1

SAIL'S VOLUNTARY RETIREMENT SCHEME

Case Code-HROB002
Published- 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
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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:

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.
 3

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. About
5,975 employees opted for the scheme. Of them, 5,317 were executives and
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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
 5

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 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:
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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
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Rourkela Steel Plant in Orissa absorbed contractors' workers on Supreme

Court orders, fresh contractors had been appointed to fill up the vacancies.

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
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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.

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,
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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.

BATA INDIA'S HR PROBLEMS

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Case code- HROB001

Published-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.
 11

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."

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
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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.
 13

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.
 14

CHANGE MANAGEMENT@ICICI

Case Code-HROB008
Published-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

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.
 15

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.
 16

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 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
 17

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 II
MANAGING HR DURING THE ICICI-BoM MERGER

AREAS OF HR INTEGRATION
THE HR BLUEPRINT
FOCUSSED ON
A data base of the entire HR
structure Employee communication
Cultural integration
Road map of career
Organization structuring
Recruitment &
Determining the blue print of HR
Compensation
moves
Performance management
Communication of milestones Training

IT Integration - People Integration Employee relations

- Business Integration.

Source:www.sibm.edu

EMPLOYEE DOWNSIZING
 18

Case Code- HROB016

Publication 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 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
 19

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 I
DOWNSIZING BY MAJOR COMPANIES (1998-2001)
No. of
YEAR COMPANY INDUSTRY Employees
Downsized
1998 Boeing Aerospace 20,000
1998 CitiCorp Banking 7,500
1998 Chase Manhattan Bank Banking 2,250
1998 Kellogs FMCG 1,00
1998 BF Goodrich Tyres 1,200
1998 Deere & Company Farm Equipment 2,400
1998 AT&T Telecommunications 18,000
1998 Compaq IT 6,500
1998 Intel IT 3,000
1998 Seagate IT 10,000
1999 Chase Manhattan Bank Banking 2,250
1999 Boeing Aerospace 28,000
1999 Exxon-Mobil Petroleum 9,000
2000 Lucent Technologies IT 68,000
2000 Charles Schwab IT 2,000
2001 Xerox Copiers 4,000
2001 Hewlett Packard IT 3,000
2001 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
 20

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).

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
 21

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 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 .
 22

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
 23

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 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
 24

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

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
 25

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,
 26

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 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
 27

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.
 28

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.
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,
 29

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.com
33. http://govinfo.library.unt.edu
34. www.greylockassociates.com
35. www.whatis.com
36. www.shrm.org
37. www.cio.com
38. www.shrm.org
39. www.forbes.com
40. www.orst.edu
41. www.humanresources.about.com
42. www.business2.com
43. www.businessweek.com
44. www.business-minds.com
45. www.themanagementor.com
46. www.bpcinc.com
47. http://members.aol.com
48. www.doleta.gov
49. www.msnbc.com

The Indian Call Center Journey

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.
 30

- 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 industrys 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.
 31

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 calls cost.

The call center could be situated anywhere in the world,

irrespective of the client companys 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.

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 I
BENEFITS 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
 32

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 II
CALL 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 countrys IT strengths being recognized all over
the world.

Moreover, India had the largest English-speaking population

after the US and had a vast workforce of educated, reasonably
 33

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 Governments pro call center industry approach and
a virtual 12-hour time zone difference with the US added to
Indias 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 III
THE INDIAN CALL-CENTER MILESTONES
Mid
GE, Swiss Air, British Airways set up captive
1990s
call center units for their global needs.

Following increasing interest in the IT-

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

A NASSCOM-McKinsey report says that

Dec-99
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
 34

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.

NASSCOM report, indicates that a center

Quarter could be set up with $ 1 million. Gold rush
4 2000 begins. Everyone, from plantation owners to
lorry-fleet operators, wanted to set up
centers.

Most of the call centers are waiting for

customers. New ventures still coming up:
capacity of between 25 seats and 10,000
Quarter seats per company. Small operators discover
1, 2001 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.

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.
 35

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
 36

computer lines.) The industry did not offer any creative work or
growth 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 centers 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,
 37

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 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
 38

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 I
CALL 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

 39

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 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 firms 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.
 40

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.com
12. 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 IAs

22,000 employees.

- Business India, January 25, 1999.

FLYING LOW

Indian Airlines (IA) the name of Indias 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. IAs recurring human resource problems were attributed
to its lack of proper manpower planning and underutilization of
 41

existing manpower.

The recruitment and creation of posts in IA was done without

proper scientific analysis of the manpower requirements of the
organization. IAs 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.

IAs 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.
 42

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 companys 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. IAs market share, however continued to drop. In 1999,
while IAs 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 interference ranged from deciding on the crews
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 IAs losses over the
years. As the carriers 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?

IAs 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.
 43

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 IAs vulnerability. April 2000 saw another go-slow agitation by IAs
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 companys 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 Modys 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 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)
 44

TABLE I
IMPACT 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 8.8
Source: IATA-World Air Transport Statistics

Initially, Sens 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
 45

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 II
INCREASE IN STAFF COSTS
Staff cost
Per as
Total
Staff cost No. of employee percentage Effective
Year expenditure
(in Rs bn) employees cost (in of total fleet size
(in Rs bn)
mn) operational
expenditure

1993-
2.85 22182 0.13 20.75 15% 54
94

1994- 3.74
22683 0.16 22.59 19% 58
95 (31.18%)*

1995- 5.71
22582 0.25 26 25% 55
96 (52.59%)

1996- 7.10
22153 0.32 29.29 26% 40
97 (24.35%)

1997- 8.17
21990 0.37 32.21 27% 40
98 (15.03%)

1998- 8.75
21922 0.39 34.31 28% 41
99 (7.12%)
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,
 46

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 airlines
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 III
A COMPARISON OF VARIOUS AIRLINES

Number
ATKm
Name of of No. of ATKm[3] Employees
per
Airlines aircraft employees (in Million) per aircraft
Employee
in fleet

Singapore
84 13,549 14418.324 1064161 161
Airlines

Thai Airways
76 24,186 6546.627 270678 318
International

Indian
51 21,990 2113.671 398204 431
Airlines

Gulf Air 30 5,308 1416.235 245831 177

Kuwait
22 5,761 345.599 92853 261
Airways

Jet Airways 19 3,722 1094.132 49756 196

Source: IATA-World Air Transport Statistics
 47

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, IAs 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.
 48

QUESTIONS FOR DISCUSSION:

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

2. IAs 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 Standard
7. Panel seeks further study on airport privatisation, April 26, 1999, Business
Standard.
8. Crasta Jivitha, The battle for the skies, May 25, 1999, Business Standard
9. 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 employees union leader in December 2000.

VRS TROUBLES
 49

In February 2001, Indias 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 Industrys (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 SBIs 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 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, SBIs 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
 50

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 SBIs 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] Banks 61 branches
were connected. By 2000, SBIs net profit per employee was Rs 0.43 million
while HDFCs was Rs 0.96 million, and SBIs NPA level was around 7.18% as
against HDFCs 0.73% (Refer Table I).

TABLE I
A COMPARISON BETWEEN SBI & SOME NPBs
PROFIT
PER
NPAs/NET
EMPLOYEE
BANK ADVANCES
(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

 51

IDBI BANK 1.95% 1.15

Source: 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 banks 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.
 52

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, MBAs, 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%.

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 SBIs 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.
 53

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 SBIs 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, SBIs 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 Governments
proposal to scrap the Banking Service Recruitment Board
(BSRB)[6] as the bank lacked expertise in recruitment
procedures.

TABLE II
CHANGE IN SBIs STAFF STRENGTH
31-03- 31-03- %
01 00 change

-
Officers 52,558 59,474
11.63%

Clerical 103,993 115,424 -9.90%

Subordinate 53,729 58,535 -8.21%

 54

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
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 banks 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 managements
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
 55

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 Banks 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 Express
4. Sahad P.V, SBI employees protest over VRS, December 28,
2000, India Today
5. 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 SBIs VRS, February 1, 2001,
Indian Express.
12. SBI to reject 10,000 VRS applications, February 3, 2001,
Hindustan Times.
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.com
 56

15. 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, Reporters 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.com
28. www.indiainfoline.com
29. www.bankersindia.com
30. www.equitymaster.com

Netscape's Work Culture

 57

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 OHare, 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 Netscapes three different businesses Netcenter portal,
Netscape browser software and a B2B e-commerce software development
division.

According to the terms of the deal, Netscapes shareholders

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

would accept Netscapes casual and independent culture. Moreover, they
were worried that this deal may lead to a reduction in Netscapes 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
 58

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.
 59

Netscape 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
Netscapes earnings. In November 1998, Netscape was acquired by AOL, the
worlds largest online services provider.

Analysts remarked that Netscapes 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 Netscapes culture, which
promoted innovation and experimentation, enabled it to adapt quickly to
changing market conditions. They also said that the companys enduring
principle Netscape Time (See Exhibit II) had enabled it to make so many
product innovations very quickly.

NETSCAPES 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 companys cubicle policy. Everyone including
CEO Barksdale, worked in a cubicle. Independence and hands-
off management[11] were important aspects of Netscapes
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
 60

did not require employees to seek anyones approval for trying

out new ideas. For example, Patrick OHare[12], who managed
Netscapes internal human resources website, was allowed to
make changes to any page on the site, without anyones
approval.

Netscapes 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 dont 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 Netscapes 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-
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 Netscapes 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 browsers marketshare fell from 73% to
 61

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 Netscapes 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 Netscapes
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 AOLs 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
 62

company. But the merger with AOL reduced them to a small part of a big
company, with slow-moving culture.

EXHIBIT I
NETSCAPE CHRONOLOGY OF EVENTS

DATE EVENT

1-Mar- Jim Clark and Marc Andreessen begin talks on

94 forming a new company

The company (first named Electric Media) is

Apr-94
founded by Clark and Andreessen.

Electric Media changes its name to Mosaic

May-94
Communications

Mosaic Communications changes its name to

Nov-94
Netscape Communications

Netscape Navigator, Netscape Commerce, and

Dec-94
Communications Servers ship.

Netscape's IPO is one of the hottest stock-market

Aug-95
debuts ever.

Netscape and Sun Microsystems announce Java

Dec-95
Script.

11-Mar- America Online agrees to include Netscape in every

96 copy of its Internet-access software.

AOL strikes a deal with Microsoft, giving Internet

12-Mar-
Explorer the coveted spot as the service provider's
96
browser.

May-96 Netscape announces Netscape Navigator 3.0.

 63

Netscape announces its server product, SuiteSpot

Oct-96
3.0.

Netscape becomes enterprise-software purveyor,

Oct-96 rolling out intranet- and Internet-server software
packages.

11-Jun-
Netscape releases Communicator
97

Aug-97 Netscape releases Netcaster, push-media software

Netscape announces an initiative to retain its

browser share by forming 100 industry partnerships.
Its new partners agree to package the Navigator
18-Aug-
browser -- unbundled from the Communicator suite
97
-- with their products. The streamlined Navigator
4.0 includes Netcaster, basic email, and calendar
software.

It unveils the Netcenter Web site, transforming the

3-Sep-
corporate Netscape.com into a site featuring news,
97
software, and chat groups.

22-Jan- It offers Communicator 5.0's source code over the

98 Net free.

Mozilla.org launched. A dedicated internal team and

23-Feb-
the website guide the open source code to
98
developers.

31-Mar- Netscape releases programming source code for its

98 Communicator software.

10-Apr- Mozilla.org posts the first version of its source code,

98 modified by outside developers.

18-May- The US Justice Department and 20 state attorney

98 generals file an antitrust case accusing Microsoft of
abusing its market power to thwart competition,
 64

including Netscape

29-Jun-
Netscape debuts Netcenter 2.0.
98

According to a study by a market researcher,

28-Sep-
Netscape cedes browser-share lead to Microsoft's
98
Internet Explorer.

Netscape releases Communicator 4.5, the latest

19-Oct- version of its browser software. It features Smart
98 Browsing, Roaming Access, and RealNetworks'
RealPlayer 5.0.

22-Nov- AOL is involved in negotiations for buying Netscape

98 in an all-s

EXHIBIT II
NETSCAPE TIME

Netscape Time was Netscapes 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 like Oracle, Silicon Graphics etc.
The company wanted them to get used to
Netscapes code-writing culture.
 65

The paranoid predator was the second

principle. Netscape knew that even a predator
could become a prey. The companys
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.

Netscapes employees seemed to be
habituated to non-stop work. For example, to
launch the companys 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
 66

evaluation copy from the Internet. A fully

supported version of the software was later
sent to interested users. This helped increase
the companys interaction with the customers.
Their feedback was utilized to design the next
version.

EXHIBIT III
BENEFITS 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 Benefits
The 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.

Flexible Spending Accounts

Spending 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 Care
The 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 Insurance
Netscape 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.
 67

Income Protection
Income 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 Benefits
The 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 Insurance

Netscape 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).

Vacation
Full-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 Holidays
Netscape observes nine scheduled company-designated
holidays and up to two employee-designated personal
holidays per year.

401(k) Retirement Savings Plan

The 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 III
BENEFITS FOR NETSCAPE EMPLOYEES contd...
 68

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

Tuition Assistance Program

Netscape 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 Legal
Netscape 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 Programs
Netscape 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 Service
LesConcierges 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 Services
Services onsite such as a florist, massages, dental care, photo
 69

processing, dry cleaning, oil changes and more!

ClubNet
Programs 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 Service

Assists employees with finding dependent care resources with
information from LifeCare.com.

Credit Unions and Banking

Select 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$ 1998
1994 1995 1996 1997
thousands) (Oct 31)
Revenues

Product 3337 77489 291183 383950 261457

Service 801 7898 55111 149901 186352

Total
4138 85387 346294 533851 447809
Cost of Revenues:

Cost of Pdt Rev 186 9177 36943 50232 27313

Cost of Ser Rev 247 2530 13124 31557 90717

 70

Total
433 11707 50067 81789 118030

Gross Profit 3705 73680 296227 452062 329779

Operating 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 2487 500 250 -- --
charges

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

Mergers related
-- 2033 6100 5848 --
charges

Restructuring
-- -- -- 23000 12000
charges

Goodwill
-- -- -- -- 5088
Amortization

Total
17772 84389 275739 584329 396045

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

Interest Income 251 4898 -- -- 6873

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

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

ADDITIONAL READINGS AND REFERENCES

 71

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
companys 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
 72

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,
Theres a growing body of data indicating that corporate wellness programs
lower medical costs for employees.[9]

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.
 73

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 I
ANNUAL AVERAGE COST PER EMPLOYEE DUE TO
VARIOUS HEALTH PROBLEMS
Nature of Health Annual average
Problem cost per employee

Heart disease $236

Mental health problems $179

High blood pressure $160

Diabetes $104

Low back pain $90

Heart attacks/Acute
$69
myocardial blockages

Bi-polar disorders/Maniac
$62
depression

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
 74

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 dont need to pay overtime or
temporary help; when people stay at the job longer, training costs go down;
lower health care claims cost you less if youre 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 factorys sale.

PEU president Kiron Mehta said, The companys 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
 75

PILs operations dates back to 1930, when Philips Electricals Co. (India) Ltd.,
a subsidiary of Holland based Philips NV was established. The companys
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 plants
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, PILs 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
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 NVs worldwide strategy of

having a common manufacturing and integrated technology to reduce costs.
 76

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 PILs 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 companys 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
 77

favor of the resolution.

The workers were surprised and angry at the decision. Kiron Mehta said, The
managements 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 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, PILs major market is in the eastern region.

The unions challenged PILs 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 PILs 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 unions offer would be considered along with
other interested parties.
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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.

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 courts decision.

The company further said that the matter was beyond the trial courts
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
workers agitation.
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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 alls 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 PILs decision to sell the Salt Lake factory.
Critically comment on PILs arguments regarding not accepting the unions
offer to buy the factory.

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