Case Game: The Case Of Effective Downsizing

CASE GAME
The Case Of Effective Downsizing

Total Industries--BT's fictional company--must trim the flab from its soaps division. But how should its traditional management go about laying off people? PwC's S. Nerurkar, NOCIL's V. Vanikar, & TISS' R.C. Datta deliberate. A BT Case Study.

By R. Chandrasekhar

Guneen Roy, the normally unflappable president of Total Industries' soaps and oils division was in a flutter. The call from Abhinav Kumar, the Managing Director of the company, had come on Friday evening even as Roy was leaving the office. ''Meet me the first thing on Monday,'' came the terse command. And Roy had spent the weekend in a haze of trepidation and anticipation. Not that he didn't know the reason for the summons: a month back, Abhinav and he had spent the better part of an afternoon poring over the numbers that represented his division's performance.

The results didn't give much cause for cheer: capacity-utilisation was at an anaemic 35 per cent, and profits per employee were down to Rs 0.50 lakh a year, the lowest among Total's four divisions. Kumar had, in his 'I-want-answers-and-I-want-them-now' manner, asked Roy to find a way out.

Roy had spent the following month doing just that. One solution was to target institutional buyers like hotels, hospitals, and launderettes. Unlike the retail segment that was dominated by three companies-Total was a laggard in the market with a less than two per cent share-the institutional one was fragmented. And much to Roy's delight, he found that no company had a share higher than five per cent in this Rs 250 crore market. ''There are several reasons why we should seriously consider this segment,'' he wrote in an e-mail to Kumar. ''It's growing at a rate of 25 per cent a year; the client base is captive; and the demand is predictable. Still better, logistics will no longer be a problem as we have to supply to a few centralised buyers. Nor will we have to worry about brand- building.'' The second solution was to become a contract manufacturer for one of the three large companies in the retail segment of the market. Kumar had let Roy know that he preferred the latter option. ''Let's target B&B,'' he e-mailed Roy, referring to second- largest player in the retail market (share: 36 per cent).

The meeting for which he'd been summoned, Roy knew, had to do with this. He wasn't mistaken. ''How're things with B&B?'' were the words Kumar greeted him with on Monday morning.

''You are aware that a team from B&B spent about a week in our soaps division last month...'' started Roy.

''I know that,'' interrupted Kumar. ''What's the progress?''

''There's been none.''

''Are we doing something wrong?'' queried Kumar.

In response, Roy opened a spread-sheet on his laptop. ''B&B believes our costs are high. Manpower costs comprise 55 per cent and 22 per cent of our fixed and overall costs respectively. They claim these are too high.''

''What's this?'' asked Kumar pointing to a column head that said teeth-tail ratio.

''That's the ratio of white collar workers to blue collar workers,'' replied Roy. ''It's 1:4 at B&B; 1:18 in our soaps division.''

''That's worrying,'' said Kumar.

''Another parameter B&B looked at was the number of management layers. It's 4 at B&B; 11 at Total's soap division. They claim that this indicates that we have accumulated a lot of unnecessary flab.''

''Maybe they're right,'' mused Kumar. ''Did they think anything else was wrong with our soaps division?''

''They are also worried that close to 40 per cent of the division's employees are over 50 years of age.''

''What's the bottomline?'' asked Kumar.

''B&B wishes to make us an offer, but before they do that the head of their away team, Ajit Singh, who's the company's Director (Corporate Planning), wishes to meet you.''

''Can you set up a meeting tomorrow? I'll ask the Chairman to be there too,'' said Kumar.

At 11.00 a.m. on Thursday, a convoy of two Red Lancers pulled up before the headquarters of Total: it was the B&B away team led by Singh.

The B&B presentation was professional. The first one outlined B&B's search for captive third- party manufacturing facilities across the country, as part of a strategic thrust to overtake Indian Soaps Ltd (ISL), the country's No. 1 soap company. Kumar and the Chairman (Kumar's father) exchanged meaningful glances.

The second highlighted the option of forming a joint venture with Total. B&B would then, they said, help Total with new technologies and formulations.

Finally, Singh took the stage. ''We want Total to downsize its soaps division,'' he said. ''It's not a pre-condition. If you start addressing this issue right away, we could form the joint venture. But we are clear that Total must reduce the headcount in its soaps division by half over the next three years.''

''I know this must be tough for you, sir,'' said Singh, as he shook hands with Deepak Kumar on his way out, ''but this is business, and there are many hard decisions that need to be made.'' Kumar waited for Roy to show their visitors out. ''Fine, this is what we were looking for,'' he told the Chairman, ''but how do we downsize, since we have no experience with laying off people.''

''I think we should offer a VRS,'' said Kumar Sr. The matter-of-fact way in which his father said this surprised Kumar Jr. He'd always felt his father would find it difficult laying off people.

I don't like the concept of a VRS,'' said Deepak Kumar, reading his son's thoughts. ''But we have to offer one if we are to survive. It will be hard. People will experience a sense of insecurity during the build-up to a VRS. And if it isn't managed well, there will be a sense of resentment towards the management. We also need to think of our frontline managers who will be responsible for implementing this. They'll be under a lot of pressure.''

A week after the visit by Ajit Singh, Total's top brass, Chairman Deepak Kumar, Managing Director Abhinav Kumar, the Presidents of Total's four divisions-Manoj Kohli of switchgears; Srikant Suresh of consumer durables; Ratika Sahai of batteries; and Roy of soaps-and the company's two functional heads, Vinod Rao of hr, and Vikas Singh of Finance, gathered in the company's boardroom to thrash out the downsizing dilemma the soaps division faced. Rao set the ball rolling by suggesting that as a run-up to the VRS, Total would do well not to replace employees who resigned or retired. Everyone liked the idea.

The next suggestion came from Kohli. ''We need to market the VRS within the company. Only then will it succeed,'' he said.

Kumar Sr. stoutly opposed this recommendation: ''Marketing a VRS won't make it voluntary, Manoj,'' he thundered. ''True, we need to keep the targets B&B has laid down in mind, but we need not necessarily chase them with the same fervour with which we chase business results. Let's identify people who are redundant, but let's not send out implicit signals that they aren't wanted here. We should also explore the possibility of redeploying some of our people. And finally, let's not lose sight of the fact that the objective of the VRS isn't to reduce headcount, but to make us competitive.''

''I agree with the chairman,'' said Suresh, ''but shouldn't we seriously evaluate the merits of carrying out the VRS not just in the soaps division, but across Total Industries? I am sure there are redundancies everywhere.''

''Why are we accepting VRS as the panacea to all our ills?'' queried Sahai. ''I know of a company which offered a VRS, and when many of its experienced employees applied for voluntary retirement, it appeared reluctant to let them go. The result? The exercise lost credibility.''

''And I know of a company,'' added Rao, ''that carried out a successful VRS, but saw its operations slipping back to previous levels of inefficiency in less than a year.''

Suresh put a modicum of strategic perspective into the argument: ''I think we should accept the fact that a VRS is only a first step in our organisational restructuring. We need to manage its aftermath well, to convince those employees who remain that we mean business.''

''That's right,'' agreed Kohli. ''And we should emphasise our commitment to new work methods while marketing the VRS. And all these things we speak of-the performance monitoring systems, the operational effectiveness techniques-need to be actually implemented. Setting high standards and being uncompromising on them requires considerable thought and detailing on what performance is, how it is to be evaluated and how it is to be enhanced. This means going into the details of job roles and expectations, defining the competencies required, and deciding on performance standards. And the initiatives for this need to begin well before the launch of a VRS.''

''We also need to look at a post-VRS skills inventory and retain, and retrain people accordingly,'' added Rao.

The final word was the CFO, Vikas Singh's: ''It isn't difficult to structure a customised separation package keeping in mind the needs of the company, and its employees. We can even help employees opting for the VRS with portfolio advisory services.''

But Kumar still had his doubts. Would the VRS go smoothly?