The Winning Edge

Compiled by Chhaya Sehgal

Rightsizing
Overview:

Rightsizing - Downsizing a company's workforce to the point where the number of

employees remaining is deemed to be "right" for the company's current condition.

Deft downsizing

DOWNSIZING, for whatever reason, is a business reality. Profitability, productivity, strategy

and the like are reasons that overarch the decision. At the same time, it is not an easier
decision to make. But, you have no other choice but to live with it. You need to communicate
the decision to your employees. You are sure to face resistance from the ones who would
have to leave and even perhaps from the ones that would stay back.

Ensure smooth transition

Just because the decision sounds harsh, you cannot delay its communication. Share with them
the rationale behind the decision. Ensure the separation process is a smooth one. Make
gestures that would have a feel-good impact.

Consider the case of a BPO unit. A couple of years ago, the company decided to lay off staff.
Following this, the company then chalked out a plan to ensure a smooth transition.

Announcing the decision

The company did not have to expend much effort in communicating the decision; because,
from time to time, the employees were being appraised of the turbulent times the company
was going through. The decision to go for downsizing, then, looked logical to the employees.
Mere announcement does not guarantee smooth implementation of the decision. The
company realized this and engaged a team of professionals to implement the process. The
team conducted a one-on-one discussion with all the employees who would be affected by the
decision to make them aware of why the decision was being made. Further, the discussions
also focused on addressing individual concerns.

The efforts paid off, as a majority of the employees were convinced about the circumstances
that forced the company to arrive at the decision.

Preparing for separation

Once the list of employees to be separated was finalized, the company made a move that
seemed unprecedented. It made efforts to know the career aspirations of individuals that were
being separated. This was followed by an exercise of mapping the skill sets of individuals
with their career aspirations. The company found that many of these individuals required soft
skills to enhance their marketability. Having found out the shortcoming, the company
engaged a professional training firm to train these individuals.

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Apart from honing the skills of the individuals, the training firm was entrusted with the
responsibility to find them a suitable placement. At the end of the training programme, many
of the individuals were either placed well in other organizations or left to pursue higher
education.

The case studies which follow illustrate that downsizing, when done with a rationale and with
a humane touch, will get a definite buy-in from your employees. Failure to do so would
trigger resistance leading to chaos and would add to the problems of the company.

In Other words it’s not Downsizing but Rightsizing which would work. Downsizing with
little or no pain to employees who have been asked to leave (at times there is gain) ,
wherein the number is not only deemed to be right for the company but also for its
employees , can be called as Rightsizing .

Voluntary Retirement Scheme

Businesses some times undergo recessionary conditions and demand for the product may
drop or production may become unviable due to various reasons like environmental laws,
economic downturn, technological obsolescence or others. Or some times a certain skill set
may become redundant due to technological advances or reorganisation of business. Excess
staff thus needs to be retrenched.

However, labour laws in India don’t allow hire and fire policy. Unions create problems and
any downsizing efforts are met with ferocious resistance. Voluntary Retirement Schemes
have born out of such requirement.

Under this scheme, employees are offered a handsome monetary package proportionate to
number of years of service or balance years, which ever is less, if they opt to take retirement.
It is also called Golden Handshake because employee and employer part ways happily by
exchange of handsome compensation. VRS schemes have been mostly lapped up by the
employees over-enthusiastically while simultaneously meeting stiff opposition from trade
unions. Trade Unions’ resistance is motivated because while individual employees benefit
from it, trade unions stand to lose all the way. Reduction in staff of company reduces trade
unions’ membership, contributions and strength.

But VRS raises a valid legal question. While the staff which collects its golden coins and
leaves is benefited, who is going to do the tasks left behind by them? People who have stayed
back are going to be burdened with retirees’ jobs; and for what? It effectively changes their
service conditions which, as per the law, can not be changed without their consent. And why
should they give consent if they have nothing to gain from it?

VRS exercises have not always been successful. If the compensation package is not attractive
enough, as was the case with HLL Sewri plant, where only 9 (yes nine only) people opted for
VRS. In contrast, Hindustan Ciba Giegy’s VRS was most successful with 100% employees
opting for the scheme and thus allowing the company to close the plant.

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If the terms of VRS are not properly designed, it may backfire completely as had happened
with SBI. During VRS, the companies target a certain section of redundant or non performing
employees but often end up with a double whammy. In most cases, VRS is opted for by the
most competent among the employees. Thus, the company loses a large amount of capital as
compensations along with competent and productive workforce and increases its non
performing to performing workers ratio. Therefore, it is essential that filters be installed in
scheme to ensure that only targeted group of employees is eligible to opt for VRS. But it is
essential that filters be installed prior to launching the scheme. Any changes in scheme after it
has been launched and employees have given their options are sure to hit the hornets’ nest
and defeat the very purpose of painless separation.

That precludes a “one size fits all VRS scheme”. The VRS schemes need to be tailor made
for each organisation.

STEPS IN DESIGNING A VRS SCHEME:

1. Identify the groups and people; company wants to retire.

2. Identify the groups/skill sets/key people that company would not like
to retire.

3. Design a scheme that will make only desired group eligible and
exclude the key groups and people.

4. If you plan to retire only a percentage of employees, don’t make it so

attractive that people fall over each other to grab it.

5. It is good idea to keep the compensation package marginally low and

plan to keep the scheme open for longer periods so that people leave gradually
allowing a transition period for operations to settle down with fewer people. However,
in the initial period, a time and number cap should be announced as a safety net
against any unexpected rush for the scheme due to some unforeseen reasons. Time
can be later extended as required. There have been instances where schemes have
been kept open for years.

6. In case it is evident that scheme has not succeeded in attracting the

target group and instead key personnel are opting for it, it is better to scrap the scheme
completely under the excuse of unions’ resistance rather than modifying the eligibility
conditions. Scheme can be re-launched after a year or so with modified conditions.
But under no circumstances attempt should be made to alter the eligibility criteria mid
way. Such action will fail the very purpose of the VRS which is meant to effect a
painless separation for both the sides.

Case Study – State Bank of India – The VRS Story

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Overview

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 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.

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

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

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 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

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. 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 overall cost
cutting initiative.

Rightsizing Strategy Used : Voluntary Retirement Scheme (VRS)

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

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package was offered to the permanent staff who had put in 15 years of service or were 40
years old as of March 31, 2000.

THE PROTESTS

The SBI was shocked to see the unprecedented outcry against the VRS from its employees.
The unions claimed that the move would lead to acute shortage of manpower in the bank and
that the bank’s decision was taken in haste with no proper manpower planning undertaken.
They added that the VRS would not be feasible as there was an acute shortage of officers
(estimated at about 10000) in the rural and semi-urban areas where the branches were not yet
computerized. Moreover, the unions alleged that the management was compelling employees
to opt for the VRS. They said that the threat of bringing down the retirement age from 60
years to 58 years was putting a lot of pressure on senior bank officials to opt for the scheme.
In December 2000, SBI had formed a joint venture with the French insurance company
Cardiff, for entering the life insurance business. The unions questioned the logic behind
diversifying the business and cutting down the staff strength. They argued that this move
would significantly increase workforce burden and, consequently, adversely affect customer
service.

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

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

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

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

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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 leaves under the VRS, it could have closed the scheme
immediately after the required number of applications was received. The unions also argued
that 35,000 applications (14% of the total workforce) could not be considered high when
compared to the response received by other public sector banks such as Syndicate Bank
(22%) and Punjab & Sind Bank (19%), where all the applications that were received were
also accepted for VRS.

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

THE POST VRS DAYS

According to reports, SBI’s total staff strength was expected to come down to around
2,00,000 by March 2001 from the pre-VRS level of 2,33,000 (Refer Table III). With an
average of 5000 employees retiring each year, analysts regarded VRS as an unwise move.
By June 2001, SBI had relieved over 21,000 employees through the VRS. It was reported that
another 8,000 employees were to be relieved after they attained the retirement age by the end
of 2001. Analysts felt that this would lead to a tremendous increase in the workload on the
existing workforce.

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

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n 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.

Conclusion

VRS was implemented in order to reduce the excess staff that dealt mostly with the routine
work. Technological up gradation has enabled it so that the work can be done with less
manpower. The advent of ATM's has rendered even many of branch offices redundant. Many
studies have indicated that a large number of those who opted for VRS were in the officer
cadre.

VRS was also intended to improve the performance of the 'weaker banks' (banks whose
efficiency was low). It was however found that the numbers of personnel opting for VRS
from low performing banks were less.

It is always desirable to carry out the Human Resource Planning before implementing the VR
scheme. Studies have indicated that especially in banks where VRS was first introduced, little
or no manpower planning seems to have been done. This has resulted in a massive exodus
from certain branches of PSB's. There existed a situation where the entire staff of a branch
has left through VRS. This meant new staff having to be deployed into a branch where no one
would know how the business was carried out previously.

The guidelines issued by the Government of India stipulated that it was the banks
management's prerogative to accept or reject a request for VRS. In reality this was not done

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in many banks. One of the ways the scheme could have been implemented would have been
by exempting certain categories from VRS. Punjab National Bank exempted the IT
professionals, forex dealers and other experts from VRS. The problem of specialists leaving
the bank in large numbers was further compounded by the fact that others also opted out
because of the fear of increased workload after VRS.

Case study discussions

There are some factual inaccuracies in the case. FICCI had nothing to do with VRS in SBI.

All companies opting for VRS normally have option to amortize the cost of VRS over five
years. SBI also had this option. However, being a profit making bank, the board decided to
write off entire cost in one go rather than carry it in the balance sheet. Had the cost been
amortized, profit would have been seen to be falling to Rs 23.2 billion from Rs 25 billion,
which would not have looked so alarming.

The last paragraph of the case study talks about the reasons for the SUCCESS of the VRS
story in SBI. But was VRS a success in the SBI in the first place?

Success of any scheme can not be measured by absolute numbers who opted for the scheme
but by “fulfilment of the objective” of the scheme.

VRS is not a cheap proposition. It costs any company a fortune. In the present case itself, in
the very first year in partial fulfilment of VRS scheme, the compensation package cost SBI
Rs 9 billion (Decrease in profits compared to previous year, assuming that there was no growth in profits in
that year). Another few billions were spent in subsequent years. Such huge sums of money are
spent by the companies with two primary objectives: -

(a) Get rid of the dead wood of the organisation without any labour trouble, and

(b) Improve the functioning of the organisation.

In case of SBI, both the objectives were squarely defeated. (Second aim has been more often
defeated than met in all cases of VRS). To begin with, VRS scheme set the unions and the officers
on the war path with the management and there was mayhem with court case and work to
rule, etc. Trade unions response can be excused considering their vested interest against VRS
(Lesser the strength of employees, lesser the members and therefore lesser the unions’ strength and lesser the
contributions) and that it presented an opportunity to them to press for better compensations.
Moreover, their contention that employees were being forced to opt for VRS was proven
wrong when there was more than desired, rather intimidating, response for VRS. However,
officers’ protest was completely of management’s own making. After making the offer and
employees exercising the option, it was manifestly wrong to change the conditions of VRS. It
is like offering a quietly standing elephant a sugarcane and then trying to snatch it back. You
are risking your life.

Secondly, rather than targeted clerical staff, it was majorly opted by the officer cadre and
even among them, the specialists like forex dealers, treasury managers, etc. The purpose of

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removing the deadwood was defeated and company ended up paying the billions to lose their
key personnel.

Another misleading issue is about the NPA figures. SBI’s 7.18% NPA look disconcerting
against 0.77% NPAs of HDFC Bank. However, figures don’t tell the whole story. The
comparison itself is wrong. You don’t ever compare an elephant with mouse. SBI was
operating in a different paradigm compared to private banks. Private banks had freedom to
choose their debtors. They were operating with a small base and niche customer segment in
big cities. SBI had 9000 branches with the responsibility of social banking.

Company had to follow the political dictates of directed lending to marginalised sections of
the society and political class with nil or inadequate securities. Another issue was that SBI
was the oldest bank. Incorporated originally as Imperial Bank of India in pre-independence
era and later in 1955 converted to SBI, its NPAs were accumulated over decades. As per
prevailing accounting practices, NPAs were not written off or provided for for decades. Also,
interest on NPAs were regularly calculated and booked as asset in the balance sheet. Thus,
NPAs kept swelling. Basel committee recommendations and Narsimhan committee report
were out before Private banks set their foot and could start on a clean slate. It is quite possible
that HDFC was following different accounting practices compared to SBI. Thus, this NPA
monster was probably to a large extent created by the accounting policies besides the directed
lending that was so rampant in pre 1990 era. And finally comes the issue of mindset and
prevailing norms. Each era has its own customs and taboos. It is grossly inappropriate to
judge an event or person in the past against standards followed in today’s society. The so
coooool dresses of today would have been scandalous a few decades back. Simalrly, in the
days when SBI accumulated all those NPAs, social banking was the norm and no one batted
an eye lid against NPAs. Even after it became the dirtiest profanity in banking dictionary in
the liberalisation years, the old timers could not change their mind set overnight. Preparation
and application of prudential credit worthiness norms and changing of employees mindset
took some time. Today, SBI’s NPAs have fallen to just 1.7% of the deposit. (However, this
statement conveniently hides the fact that lot of NPAs have been securitied to a corporation
created for the purpose).

Comparison of internet connectivity of SBI branches commented upon in the case was also
discussed. It was another case of wrong comparison. HDFC with barely 61 branches in large
cities was being compared with SBI which had 9000 branches spread across length and
breadth of the country and penetrating even the remotest locations in the country where
people had not even heard of telephone leave alone internet. New private banks started their
operations in fully computerised era and their branches, employees, procedures were all fully
IT friendly from day one. In case of SBI, every thing, right from procedures to employees,
had to be converted into IT compliant. And conversion is many fold tougher job than new
creation.

One of the logics given for VRS was high average of SBI at 45 years (approx). It needs to be
appreciated that public sector banks had almost 800% growth between 1969 and 1990 when
RRBs were started and given a boost by public sector banks as sponsoring banks. Large part
of this growth had taken place in few years after 1969 (nationalisation of banks by Mrs
Gandhi). Those people had led to this increase in average age of employees. Given

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everything stated above, was the average age really too high? Assume that average age of an
employee was 25 years when he was inducted in to service and retired at the ripe old age of
60 years. Even if recruitment process was absolutely regular and gradual, average age would
have been  (25+60)/2 = 42.5 year which is the lowest possible age for an old bank.

Questions for Discussion:

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 optees have been from the officer cadre. Was SBI wrong in not
anticipating same with their scheme? Comment whether SBI was justified in altering
the eligibility criteria after making the offer to restrict their outflow?

3. Why 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.

4. In most of the VRS implementation exercises in Indian PSUs, the

largest number of optees have been from the officer cadre. Was SBI wrong in not
anticipating same with their scheme? Comment whether SBI was justified in altering
the eligibility criteria after making the offer to restrict their outflow?

HUMOUR BREAK
Once upon a time the government with Ruling Party XYZ.. had a vast scrap yard in the
middle of a desert.
Ruling Party XYZ Said.. - "Someone may steal from it at night."
So they created a night watchman position and hired a person for the job. Then Ruling Party
XYZ Said..
- "How does the watchman do his job without instruction?"
So they created a planning department and hired two people, one person to write the
instructions, and one person to do time studies. Then Ruling Party XYZ Said..,
- "How will we know the night watchman is doing the tasks correctly?"
So they created a Quality Control department and hired two people. One to do the studies
and one to write the reports. Then Ruling Party XYZ Said.. ,
- "How are these people going to get paid?"
So they created the following positions, a time keeper, and a payroll officer, then hired two
people. Then Ruling Party XYZ Said..,

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- "Who will be accountable for all of these people?"
So they created an administrative section and hired three people, an Administrative Officer,
Assistant Administrative Officer, and a Legal Secretary. Then Ruling Party XYZ Said..,
- "We have had this command in operation for one year and we are $18,000 over budget, we
must cutback overall cost."
So they lay off the night watchman.

Moral of the story:

"Current Situation In MOST industries"

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