case study on hr.
suruchi mittar
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
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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. |
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SAIL operated four integrated steel plants, located at Durgapur (WB), Bhilai (MP), Rourkela (Orissa) and Bokaro (Bihar). The company also operated two alloy/special steel plants located at Durgapur (WB) and Salem (Tamil Nadu). The Durgapur and Bhilai plants were pre-dominantly1ong products[2] plants, whereas the Rourkela and Bokaro plants had facilities for manufacturing flat products[3] .
THE JOLT
In February
2000, the SAIL management received a financial and business-restructuring plan
proposed by McKinsey & Co, a leading global management-consulting firm, and
approved by the government of India
(held 85.82% equity stake).
The McKinsey report suggested that SAIL be reorganized into two strategic
business units (SBUs) - a flat products company and a long products company.
The SAIL management board too was to be restructured, so that it should
consisted of two SBU chiefs and directors of finance, HRD, commercial and
technical. To increase share value, McKinsey suggested a phased divestment
schedule. The plan envisaged putting the flat products company on the block
first, as intense competition was expected in this area, and the long products
company at a later date.
Financial
restructuring envisaged waiver of Steel Development Fund[4](SDF) loans worth Rs
50.73 billion and Rs 3.8 billion lent to IISCO. The government also agreed to
provide guarantee for raising loans of Rs 15 billion with a 50% interest
subsidy for the amount raised. This amount had to be utilized for reducing
manpower through the voluntary retirement scheme. Another guarantee was given
for further raising of Rs 15 billion, for repaying past loans.
Business restructuring proposals included divestment of the following non-core
assets:
· 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.
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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. |
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Another official
commented: "Systems have to be result oriented, rather than person
oriented and responsibilities must match rewards and recognition. There is a
need to change the mindset of the management, before specific plans can be
drawn out for reduction of office staff."
From the beginning, SAIL had to contend with political intervention and
pressure. Many officials held that SAIL had to overcome these objectives: “Many
employees do not have sufficient orders or work on hand to justify their
continuance, and yet political pressures keep them going. It is time that the
top management takes a tough stand on such matters. One does not have to call
in McKinsey to decide that many SAIL stockyards and branch offices are redundant.”
THE VOLUNTARY RETIREMENT SCHEME
As a
part of the restructuring plan, McKinsey had advised Pande that SAIL needed to
cut the 160,000-strong labor force to 100,000 by the end of 2003, through a
voluntary retirement scheme. Pande was banking on natural attrition to reduce
the number by 45,000 within two years, but GOI's decision to increase the
retirement age to 60 further delayed the reduction. Subsequently, SAIL had
requested GOI to bail it out with a one-time assistance of Rs 15 billion and
another subsidized loan of the same size for a VRS, to achieve the McKinsey
targets.
In a bid to 'rationalize' its huge workforce, SAIL launched a VRS in mid 1998,
for employees who had put in a minimum service of 20 years or were 50 years in
age or above. The scheme provided an income that was equal to 100 per cent of
the prevailing basic pay and DA to the eligible employees. About 5,975
employees opted for the scheme. Of them, 5,317 were executives and 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
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In mid 1998, in a bid to convince its employees to accept VRS, SAIL highlighted six 'plus' points of VRS, in its internal communique, Varta. They were as follows: · During the next 4-5 years, SAIL has to reduce its workforce by 60,000 for its own survival. Employees with chronic ailments, and habitual absentees, who add to low productivity, have to go first - maybe, with the help of administrative actions. · The employees may have to be transferred to any other part of the country in the larger interest of the company. · For those who started their career as healthy young men 25-30 years ago, the VRS will take care of their financial worries to a great extent, and they can discharge their domestic duties more comfortably. · VRS can be used for special purposes like paying huge sum of money for getting one's son admitted to a professional course. · VRS will give many individuals the money and time on pursuing personal dreams. · It can be a good opportunity to do social service. |
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On December 27, 1999, SAIL
initiated a company-wide information dissemination program to educate the staff
on restructuring. The company drafted an internal communication document
entitled "Turnaround and Transformation" and a special team of 66
internal resource persons (IRP) had been assigned the task of preparing a
detailed plan to take this document to a larger number of people within the company.
The 66-member team was constituted in September 1999 and was stationed in Ranchi to undergo a
detailed briefing-cum-training course. A generalized module was presented to
the IRP team during the course, which then summarised the root causes of SAIL's
crisis and the strategies to overcome it.
According to an official involved with the program: "Initiatives like the
power plant hive-off or the Salem Steel joint venture will hinge on employee
concurrence, particularly at the shop floor level, and therefore there has to
be an intensive communication program in place to reassure employees that their
interests will be protected."
The 66-member IRP team conducted half-day workshops across plants and other
units based on three specific modules:
A video film conveying a message from the chairman of the company.
A generalized module of the recommendations of the turnaround plan focusing on
restoring the financial foundation, reinforcing marketing initiatives and
regaining cost leadership.
A module covering plant-specific or unit-specific issues and strategies for
action.
The exercise was expected to cover at least 16,000 SAIL employees by the end of
March 2000. A senior official at SAIL said: "The idea is that the
employees covered in this phase would take the communication process forward to
their peer group and fellow colleagues."
The staff education exercise was stressed upon, particularly in view of the
power plant hive-off fiasco, which could not take off as scheduled due to stiff
resistance from central trade unions. The problem, at the time, was that the
SAIL top brass had failed to convince the employees that jobs would not be at
risk because of the hive-off.
THE REACTION
The
trade unions were on a warpath against the recommendations of McKinsey. Posters
put up by the Centre of Indian Trade Unions (CITU) at SAIL's central marketing
office said that the McKinsey report was meant, not for the revival or survival
of SAIL, but for its burial. A senior TU leader said: "SAIL TUs so far
have been extremely tolerant and exercised utmost restraint. Even in the face
of scanty communication by the management of SAIL, they have not lost patience
in these trying times."
The TU leaders felt that SAIL would try to bolster support for the financial
restructuring proposal based on the recommendations of McKinsey. But being a
government-owned company, SAIL cannot take decisions on such recommendations as
the privatization of SAIL or breaking it up into two product-based companies.
Even in relatively small matters the like hiving off of power plants to a
subsidiary company, with SAIL being the major partner, the government had not
cleared SAIL's proposal, even after months of gestation. Therefore, it was
futile to think that SAIL would secure the permission of the government to sell
off Salem Steel Plant (SSP) in Tamil Nadu or close down Alloy Steels Plant
(ASP) at Durgapur in West
Bengal.
At SSP, all the TUs had joined hands to form a 'Save Salem Steel Committee' and
observed a day's token strike on June 24, 1999, demanding investment in SSP by
SAIL, rather than by a private partner.
Though TUs had no objection to voluntary retirements, they were not very happy
about the situation. They were worried that employment opportunities were
shrinking in the steel industry and that reduction of manpower would mean
increasing the number of contractors and their workforce. After the Rourkela
Steel Plant in Orissa absorbed contractors' workers on Supreme Court orders,
fresh contractors had been appointed to fill up the vacancies.
Suruchi Mittar
Associate Professor
Dept.of Fashion Technology
National Institute of Fashion Technology
New Delhi
Handphone - 9810241425
Direct - 011 - 26542174