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http://www.icmrindia.org/casestudies/Case_Studies.asp?cat=Human
%20Resource%20and%20Organization%20Behavior

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 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
 2

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.

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
 3

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 658
non-executives. Most of those who opted were above 55 years.

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

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

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

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

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

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

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

THE PERSUASION

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

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

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

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

THE PERSUASION & THE RELATION

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

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

QUESTIONS FOR DISCUSSION

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

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

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

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

ADDITIONAL READING & REFERENCES:

1. Bhandari Bhupesh, SAIL sill has an appetite for equity, Business World, February 7,
1996.
2. Sarkar Ranju, Has SAIL recast its bottomline?, Business Today, July 22, 1997.
3. Maitra Dilip, Did SAIL smelt its profits in its furnaces?, Business Today, November 7,
1998.
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.
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BATA INDIA'S HR PROBLEMS

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.

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
 8

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
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
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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.

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

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

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

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

CHANGE MANAGEMENT@ICICI

Case Code-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."
 10

- 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.

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.
 11

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

ICICI was reported to be one of the few Indian companies known for its quick responsiveness to the
changing circumstances. While its development bank counterpart IDBI was reportedly not doing
very well in late 2001, ICICI had major plans of expanding on the anvil. This was expected to bring
with it further challenges as well as potential change management issues. However, the organization
did not seem to much perturbed by this, considering that it had successfully managed to handle the
employee unrest following Kamath's appointment.

CHANGE CHALLENGES - PART II

ICICI had to face change resistance once again in December 2000, when ICICI Bank was merged
with Bank of Madura (BoM)[1] . Though ICICI Bank was nearly three times the size of BoM, its staff
strength was only 1,400 as against BoM's 2,500. Half of BoM's personnel were clerks and around
350 were subordinate staff.

There were large differences in profiles, grades, designations and salaries of personnel in the two
entities. It was also reported that there was uneasiness among the staff of BoM as they felt that
ICICI would push up the productivity per employee, to match the levels of ICICI [2]. BoM
employees feared that their positions would come in for a closer scrutiny. They were not sure
whether the rural branches would continue or not as ICICI's business was largely urban-oriented.

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

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

TABLE I
'POST-MERGER' EMPLOYEE BEHAVIORAL PATTERN
PERIOD EMPLOYEE BEHAVIOR
Day 1 Denial, fear, no improvement
After a month Sadness, slight improvement
After a Year Acceptance, significant improvement
After 2 Years Relief, liking, enjoyment, business development activities

Source:www.sibm.edu

Based on the above findings, ICICI established systems to take care of the employee resistance
with action rather than words. The 'fear of the unknown' was tackled with adept communication and
the 'fear of inability to function' was addressed by adequate training. The company also formulated
a 'HR blue print' to ensure smooth integration of the human resources. (Refer Table II).
 12

TABLE II
MANAGING HR DURING THE ICICI-BoM MERGER

AREAS OF HR INTEGRATION
THE HR BLUEPRINT
FOCUSSED ON

• Employee communication
• A data base of the entire HR structure
• Cultural integration
• Road map of career
• Organization structuring
• Determining the blue print of HR moves
• Recruitment & Compensation
• Communication of milestones
• Performance management
• Training
• IT Integration - People Integration -
Business Integration.
• Employee relations

Source:www.sibm.edu

EMPLOYEE DOWNSIZING

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
 13

when it was not required.

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

TABLE I
DOWNSIZING BY MAJOR COMPANIES (1998-2001)

No. of Employees
YEAR COMPANY INDUSTRY
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 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
 14

value." In line with this approach to leadership, GE abandoned policy of lifetime employment
and introduced the concept of contingent employment. Simultaneously, it began offering
employees the best training and development opportunities to constantly enhance their skills
and performance and keep pace with the changing needs of the workplace.

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

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

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

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

As investors seemed to be flocking to downsizing companies, many companies saw downsizing as a

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

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

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

THE SECOND PHASE

By the mid-1990s, factors such as increased investor awareness, stronger economies, fall in
inflation, increasing national incomes, decrease in level of unemployment, and high profits, reduced
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
 15

increase in the availability of a temporary employee base. Rationalization of the labor force
and wage reduction took place at an alarming rate during the late 1990s and early 21st
century, with increased strategic alliances and growing popularity of concepts such as lean
manufacturing and outsourcing .

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

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

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

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

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

TACKLING THE EVILS OF DOWNSIZING

During the early 21st century, many companies began offering flexible work arrangements to their
employees in an attempt to avoid the negative impact of downsizing. Such an arrangement was
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
 16

space. This type of arrangement also gave more time to pursue their education, hobbies, and
professional development, and handle personal responsibilities.

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

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

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

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

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

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

LESSONS FROM THE 'DOWNSIZING BEST PRACTICES' COMPANIES

In the late 1990s, the US government conducted a study on the downsizing practices of firms
(including major companies in the country). The study provided many interesting insights into the
practice and the associated problems. It was found that the formulation and communication of a
 17

proper planning and downsizing strategy, the support of senior leaders, incentive and compensation
planning and effective monitoring systems were the key factors for successful downsizing.

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

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

Communication was found to be a primary success factor of effective downsizing programs.

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

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

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

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

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

According to a survey report, information that was not required by companies for their normal day-
to-day operations, became critical when downsizing. This information had to be acquired from
internal as well as external sources (the HR department was responsible for providing it). From
external sources, downsizing companies needed to gather information regarding successful
downsizing processes of other organizations and various opportunities available for employees
outside the organization. And from internal sources, such companies need to gather demographic
 18

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

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

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

Some techniques considered by organizations in lieu of downsizing included overtime restrictions,

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

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

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

QUESTIONS FOR DISCUSSION

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

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

3. As part of an organization's HR team responsible for carrying it through a downsizing exercise,

discuss the measures you would adopt to ensure the exercise's success. Given the uncertainty in
the job market, what do you think employees should do to survive the trauma caused by downsizing
and prepare themselves for it?
 19

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, 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
 20

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.”

- A Mumbai based call center agent, in 2001.

CALL CENTERS FARE BADLY

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

Noted Massachusetts Institute of Technology (MIT) scholar, Michael Dertouzos

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

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

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

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

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

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

CALL CENTER BASICS

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

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

The call center could be situated anywhere in the world, irrespective of the client
company’s customer base. Call centers date back to the 1970s, when the
travel/hospitality industry in the US began to centralize their reservation centers.
 21

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 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
 22

companies at various stages viz. setting up of the center, internal infrastructure revamps, excess
traffic situations etc.

INDIAN CALL CENTERS – MYTHS AND REALITIES

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

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

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

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

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

TABLE III
THE INDIAN CALL-CENTER MILESTONES
Mid GE, Swiss Air, British Airways set up captive call center units
1990s for their global needs.
Following increasing interest in the IT-enabled services
sector, NASSCOM held the first IT-enabled services meet.
May-99
Over 600 participant firms plan to set up medical
transcription outfits and call centers.
A NASSCOM-McKinsey report says that remote services
Dec-99
could generate $ 18 billion of annual revenues by 2008.
Venture Capitalists rush in. Make huge investments in call
May-00
centers.
More than 1,000 participants flock to the NASSCOM meet to
hear about new opportunities in remote services. Though the
Sep-00
medical transcription business is not flourishing, call centers
seen as a big opportunity.
NASSCOM report, indicates that a center could be set up
Quarter
with $ 1 million. Gold rush begins. Everyone, from plantation
4 2000
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 seats per company. Small operators discover that the
Quarter
business is a black hole where investments just disappear.
1, 2001
They look for buyers, strategic partnerships and joint
ventures. Brokers and middlemen make an entry to fix such
deals.
 23

INDIAN CALL CENTERS – MYTHS AND REALITIES contd...

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

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

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

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

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

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

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

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

INDIAN CALL CENTERS – MYTHS AND REALITIES contd...

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

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

Job security was another major problem, with agents being fired frequently for
not being able to adhere to the strict accuracy standards. (Not more than one
mistake per 100 computer lines.) The industry did not offer any creative work or
 24

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 center’s profits but also customer service and
satisfaction. This was because a new agent normally took a few months before becoming as
proficient as an experienced one. This meant that opportunities for providing higher levels of
customer service were lost on account of high staff turnover

FUTURE PROSPECTS

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

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

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

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

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

He said: “The English spoken by Indians is a very heavy dialect – in fact, in face to face
conversations, I found it very difficult to understand what was said. How will this play out over the
 25

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

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

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

QUESTIONS FOR DISCUSSION

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

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

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

EXHIBIT 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 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
 26

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 firm’s
specifications, either simple proprietary tools could be used or advanced tools
that blend information from multiple communications and information systems
platforms can be adopted.

• Workflow Management Tools: Coordinating telephony applications with

information systems applications, workflow management tools assist call center
supervisors to script and manage employee activity. For example, selecting the
best agent for handling particular types of calls.
Source : ICMR

ADDITIONAL READINGS & REFERENCES

1. Mukerjea D.N. & Dhawan Radha, Teleworking - The hottest business opportunity for
India, Business World, January 7, 1999.
2. Chandrashekhar S. & Lahiri Jaideep, Connecting to customers through call
centers, Business Today, June 22, 1999.
3. Jayaram Anup, Can I help you sir?, Business Today, November 29, 1999.
4. Carver John, Staff turnover – friend or foe?, www.callcentres.com, February 18,
2000.
5. Kumar Rahul, Finding the Right Mix, Computer Today, November 1, 2000.
6. Rajawat K. Yatish & Kulkarni Sangeeta, No-fuss gus, Economic Times, December
1, 2000.
7. Kjellerup Niels. Myth & Reality about Contact Centers in India,
www.callcentres.com, February 20, 2001.
8. Agnihotri Peeyush, How can I help you, sir?, Tribune India, February 12, 2001.
9. Singh Shelley & Srinivas Alam, Waiting for the call, Business World, May 28,
2001.
10. Sarma Uma & Ramavat Mona, Call centers attract but disappoint, The Economic
Times.
11. I.T Enabled Services - The Indian Scenario, www.teleworkingindia.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 IA’s 22,000 employees.”
 27

- Business India, January 25, 1999.

FLYING LOW

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

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

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

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

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

BACKGROUND NOTE

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

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

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

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

In the next few years, private players such as East West, NEPC, and Damania had to close shop due
to huge losses. Jet was the only player that was able to sustain itself. IA’s market share, however
 28

continued to drop. In 1999, while IA’s market share was 47%, the share of private airlines reached
53%.

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

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

‘FIGHTER’ PILOTS?

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

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

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

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

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

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

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

However, government rejected Mody’s plans[2]. When Probir Sen (Sen) took over as chairman and
managing director, he bought the pilot emoluments on par with emoluments other airlines, thereby
successfully controlling the exodus. In 1994, the IA unions opposed the re-employment of pilots
 29

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)

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, Sen’s efforts seemed to have positive effects with an improvement in

aircraft utilization figures. IA also managed to cut losses during 1996-97 and
reported a Rs 140 mn profit in 1997-98. But recessionary trends in the economy
and its mounting wage bill pushed IA back into losses by 1999. Sen and the entire
board of directors was sacked by the government.

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

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

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

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

TABLE II
INCREASE IN STAFF COSTS
Staff cost as
Per
Total percentage
Staff cost No. of employee Effective
Year expenditure of total
(in Rs bn) employees cost (in fleet size
(in Rs bn) operational
mn)
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%)*
 30

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, heavy payments were made on account of
PLI. A net loss of Rs 641.8 mn was registered during the period 1995-99. PLI
payments alone amounted to Rs 6.66 bn, during the same period. According to
unofficial reports, arrears to be paid to employees on account of PLI touched
nearly Rs 7 bn by 1999.

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

TABLE III
A COMPARISON OF VARIOUS AIRLINES
Number of
Name of No. of ATKm[3] ATKm per Employees
aircraft in
Airlines employees (in Million) Employee per aircraft
fleet
Singapore
84 13,549 14418.324 1064161 161
Airlines
Thai Airways
76 24,186 6546.627 270678 318
International
Indian Airlines 51 21,990 2113.671 398204 431
Gulf Air 30 5,308 1416.235 245831 177
Kuwait Airways 22 5,761 345.599 92853 261
Jet Airways 19 3,722 1094.132 49756 196
Source: IATA-World Air Transport Statistics

Analysts criticized the way posts were created in IA. In 1999, Six new posts of directors were
created of which three were created by dividing functions of existing directors. Thus, in place of 6
directors in departments’ prior April 1998, there were 9 directors by 1999 overseeing the same
functions. There were 30 full time directors, who in turn had their retinue of private secretaries,
drivers and orderlies. The posts in non-executive cadres were to be created after the assessment by
the Manpower Assessment committee. But analysts pointed that in the case of cabin crew, 40 posts
were introduced in the Southern Region on an ad-hoc basis, pending the assessment of their
requirement by the Staff Assessment Committee.
 31

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

TROUBLED SKIES

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

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

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

QUESTIONS FOR DISCUSSION:

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

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

ADDITIONAL READINGS & REFERENCES:

1. Sanjeev Sharma, In Air Pocket, March 27, 1995, Business Today.

2. Rakhi Mazumdar & Anjan Mitra, IA, Alliance Air wage disparity issue unresolved, January 24,
1997, Business Standard.
3. Sengupta Snigdha, Indian Airlines pilots call off strike, January 28, 1997, Business Standard.
4. IA awaits govt decision on Kelkar committee report, February 22, 1997, Business Standard.
5. Flying high, August 12, 1997, Business Standard.
6. Bhargava Anjuli, Ministry finds Brar report on IA recast too hot to handle, January 7, 1998,
Business 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.
 32

State Bank of India - The VRS Story

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

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

VRS TROUBLES

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

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

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

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

In February 2001, the SBI issued a directive altering the eligibility criteria for VRS for the officers by
stating that only those officers who had crossed the age of 55 would be granted VRS. Consequently,
applications of around 12,000 officers were rejected. The officers who were denied the chance to
opt for the VRS formed an association – SBIVRS optee Officers’ Association to oppose this SBI
directive. The association claimed that the management was adopting discriminatory policies in
granting the VRS.

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

BACKGROUND NOTE

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

• State Bank of Hyderabad

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

The SBI was the largest bank in India in terms of network of branches, revenues
and workforce. It offered a wide range of services for both personal and corporate
banking. The personal banking services included credit cards, housing loans,
 33

consumer loans, and insurance. For corporate banking, SBI offered infrastructure
finance, cash management and loan syndication[4] .

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

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

TABLE 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
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
bank’s decision was taken in haste with no proper manpower planning undertaken.

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

In December 2000, SBI had formed a joint venture with the French insurance
company Cardiff, for entering the life insurance business. The unions questioned
the logic behind diversifying the business and cutting down the staff strength.
 34

They argued that this move would significantly increase workforce burden and,
consequently, adversely affect customer service.

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

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

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

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

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

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

THE POST VRS DAYS

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

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

According to industry watchers, by 2010, the entire SBI staff recruited between
 35

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

TABLE II
CHANGE IN SBI’s STAFF STRENGTH
31-03-01 31-03-00 % change
Officers 52,558 59,474 -11.63%
Clerical 103,993 115,424 -9.90%
Subordinate 53,729 58,535 -8.21%
Total 210,280 233,433 -9.92%
Source: www.indiainfoline.com

In the post-VRS scenario, SBI planned to merge 440 loss-making branches and announced redeploy
additional administrative manpower (resulting from the merger of loss-making branches) to
frontline banking jobs. SBI also planned to reduce its regional offices from 10 to 1 or 2 in each
circle. In August 2001, it was reported that a single officer had to take charge of 3 or 4 branches as
the daily concurrent audit got affected.

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

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

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

QUESTIONS FOR DISCCUSION

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

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

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

ADDITIONAL READINGS & REFERENCES

1. Mandal Kohinoor & Mukherjee Arpan, Voluntary retirement scheme by September,

June 23, 2000, Indian Express.
2. Ray Chaudhuri Sumanta, State Bank’s VRS likely to leave pension fund deep in
 36

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 SBI’s 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
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, Reporter’s Notebook, May 4, 2001, Business Week.
23. SBI aims to hike advances by Rs 18,000 crore, June 21, 2001, Hindustan
Times.
24. Shetty Mayur, The big bank theory, July 18, 2001, Economic Times.
25. Shukla Nimish, SBI revamp to see loss-making branches merged, July 20,
2001, Economic Times.
26. Goswami Nandini, Life after VRS: Nationalized banks facing shortage of staff,
August 18, 2001, Economic Times.
27. www.banknetindia.com
28. www.indiainfoline.com
29. www.bankersindia.com
30. www.equitymaster.com
 37

Netscape's Work Culture

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

- Marc Andreessen, Co-founder, Netscape.

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

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

INTRODUCTION

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

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

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

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

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

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

BACKGROUND NOTE

Netscape was co-founded by Jim Clark (Clark) and Andreessen. Clark was a Stanford University
professor turned entrepreneur[3]. Andreessen was an undergraduate from the University of Illinois,
 38

working with the National Center for Supercomputing Applications[4]. In 1993, with a fellow student,
Andreessen developed the code for a graphical Web browser and named it Mosaic.

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

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

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

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

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

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

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

NETSCAPE’S CULTURE

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

The company promoted an environment of equality – everyone was encouraged to

contribute his opinions. This was also evident in the company’s cubicle policy.
Everyone including CEO Barksdale, worked in a cubicle. Independence and hands-
off management[11] were important aspects of Netscape’s culture. There was no
dress code at Netscape, so employees, were free to wear whatever they wanted.
 39

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

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

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

Employees were offered a wide range of training options and an annual tuition reimbursement of US
$6,000. This opportunity to expand their skills on the job was valued by all employees. The
company also helped employees learn about the functioning of other departments. There were
quarterly ‘all-hands’ meetings in which senior managers of different departments gave presentations
on their strategies. These efforts created a sense of community among employees. An employee
remarked, “They really try to keep us informed so we feel like we are involved with the whole
company.”

THE SETBACK

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

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

His departure triggered a mass exodus of software engineering talent from

Netscape. Soon after, engineers from Netscape joined Silicon Valley start-ups like
Accept.com, Tellme Networks, Apogee Venture Group and ITIXS. Former Netscape
vice president of technology Mike McCue and product manager Angus Davis
founded Tellme Networks.

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

He was soon joined by Lou Montulli and Aleksander Totic, two of Netscape’s six founding engineers.
Other Netscape employees helped start Responsys. Some employees joined Accept.com and others
AuctionWatch. Spark PR was staffed almost entirely by former Netscape PR employees.
 40

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

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

Netscape employees always perceived themselves as an aggressive team of revolutionaries who

could change the world. Before resigning from AOL, Jamie Zawinski, the 20th person hired at
Nescape, said, “When we started this company, we were out to change the world. We were the ones
who actually did it.

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

EXHIBIT I
NETSCAPE – CHRONOLOGY OF EVENTS
DATE EVENT

Jim Clark and Marc Andreessen begin talks on forming a new

1-Mar-94
company

The company (first named Electric Media) is founded by Clark and

Apr-94
Andreessen.

May-94 Electric Media changes its name to Mosaic Communications

Mosaic Communications changes its name to Netscape

Nov-94
Communications

Netscape Navigator, Netscape Commerce, and Communications

Dec-94
Servers ship.

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

Dec-95 Netscape and Sun Microsystems announce Java Script.

America Online agrees to include Netscape in every copy of its

11-Mar-96
Internet-access software.

AOL strikes a deal with Microsoft, giving Internet Explorer the

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

May-96 Netscape announces Netscape Navigator 3.0.

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

Netscape becomes enterprise-software purveyor, rolling out

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

11-Jun-97 Netscape releases Communicator

Aug-97 Netscape releases Netcaster, push-media software

18-Aug-97 Netscape announces an initiative to retain its browser share by

 41

forming 100 industry partnerships. Its new partners agree to

package the Navigator browser -- unbundled from the
Communicator suite -- with their products. The streamlined
Navigator 4.0 includes Netcaster, basic email, and calendar software.

It unveils the Netcenter Web site, transforming the corporate

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

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

Mozilla.org launched. A dedicated internal team and the website

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

Netscape releases programming source code for its Communicator

31-Mar-98
software.

Mozilla.org posts the first version of its source code, modified by

10-Apr-98
outside developers.

The US Justice Department and 20 state attorney generals file an

18-May-98 antitrust case accusing Microsoft of abusing its market power to
thwart competition, including Netscape

29-Jun-98 Netscape debuts Netcenter 2.0.

According to a study by a market researcher, Netscape cedes

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

Netscape releases Communicator 4.5, the latest version of its

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

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

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

The first principle was ‘fast enough never is.’ Ever since its
inception, Netscape maintained a lightening speed in
whatever it did. Analysts felt that the company could move
quickly because it knew what it wanted. It hired
programmers from the best schools and from companies like
Oracle, Silicon Graphics etc. The company wanted them to
get used to Netscape’s code-writing culture.

‘The paranoid predator’ was the second principle. Netscape

knew that even a predator could become a prey. The
company’s management believed that their role was to instill
urgency at all levels. They always potrayed Netscape as a
startup which had to compete with industry giants like
Microsoft and Oracle.
 42

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

‘Just enough management’ was the fourth principle.

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

Another principle of Netscape Time was doing things ‘four

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

The last and most important aspect of Netscape Time was

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

EXHIBIT 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.
 43

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.

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...
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
 44

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 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
1998 (Oct
(in US$ thousands) 1994 1995 1996 1997
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
 45

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-process R&D -- -- -- 103087 --
Mergers related charges -- 2033 6100 5848 --
Restructuring charges -- -- -- 23000 12000
Goodwill Amortization -- -- -- -- 5088
Total 17772 84389 275739 584329 396045
Operating Income (Loss) -14067 -10709 20488 -132267 -66266
Interest Income 251 4898 -- -- 6873
Interest Expense -14 -304 -- -- --
Net Income (Loss) -13830 -6613 19517 -115496 -51417
Source: www.sec.gov

ADDITIONAL READINGS AND REFERENCES

1. Birchard Bill, Hire Great People Fast, www.fastcompany.com, November 1995.

2. Steinert Tom, Can You Work at Netscape Time?, www.fastcompany.com, November 1995.
3. Brown Janelle, Start-Up-Cum-Goliath Works Hard to Get Help, www.wired.com, August 22, 1997.
4. Netscape through the Ages, www.wired.com, November 23, 1998.
5. Katz Jon, The Netscape Tragedy, www.slashdot.org, November 23, 1998.
6. Tsuruoka Doug, America Online must prove that East Can Meet West, www.loyaltyfactor.com,
November 25, 1998.
7. Geeks Vs Suits, www.nua.ie, November 30, 1998.
8. Kornblum Janet, Can Aol And Netscape Make It Work?, CNET News.com, November 30, 1998.
9. Schneider Polly, Inside Netscape, The Renaissance Company, www.cnn.com, January 5, 1999.
10. Zaret Elliot, The Rise and Fall of Netscape, www.msnbc.com, March 8, 1999.
11. Swartz Jon, AOL-Netscape: One Year Later, www.forbes.com, December 1, 1999.

Johnson & Johnson's Health and Wellness Program

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

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

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

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

INTRODUCTION

In 1998, the American College of Occupational and Environmental Medicine conferred Johnson &
Johnson (J&J)[3] the Corporate Health Achievement Award (CHAA)[4] . J&J was one of the four
national winners[5] selected for having the healthiest employees and workplace environment in the
US.
 46

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

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

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

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

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

BACKGROUND NOTE

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

Moreover, according to the estimates of Mercer[10] , the US industry expenditure

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

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

TABLE I
ANNUAL AVERAGE COST PER EMPLOYEE DUE TO
VARIOUS HEALTH PROBLEMS
Annual average cost per
Nature of Health Problem
employee
Heart disease $236
Mental health problems $179
High blood pressure $160
Diabetes $104
Low back pain $90
Heart attacks/Acute myocardial
$69
blockages
 47

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 University of Michigan said[16] , “Wellness programs in general, and
fitness programs in particular may be the only employee benefits which pay money back. When
more people come to work, you don’t need to pay overtime or temporary help; when people stay at
the job longer, training costs go down; lower health care claims cost you less if you’re self-insured
and health care insurers as well as some companies are already beginning to create premiums
based on fitness levels.”

Philips India - Labor Problems at Salt Lake

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

– Manohar David, Director, PIL in 1996.

SELLING BLUES

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

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

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

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

SOURING TIES

PIL’s operations dates back to 1930, when Philips Electricals Co. (India) Ltd., a subsidiary of Holland
based Philips NV was established. The company’s name was changed to Philips India Pvt. Ltd. in
September 1956 and it was converted into a public limited company in October 1957. After being
 48

initially involved only in trading, PIL set up manufacturing facilities in several product lines. PIL
commenced lamp manufacturing in 1938 in Kolkata and followed it up by establishing a radio
manufacturing factory in 1948. An electronics components unit was set up in Loni, near Pune, in
1959. In 1963, the Kalwa factory in Maharashtra began to produce electronics measuring
equipment. The company subsequently started manufacturing telecommunication equipment in
Kolkata.

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

By 1996, PIL’s capacity expansion plans had fallen way behind the targeted level. The unions
realized that the management might not be able to complete the task and that their jobs might be
in danger. PIL on the other hand claimed that it had been forced to go slow because of the
slowdown in the CTV market. However, the unconvinced workers raised voices against the
management and asked for a hike in wage as well. PIL claimed that the workers were already
overpaid and under productive. The employees retaliated by saying that said that they continued to
work in spite of the irregular hike in wages. These differences resulted in a 20-month long battle
over the wage hike issue; the go-slow tactics of the workers and the declining production resulted in
huge losses for the company.

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

SELLING TROUBLES

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

Director Ramachandran stated that the company had plans to depend on

outsourcing rather than having its own manufacturing base in the future. The
company selected Pune as its manufacturing base and decided to get the Salt
Lake factory off its hands.

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

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

The total value of the plant was ascertained to be Rs 28 crore and Videocon agreed to pay Rs 9
crore in addition to taking up the liability of Rs 21 crore. Videocon agreed to take over the plant
along with the employees as a going concern along with the liabilities of VRS, provident fund etc.
The factory was to continue as a manufacturing center securing a fair value to its shareholders and
employees.
 49

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

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

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

The workers were surprised and angry at the decision. Kiron Mehta said, “The management’s
decision to sell the factory is a major volte face considering its efforts at promoting it and then
adding capacity every year.” S.N.Roychoudhary of the Independent Employees Federation in
Calcutta said, “The sale will not profit the company in any way. As a manufacturing unit, the CTV
factory is absolutely state-of-the-art with enough capacity.

SELLING TROUBLES contd...

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

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

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

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

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

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

PIL said that it would not let the workers use the Philips brand and that the workers could not sell
the CTVs without it. Moreover the workers were taking a great risk by using their savings to buy out
the plant. Countering this, the workers said that they did not trust Videocon to be a good employer
and that it might not be able to pay their wages.
 50

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 court’s decision.

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

JUDGEMENT DAY

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

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

Accordingly, the services of the workmen were to be treated as continuous and

not interrupted by the transfer of ownership. The terms and conditions of
employment too were not changed. Kitchen Appliances started functioning from
March 2001.

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

The Supreme Court decision seemed to be a typical case of ‘all’s well that ends well.’ Ashok
Nambissan, General Counsel, PIL, said, “The decision taken by the Supreme Court reiterates the
position which Philips has maintained all along that the transaction will be to the benefit of Philips’
shareholders.”
 51

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

QUESTIONS FOR DISCUSSION:

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

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

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