Financial Daily
from THE HINDU group of publications

Wednesday, April 25, 2001



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Fattening the pig

Bharat Kumar

THE average Indian worker is familiar with lay-offs, shutdowns and lock-outs, but isn't used to it. His reaction to retrenchment is primarily negative: ``How can you retrench people just because the industry isn't doing well? Can't turn in enough profits ? Too bad for you, buddy. But don't pin the blame on us, poor workers.''

The US worker takes a different view. Retrenchment is a way of life there. You're cruising smoothly one day, bumped off the next? That's ok. Just dust your trousers and get on with life.

The Japanese industry takes the Middle Path. Remember the story of Japanese workers in a shoe factory on a ``strike,'' for better pay, who didn't stop work but continued to produce only left-foot shoes? Considerate chaps.

The management too returns the compliment. Early Japanese business philosophy advocates retaining employees, whatever the business scenario, except in extreme cases. If anything, it uses the extra time employees have to train them so that the new lessons will come in useful when the economy surges again. Going by this philosophy, hiring like the blazes when the going's good and then retrenching during a slump is a silly idea.

Akio Morita put it succinctly in ``Made in Japan,'' ``In times of boom, we are very careful about increasing our personnel. Once we have hired people, we try to make them understand our concept of a fate-sharing body and how, if a recession comes, the co mpany is willing to sacrifice profit to keep them in the company. Their wage increases and bonus might also have to be sacrificed, because we all must share this difficulty.''

Says V. Ramakrishnan, a principal consultant based out of Singapore, ``Successful companies monitor performance continuously and seldom seem to need to resort to lay-offs. They seem to have an early recognition system which catches potential downsides ea rly and corrects for it on the revenue and cost side. Ill-managed companies wake up after they have been hit and cut costs to show a profit. It works best if the company can keep an eye on revenue and costs rather than just on the latter.''

The Middle Path is a great boon for employees who think Damocles' sword might fall any moment. At the same time, news of lay-offs in the US abounds now. In this scenario, is the Indian software industry, bound to feel the effect of the slowdown anytime n ow, ready to handle a crunch situation? This is a question worth asking since this is the first time that the nascent IT industry has felt any rumblings here.

No to lay-offs

There have been few cases of Indian companies reflecting anti-layoff sentiments. We did have Azim Premji, Chairman of Wipro Ltd, saying ``belt tightening, not lay-offs, is the need of the hour.'' Another story that caught reader attention was on a softwa re company chopping salary hikes to about 10 per cent this year from 30 per cent last year.

S.Ramadorai, CEO, Tata Consultancy Services, says, ``We do not subscribe to the `take on/lay off' philosophy at all! In a knowledge-based industry, good people are key assets regardless of whether it is boom-time or a slump.''

Says Bhaskar Das, Director, Human Resources, Cognizant Technology Solutions, India, ``Organisations that hire talent in large numbers in a short span are hard hit as they cannot carry this human inventory for too long. The best way to tide over the curre nt crisis is to stick on talent and not by letting go. Strong performance management systems will anyway ensure that poor performers are eased out to retain the competitive advantage even when the going is good.''

In their turn, employees should strive to deliver a little more than is normal. For, not all is hunky-dory for the customer either. He has to see increased value proposition in every cent he spends, and it's imperative that we offer that value propositio n speedily and consistently.''

The boot or glamourless pay?

Stripping employees of certain benefits or pruning the salary to report healthier quarterly results is an unhealthy business proposition, Das feels.

There is another view in the industry regarding salary cuts. Says a spokesperson for Ramco Systems, ``There needs to be a healthy balance between the short term and the long. In difficult times, it is better for companies to reduce/postpone expenses by d elaying a raise or salary revisions, freezing man-power and cutting on general overheads (belt-tightening) rather than take a short-term approach and resort to lay-offs.''

Ramadorai feels, ``Employees who show consistent non-performance against a set of measurable goals are expendable, and the attrition curve should include such employees. I don't believe that salary cuts for employees during a slump are an effective cost- saving measure. The compensation structure should factor in both a fixed and variable element.''

He feels that in times like these, TCS' initiative in the Economic Value Added (EVA) area is a good measure of performance and hence a good basis for reward.

According to him, ``The fixed element can be modest, while the variable element can vary vastly, based on the employee's contribution/performance during the period in question. In TCS, the EVA model allows us to share the benefits of the company's overal l performance while factoring in the EVA of the team/individual through a solid metrics-driven measurement system.''

Layoffs can create serious insecurities among employees, including valuable ones, and serve as more of a harsh and dirty, short-term management initiative, thus diluting an organisation's brand equity, he says.

Retrenchment a sin?

Maybe not. If there's no money to pay, your employees are probably better off looking for work elsewhere. But if you want to trim salary expenses just for profits in the next quarter and to counter a slowdown, retrenchment can have a terrible effect.

Morita says this affects company philosophy. If there is a constant movement among the company's populace at all levels, how does the company instill a sense of its philosophy in employees? In such a case, the company lacks direction and is bound to be d ogged by the need to show profits in the subsequent quarter. This blinds the management to the need for a long-term vision. Says Morita in his book published in 1985, ``Recently, a new CEO came into an American company, closed down several factories, lai d off thousands of employees and was hailed by other executives as a great manager. In Japan, such a performance would be considered a disgrace.''

Note of dissent

However, the 21st century business scenario does not agree wholeheartedly with this view.

Says Ramesh Santhanam, CEO, RamSoft, ``We cannot assume companies lay off just to reduce salary expenses and marginally increase `profitability'. Further, they may not be necessarily sending well-trained, productive people home and then stop to wonder ho w they would get them back or build their organisation.'' In other words, a majority of lay-offs do not happen for short-term reduction of salaries. These companies probably inherently have a lot of problems and would not have got their act together. Pro blems such as; faster growth than they could handle; high costs; poor projections; changing market scenario and investors pulling out;

According to Santhanam,``Companies typically wait for the last straw and then clamp on every part of their organisation to set things right. A lay-off policy is just a result of a number of occurrences and can never be viewed in isolation.''

But how about loss of goodwill? If a huge organisation lays off 11,000 employees at one go, then how come ``employees are the most important in the software business?'' Agrees Santhanam,

``This is certainly a problem. But evaluate this not when `laying off', but before `hiring at will'.

Sometimes, it makes sense to lose some of the `goodwill' and have a chance to rebuild it; than to close shop.''

Finally, does company philosophy get the boot before the employee? Given the tenor of response above, one is bound to ask, ``Did the software industry have company philosophies in the first place?'' Hiring and firing was rampant much before the lay-off t hreat.

Will the real employee stand up?

One train of thought in the domestic industry is that an employee, especially in the software industry, does not deserve to question lay-off ethics. Say industry watchers, ``When the going was good they jumped ship to, say two companies a month. They nei ther lent stability to their own careers nor to the companies they went to. Software developers with more than one H1B visa being processed have few parallels.''

Ask the average employee about this and he says, ``At least we wore our hearts on our sleeves when we jumped ship.''

Hiring vs outsourcing

Finally, a word of credit to the US software industry: they probably did a great thing in outsourcing software to countries like India. Not only did it give us much needed dollar revenues, but it also gave an option to software engineers -- to choose bet ween Indian software companies and US giants. Those who chose to remain employees of Indian companies, especially at the lower and middle level, are probably better off - marginally atleast, in postponing the inevitable. The argument below allows such an inference.

Ramakrishnan says, ``Hiring like blazes in no longer in fashion. By moving low-end work to Mexico or Asia, American and Japanese companies have shifted the damage control away from their immediate circle. At the second level, the primary responsibility h as been handed over by many companies to ``contract manufacturers'' and again the companies themselves are not visible to the public as having axed people. My estimate is that for every direct employee in cell-phone manufacturing, there are probably six in outsourcing. More importantly this model saves the company costs without damaging its reputation in the market.''

The elegy

The US slowdown is causing a great deal of worry to the IT industry. In this issue of eWorld, we have as many as four stories that look at this issue from as many angles. Our cover story questions the validity of a lay-off policy, on the basis of the Jap anese industry's early business philosophy that dictates that unless you close shop, you should hold on to dear employees. On the same page, ``Silver lining peeps'' finds candlelight amidst gloom. On Page III, ``Fresh air? No thank you!,'' questions the wisdom of ignoring domestic and other IT markets so far -- which focus could have made the US slowdown bearable; while, ``Fancy frills fall away'' enumerates the steps companies are actually taking to counter the blow.

The media has obtained a lot of fodder to chew thanks to the slowdown. Here's hoping that the IT industry never gives us another chance to bring out ``elegies.''

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