize that they are just one of the stakeholders in the company and have to accept the tyranny of the market place.”

 – Manohar David, Director, PIL in 1996.

SELLING BLUES

The 16th day of March 1999 brought with it a shock for the management of Philips India Limited (PIL). A judgement of the Kolkata[1] High Court restrained the company from giving effect to the resolution it had passed in the extraordinary general meeting (EGM) held in December 1998.

The resolution was to seek the shareholders’ permission to sell the color television (CTV) factory to Kitchen Appliances Limited, a subsidiary of Videocon. The judgement came after a long drawn, bitter battle between the company and its two unions Philips Employees Union (PEU) and the Pieco Workers’ Union (PWU) over the factory’s sale.

PEU president Kiron Mehta said, “The company’s top management should now see reason. Ours is a good factory and the sale price agreed upon should be reasonable. Further how come some other company is willing to take over and hopes to run the company profitably when our own management has thrown its hands up after investing Rs.70 crores on the plant.”

Philips sources on the other hand refused to accept defeat. The company immediately revealed its plans to take further legal action and complete the sale at any cost.

SOURING TIES

PIL’s operations dates back to 1930, when Philips Electricals Co. (India) Ltd., a subsidiary of Holland based Philips NV was established. The company’s name was changed to Philips India Pvt. Ltd. in September 1956 and it was converted into a public limited company in October 1957. After being initially involved only in trading, PIL set up manufacturing facilities in several product lines. PIL commenced lamp manufacturing in 1938 in Kolkata and followed it up by establishing a radio manufacturing factory in 1948. An electronics components unit was set up in Loni, near Pune, in 1959. In 1963, the Kalwa factory in Maharashtra began to produce electronics measuring equipment. The company subsequently started manufacturing telecommunication equipment in Kolkata.

In the wake of the booming consumer goods market in 1992, PIL decided to modernize its Salt Lake factory located in Kolkata. Following this, the plant’s output was to increase from a mere 40000 to 2.78 lakh CTVs in three years. The company even expected to win the Philips Worldwide Award for quality and become the source of Philips Exports in Asia. PIL wanted to concentrate its audio and video manufacturing bases of products to different geographic regions. In line with this decision, the company relocated its audio product line to Pune. In spite of the move that resulted in the displacement of 600 workers, there were no signs of discord largely due to the unions’ involvement in the overall process.

By 1996, PIL’s capacity expansion plans had fallen way behind the targeted level. The unions realized that the management might not be able to complete the task and that their jobs might be in danger. PIL on the other hand claimed that it had been forced to go slow because of the slowdown in

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the CTV market. However, the unconvinced workers raised voices against the management and asked for a hike in wage as well. PIL claimed that the workers were already overpaid and under productive. The employees retaliated by saying that said that they continued to work in spite of the irregular hike in wages. These differences resulted in a 20-month long battle over the wage hike issue; the go-slow tactics of the workers and the declining production resulted in huge losses for the company.

In May 1998, PIL announced its decision to stop operations at Salt Lake and production was halted in June 1998. At that point, PWU members agreed to the Rs 1178 wage hike offered by the management. This was a climbdown from its earlier stance when the union, along with the PEU demanded a hike of Rs 2000 per worker and other fringe benefits. PEU, however, refused to budge from its position and rejected the offer. After a series of negotiations, the unions and the management came to a reasonable agreement on the issue of the wage structure.

SELLING TROUBLES

In the mid-1990s, Philips decided to follow Philips NV’s worldwide strategy of having a common manufacturing and integrated technology to reduce costs. The company planned to set up an integrated consumer electronics facility having common manufacturing technology as well as suppliers base.

Director Ramachandran stated that the company had plans to depend on outsourcing rather than having its own manufacturing base in the future. The company selected Pune as its manufacturing base and decided to get the Salt Lake factory off its hands.

In tune with this decision, the employees were appraised and severance packages were declared. Out of 750 workers in the Salt Lake division, 391 workers opted for VRS. PIL then appointed Hong Kong and Shanghai Banking Corporation (HSBC) to scout for buyers for the factory. Videocon was one of the companies approached.

Though initially Videocon seemed to be interested, it expressed reservations about buying an over staffed and under utilized plant.To make it an attractive buy, PIL reduced the workforce and modernised the unit, spending Rs 7.1 crore in the process. In September 1998, Videocon agreed to buy the factory through its nominee, Kitchen Appliances India Ltd.

The total value of the plant was ascertained to be Rs 28 crore and Videocon agreed to pay Rs 9 crore in addition to taking up the liability of Rs 21 crore. Videocon agreed to take over the plant along with the employees as a going concern along with the liabilities of VRS, provident fund etc. The factory was to continue as a manufacturing center securing a fair value to its shareholders and employees.

In December 1998, a resolution was passed at PIL’s annual general meeting (AGM) with a 51% vote in favor of the sale. Most of the favorable votes came from Philips NV who held a major stake in the company. The group of FI shareholders comprising LIC, GIC and UTI initially opposed the offer of sale stating that the terms of the deal were not clearly stated to them.

They asked for certain amendments to the resolutions, which were rejected by PIL. Commenting on the FIs opposing the resolution, company sources said, “it is only that the institutions did not have enough time on their hands to study our proposal in detail, and hence they have not been able to make an informed decision.”

Defending the company’s decision not to carry out the amendments as demanded by the financial institutions, Ramachandran said that this was not logical as the meeting was convened to take the approval of the shareholders, and the financial institutions were among the shareholders of the company. Following this, the FIs demanded a vote on the sale resolution at an EGM. After negotiations and clarifications, they eventually voted in favor of the resolution.

The workers were surprised and angry at the decision. Kiron Mehta said, “The management’s decision to sell the factory is a major volte face considering its efforts at promoting it and then adding capacity every year.” S.N.Roychoudhary of the Independent Employees Federation in

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Calcutta said, “The sale will not profit the company in any way. As a manufacturing unit, the CTV factory is absolutely state-of-the-art with enough capacity.

SELLING TROUBLES contd...

It is close to Kolkata port, making shipping of components from Far Eastern countries easier. It consistently gets ISO 9000 certification and has skilled labor. Also, PIL’s major market is in the eastern region.”

The unions challenged PIL’s plan of selling the CTV unit at ‘such a low price of Rs 9 crore’ as against a valuation of Rs 30 crore made by Dalal Consultants independent valuers. PIL officials said that the sale price was arrived at after considering the liabilities that Videocon would have along with the 360 workers of the plant.

This included the gratuity and leave encashment liabilities of workers who would be absorbed under the same service agreements. The management contended that a VRS offer at the CTV unit would have cost the company Rs 21 crore. Refuting this, senior members of the union said, “There is no way that a VRS at the CTV unit can set Philips by more than Rs 9.2 crore.”

They explained that PIL officials, by their own admission, have said that around 200 of the 360 workers at the CTV unit are less than 40 years of age and a similar number have less than 10 years work experience. The unions also claimed that they wrote to the FIs' about their objection.

The workers then approached the Dhoots of Videocon requesting them to withdraw from the deal as they were unwilling to have Videocon as their employer. Videocon refused to change its decision. The workers then filed a petition in the Kolkata High Court challenging PIL’s decision to sell the factory to Videocon.

The unions approached the company with an offer of Rs 10 crore in an attempt to outbid Videocon. They claimed that they could pay the amount from their provident funds, cooperative savings and personal savings. But PIL rejected this offer claiming that it was legally bound to sell to Videocon and if the offer fell through, then the union’s offer would be considered along with other interested parties.

PIL said that it would not let the workers use the Philips brand and that the workers could not sell the CTVs without it. Moreover the workers were taking a great risk by using their savings to buy out the plant. Countering this, the workers said that they did not trust Videocon to be a good employer and that it might not be able to pay their wages.

They followed it up with proofs of Videocon's failure to make payments in time during the course of its transactions with Philips. In view of the rejection of its offer by the management, the union stated in its letter that one of its objection to the sale was that the objects clause in the memorandum of association of Kitchen Appliances did not contain any reference to production of CTVs.

This makes it incompetent to enter into the deal. The union also pointed out that the deal which was signed by Ramachandran should have been signed by at least two responsible officials of the company. As regards their financial capability to buy out the firm, the union firmly maintained that it had contacts with reputed and capable businessmen who were willing to help them.

In the last week of December 1998, employees of PIL spoke to several domestic and multinational CTV makers for a joint venture to run the Salt Lake unit. Kiron Mehta said, “We can always enter into an agreement with a third party. It can be a partnership firm or a joint venture. All options are open. We have already started dialogues with a number of domestic and multinational TV producers.”

It was added that the union had also talked to several former PIL directors and employees who they felt could run the plant and were willing to lend a helping hand. Clarifying the point that the employees did not intend to takeover the plant, Mehta said, “If Philips India wants to run the unit again, then we will certainly withdraw the proposal. Do not think that we are intending to take over the plant.”

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In March 1999, the Kolkata High Court passed an order restraining any further deals on the sale of the factory. Justice S.K.Sinha held that the transfer price was too low and PIL had to view it from a more practical perspective. The unrelenting PIL filed a petition in the Division bench challenging the trial court’s decision.

The company further said that the matter was beyond the trial court’s jurisdiction and its interference was unwarranted, as the price had been a negotiated one. The Division bench however did not pass any interim order and PIL moved to the Supreme Court. PIL and Videocon decided to extend their agreement by six months to accommodate the court orders and the worker’s agitation.

JUDGEMENT DAY

In December 2000, the Supreme Court finally passed judgement on the controversial Philips case. It was in favour of the PIL. The judgement dismissed the review petition filed by the workers as a last ditch effort.

The judge said that though the workers can demand for their rights, they had no say in any of the policy decisions of the company, if their interests were not adversely affected. Following the transfer of ownership, the employment of all workmen of the factory was taken over by Kitchen Appliances with immediate effect.

Accordingly, the services of the workmen were to be treated as continuous and not interrupted by the transfer of ownership. The terms and conditions of employment too were not changed. Kitchen Appliances started functioning from March 2001.

This factory had been designated by Videocon as a major centre to meet the requirements of the eastern region market and export to East Asia countries.

The Supreme Court decision seemed to be a typical case of ‘all’s well that ends well.’ Ashok Nambissan, General Counsel, PIL, said, “The decision taken by the Supreme Court reiterates the position which Philips has maintained all along that the transaction will be to the benefit of Philips’ shareholders.”

How far the Salt Lake workers agreed with this would perhaps remain unanswered.

QUESTIONS FOR DISCUSSION:

1. ‘Changes taking place in PIL made workers feel insecure about their jobs.’ Do you agree with this statement? Give reasons to support your answer.

2. Highlight the reasons behind PIL’s decision to sell the Salt Lake factory. Critically comment on PIL’s arguments regarding not accepting the union’s offer to buy the factory.

3. Comment on the reasons behind the Salt Lake workers resisting the factory’s sale. Could the company have avoided this?

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