How India Inc Is Managing Employee Exit

It doesn't matter who you are, and which sector you belong to. For reductions in workforce have been happening all over. In the private corporate sector and the public. There are no official figures to sum up the extent of downsizing that has happened, but guesstimates vary from one million organised sector workers to three million and over the decade. The pressures of globalisation, increasing competition and technology upgradation are beginning to tell on India Inc - and the first to bear the brunt is labour. Both white-collar and blue-collar.

Says Sunil Kumar Maheshwari, professor and member of the faculty at IIM, Ahmedabad, who specialises in personnel and industrial relations: "The current changes in organisations are triggered by globally competitive pressures and technological advancements. In the protected economy, growth was synonymous with profitability and security. Organisations were focused on production. The focus is now shifting from 'production' to 'productivity'. Organisations have no option but to reduce their manpower to be cost-effective in the changed environment."

Companies have been doing just that, but hook or by crook. This is apparent from the macro numbers. According to the Union labour ministry, employer militancy through lockouts significantly outweighed employee action through strikes throughout the reformist 1990s. Mandays lost through lockouts outnumbered those lost through strikes by 3:2 for the decade as a whole (1991-00).

Signs of more benign exit policies are even more visible now. Public sector banks recently shed close to one lakh employees through VRS. The steel industry - with Tata Steel and SAIL in the vanguard - is in the process of shedding another lakh, if not more. Add textile mills, the engineering sector, the financial institutions, other central and state public sector companies, and the rest of the private corporate sector, and you know it's an epidemic of sorts.

When you have an epidemic on hand, its social consequences go far beyond the well-being of just one company or one industry. And it's not just about paying out compensation through voluntary packages (VRS). Says Ramesh Chandra Datta, Professor and Head, Department of Personnel Management and Industrial Relations and Mumbai's Tata Institute of Social Sciences: "A thoughtless VRS can lead to high social costs for the employee and his family. First, the income goes down, children start dropping out of school, and health expenses go up with age. Psychologically, too, the employee who is identified as surplus faces problems. I have also heard - though I don't know it personally - that the increase in urban crime rates could be one consequence of large-scale VRS and unemployment."

The organisations planning the exits suffer, too, if they don't plan it well A case in point is the public sector bank industry, which executed a "successful" VRS in 2001. The unexpected exodus of some of its best officers caused a major disruption for several weeks in some banks, resulting in financial losses as well as damage to customer relations (see following story).

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Datta, in fact, goes a step further and questions whether VRS can be the answer to all problems relating to competitiveness. "Even after reducing the labour force, one cannot be certain whether an enterprise will become competitive. If your basic product is uncompetitive, reducing labour will not help. Some studies in the US have also shown that reducing labour is not the answer to uncompetitive companies and products," he says.

Most pundits, though, are not questioning the basic validity of the premise that Indian industry - after years of living in a sellers' market - has to become lean and mean, and one way of doing this is by reducing employee costs. Ashis Bhattacharya, professor in the department of finance and control, IIM, Kolkata, is one of them.

"Indian companies are in transition. VRS is their response to changes in the marketplace, technology and the regulatory environment. In the dynamic business environment, job profiles will change resulting in a mismatch between new skill requirements and the profiles of existing people. Companies will create competitive advantage by reconfiguring the value chain. As a result, obsolescence of human resources will be faster than before. VRS will be a rule rather than an exception."

If that's so, the focus then needs to shift from whether to how. If job losses and VRS are inevitable, what is the best way to implement them? Is there only one right way to do it, or can there be many paths to downsizing nirvana? Is Indian industry doing VRS as a part of strategy or just in response to short-term cost pressures? Given the fact that safety nets are practically non-existent in the Indian context, how do employers soften the blow? As VRS spreads from workers to office employees and middle and upper management, how does one square this burning desire to reduce employees with the general assertion that human capital is more important than financial capital in today's competitive scenario.

Though examples of successful VRS strategies are a handful, many professionals agree that VRS programmes go most wrong when they are driven by short-term bottomline considerations. Says Santrupt Misra, HR chief of the Aditya Birla group and director, Birla Management Corporation: "There are many instances of downsizing that have not been well thought out. Very often this happens when a new CEO takes charge and he wants to produce immediate results on the bottomline. To achieve quick breakeven or turnaround, he may downsize or cut staff with short-term ends in mind."

In sharp contrast is the VRS done by Tata Steel. One of the longest running separation schemes in the corporate sector, the Tata Steel scheme has reduced employee strength by over 31,000 over the last seven years - and it has been done in a genteel fashion. Very little heartburn, and lots of benefits for the company in terms of competitive advantage (see box: How Tata Steel did it).

But its worth remembering that what works for one company may not work elsewhere. Most HR pundits, therefore, advocate different strokes for different situations. Maheswari of IIM, Ahmedabad, who has studied turnaround management, says that Mangalore Chemicals and Fertilizers Ltd had a very effective VRS experience.

Unlike the Tatas, MCF had a more discriminating VRS programme, and it worked for them "They were selective in accepting VRS applications based on certain guidelines. Functional managers were involved in the exercise at every stage. The company made a rational manpower assessment through an independent agency. They also helped in providing earning opportunities for retired employees. However, I would also suggest their model should not be adopted blindly as it was useful mainly in their context."

If context is the key to success, the first principle in managing exits clearly should be an objective asessment on why one wants to reduce the workforce. In the Indian context, there are several reasons why companies want to do a VRS. These could range from broader strategy to narrow cost considerations, from crisis-driven downsizing to merger and restructuring-related reductions, and from unfavourable employee demographic profiles to wrong skillsets.

At the base level, the most inevitable exits are those related to corporate distress and closures. The coercive circumstance of already closed mills and manufacturing units was what made the NTC separation schemes work despite strong union opposition. In recent times, the Orissa and Andhra Pradesh government have also used the argument of closed plants to send employees home permanently - with financial help from the UK Department for International Development (DFID). At least 11,000 employees in 35 Orissa government units took VRS. They saw it as a better option than staying employed without work or wages.

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In Andhra Pradesh, the government paid Rs 194.58 crore as VRS money to 15,228 employees in 17 state-level enterprises and 18 cooperatives. Another 23 enterprises and 55 cooperatives will be covered in the next four years. The bright spot in this scheme is not the way it was implemented, but how the follow-up was done. The state government first set up a social safety net programme (SSNP) to minimise the social impact on workers affected by the reforms process.

An autonomous body, The Implementation Secretariat, was also created to plan, recommend and implement the strategy for the reforms programme. This secretariat is manned by professionals recruited on a contract basis in the areas of management, finance, legal, media, labour and information technology. The DFID additionally appointed the Adam Smith Institute, London, as consultant to provide expatriate inputs to the Implementation Secretariat.

The benefits of this follow-through are there for all to see. A survey of 2,000 workers, undertaken by the Implementation Secretariat, discovered that 50 per cent of the VRS beneficiaries put their money in fixed deposits while 15 per cent squandered it on social evils like drinking liquor and gambling.

Another 10 per cent acquired assets like land and extended existing houses, while an equal percentage used the money to discharge social obligations like getting their daughters married. The remaining 15 per cent utilised the amount towards acquiring household goods or ornaments, retiring old debts and towards meeting medical and educational expenses.

Based on these inputs, and given the demographic profile of the VRS takers, the SSNP designed a programme of counselling, retraining and limited follow-up services. As on March 1 this year, 4,708 VRS employees had been surveyed, 4,070 counselled, 1,715 retrained and 266 were still undergoing training. Of the retrained personnel, 524 were redeployed while another 359 got self-deployed. In the next five years, 50,604 employees in pubic enterprises and cooperatives are expected to opt for the VRS and the Implementation Secretariat expects at least 60 per cent of them to be retrained, of whom 35 per cent will be redeployed.

That kind of happy ending may not be possible in many of the private sector VRS programmes, because most managements do not find it worth their while to put in that time or effort. But there are exceptions. When Birla Periclase was shut down because the entire economics of the project went awry due to Chinese dumping of manganese, the company's HR head took it upon himself to help employees find jobs. "With the local HR chief taking a personal interest, we actually went with the employees' CVs to various Birla units. More than 50 per cent of the staff of 300-and-odd got placed. Even the rest were placed outside the group - but with companies in the vicinity", notes Santrupt Misra of the Birlas. But even Santrupt is clear that this kind of help may not always be possible. In the event, the best that companies can do is help them with counselling and outplacement help.

The companies that do it best are those that do voluntary separations for strategic reasons - because the demographic profiles are wrong (foreign banks), the skillsets are inappropriate (PSU banks) or for long-term competitive reasons (Hindustan Lever). Hindustan Lever knew that it would not be able to hold its own in the price-sensitive segments of the detergent markets with its high-cost labour force when the Nirmas of the world were making inroads. It, therefore, had to brave a prolonged strike at its Sewri plant in Mumbai. After the battle was won with the unions, it got the numbers down through generous VRS programmes and moved production to smaller units with lower cost structures.

The Hindustan Lever, NTC and PSU banks' VRS programmes show that one constituency that will always be wary of VRS will be the trade unions. They lose out because downsizing always brings down union power, and this is not something that will willingly acquiesce in.

But, as B Muthuraman, managing director of Tata Steel, points out, unions are vital for success. "No organisation can smartsize unless you take the union into confidence. The first step that the management took was to apprise the union of the changes in the industry. The unions were made to visit the best steel plants in Japan, Korea, the best industries in Malaysia, Singapore and the best mining and steel companies in South Africa. The shared vision of the future with the union was the most critical component in the success of our VRS."

That's the ultimate lesson. Communicate, communicate, communicate.

HOW TATA STEEL DID IT

Till the early 1990s, Tata Steel was always run as a welfare state: even now it runs everything from housing to schools to hospitals and even civic services in the steel city of Tatanagar. For a company with this kind of public responsibility thrust on it, handing workers the pink slip can be a daunting task. But in work as in separation, Tata Steel has evolved its own unique style of dealing with employees. Its early separation scheme (ESS) for workers offers a lesson in corporate responsibility in difficult times.

The reason why Tata Steel's ESS works - it still has some years to run - is simple: the company saw the writing on the wall early, and planned to cut is labour costs over a long period of time instead of just adopting a slash-and-burn strategy. Between 1995 and 2001, the company managed to reduce its workforce from 78,300 to 47,300. As on April 1 this year, the figure should have dwindled further to a shade under 47,000.

And surprise: it did not cost the company a bomb to implement. Reason? The company realised early on that the big savings in VRS programmes come not from savings on direct costs, but indirect ones. The cost of ESS would have been enormous had it been a one-time payment. But what Tata Steel did was not offer a lumpsum package, but a salary-like structure under which employees continue to get paid their wages, but not the incremental indirect payments like gratuity and superannuation, bonus, or provident fund contributions.

In Tata Steel as in every other big company, the indirect component of the wage bill tends to high. For every rupee that the employee receives as salary, the cost to Tata Steel is around Rs 1.60. Hence, the benefits of the ESS can be felt within months of implementation.

Employees' salaries are paid out of the revenues of various department to a central pool which is then debited in the annual accounts of the company. In any given year, the amount debited in the balance-sheet of the company on account of ESS is around Rs 120 crore. Last year, Rs 122 crore was debited on account of the ESS. This is the central cost of the scheme.

Had Tata Steel not introduced VRS in 1995, all its profits, especially in 2001-02, would have been swallowed up by salaries. In short, Tata Steel would have been in the red for the first three quarters of fiscal 2001-02. Instead, the bottomline looks healthy because of productivity increases. Capacity has increased marginally by 10 per cent merely by getting more heats from the furnaces. In 1995, productivity was at 93 tonnes of crude steel per manyear. In 2000-01, it stood at 196 tonnes. Saleable steel was at 79 tonnes per manyear in 1995; by 2000-01 it had risen to 189 tonnes.

How did the company sell the idea of the ESS? Through relentless communication to workers from all forums-- through channel T (the local Jamshedpur channel), newsletters, communications from the managing director and deputy managing directors through the intranet.

But whom did the Ess target? Surprisingly, there is no target group, but normally it is the 40-45-plus age groups that opt for early separation. The company claims there is no coercion. If an employee is redundant, he is told that this is not due to his inefficiency but because times have changed.

Apart from the regular salary, the pill is sweetened by offering ESS takers three years' education costs if the company's school seat is vacated. Medical benefits at Tata Medical Hospital are available for those who stay in Jamshedpur and an insurance card is offered to the rest. A Rs 3 lakh advance payment is made from an employee's salary interest-free for those who have to vacate the company house. Many people who opt for VRS prefer staying in Jamshedpur due to these multiple benefits.

For those who want to look for further employment, there are on-site consultants who help them write better CVs. Little wonder, employees have taken exit in their stride.

By Ishita Ayan Dutt

IN ANY VRS, COMPANIES MUST...

- Realise that VRS is only one aspect of restructuring. It should not expect miracles and substantial cost-savings from VRS immediately

- Communicate with the employees before hand about the reasons for implementing the VRS and the how it will be implemented fairly

- Initiate talks with the unions to get their buy-in for the programme, thereby ensuring its success

- Ensure quick and accurate payment of the VRS package, ensure buy-in for the later stages also

- Initiate measures to set up a safety net programme whereby retrenched employees are helped with counselling, training and redeployment

- Retrain the existing staff to better fulfill their new job-profile and provide a measure to instill confidence to them about job-security

... AND MUST NOT

- Roll out a VRS programme without any warning and build-up time for the employees to get used to the idea

- Repeatedly implement VRS. A company must assess once and for all its staffing requirements and then go in for restructuring exercise of which VRS will be a part.

- Employ other fresh people, with not very varied skillsets, for the same job immediately after retrenchment

(This article was first published in the April 2002 issue of Indian Management magazine.)