WHAT IS DOWNSIZING?

A downsizing strategy reduces the scale (size) and scope of a business to improve its financial performance.

A reduction of the workforce is one of only several possible ways of improving profitability or reducing costs.

WHY DO FIRMS DOWNSIZE ?

Reduce costs. Reduce layers of

management to increase decision making speed and get closer to the customer.

Generate positive reactions from shareholders in order to improve valuation of stock price.

Increase productivity.

DOWNSIZING STRATEGIES

Early retirement Transfers Outplacement Buy-out packages Lay-offs

Eliminate functions Cut hierarchical

levels Drop divisions or

products Reduce work hours Lengthen shifts

WORKFORCE REDUCTION

ORGANIZATIONAL REDESIGN

CASE OF TATA STEEL

Downsizing – August 2007 The fifth largest steel manufacturer in the

world, has managed to have its staff strength in the last 13 years without giving much scope of tears.

Director of TATA Sons, said when they company decided to reduce the number of employees, it evolved a VRS plan taking care not to cause any heartburn.

Early Separation Scheme (ESS), the humaneness and effectiveness with which the company cut its members.

They offered them 1.2 times their monthly salary for the rest of their service in the form of cheques. The scheme also comprises of insurance rider – in case of employee’s death, their family would continue to get the benefit, he said.

The number of employees has been reduced from 77,448 in 1994 to 52,167 in 2000 and to 39,658 in 2005.

DOWNSIZING EFFECTS : OVERALL

Mixed effects on firm performance: short term cost savings, but long term profitability & valuation not strongly affected.

Downsizing forces re-thinking of Employment strategy. Lifelong employment policies not credible after downsizing.

Example : IBM abandoned lifelong policy after several lay-offs in early 1990s.

Firm’s reputation as a good employer suffers.

Example : Apple Computer’s reputation as good employer declined after several lay-offs in 1990s.

VOLUNTARY RETIREMENT SCHEME

WHAT IS VRS? The Voluntary Retirement Scheme

(VRS) is the latest mantra of many a corporate and Public sector units.

VRS is a scheme whereby the employee is offered to voluntarily retire from his services before his retirement date.

Subject to certain conditions the company offers VRS to its employees It is the golden route to cut the excess flab.

THE GOLDEN HANDSHAKE

The most humane technique to retrench the employees in the company today is the voluntary retirement scheme.

It is the golden handshake for the employees and the only option today for the companies to reduce organization staff.

The scheme which is formally permitted by the Department of Public Enterprises and which provides the lucrative way for the employees to terminate their services and accept VRS.

THE GOLDEN HANDSHAKE

As the name suggests the VRS is strictly voluntary i.e. one can neither compel the workers to accept it nor apply it selectively to certain individuals.

One can however choose the levels, units and age groups among whom one wants to offer VRS.

The company can always accept or reject the application for the VRS.

TRADE UNIONS & VRS Trade unions play a crucial role in introducing the VRS

in any organized sector firm. The scheme cannot be implemented without, at least, the tacit approval of the representative union. Sometimes without the consent of the trade unions, workers legalize the VRS by accepting it in mass.

Very recently, the entire workforce of Sri Ram Mills (1,400 workers) has accepted VRS while the major union opposed the scheme tooth and nail. Other companies such as Ind Auto, SKF Bearings, and Novartis have also been able to successfully reduce their workforce through the introduction of VRS. When the workers are convinced that the scheme is sufficiently attractive monetarily and/or the company is in deep crisis, they opt for the scheme.

MORE ON VRS

Employers refer to VRS as 'golden handshake', trade

unions call it 'voluntary retrenchment scheme', and for the

government, it is 'unstated exit policy' which means that

an exit policy which may not exist on paper. VRS is one of

the strategies introduced in the early 1980s in central

public sector undertakings (PSUs) to reduce the extra

workforce.

TECHNICALITIES The Voluntary Retirement Scheme is a legal way to

down size and thus it involves certain technicalities.

The VRS candidates must have worked for the organization for minimum of 10 years and also the age of the worker must be minimum of 40.

Employees not complying with these conditions still can apply for the early separation but it would not be counted as the VRS legally. Thus these employees won't be able to avail the benefit of tax exemption.

The employees receiving VRS can get the tax exemption for the amount of Rs. 5 lacs lumpsum.

TECHNICALITIES

The Voluntary Retirement Scheme is given tax exemption as per the following limits:

Least of following :

Last drawn salary × 3 × completed yrs. Of services or Last drawn salary × remaining month of service which ever is higher

Rs. 5,00,000

Actual compensation received

TECHNICALITIES Employees not complying with these conditions still

can apply for the early separation but it would not be counted as the VRS legally.

Thus these employees won't be able to avail the benefit of tax exemption. The employees receiving VRS can get the tax exemption for the amount of Rs. 5 lacs lumpsum.

Anyone receiving more than Rs. 5 lacs would be charged under Income Tax Act

BENEFITS

The normal benefits that an employee gets:

1. Provident fund

2. Encashed accumulated leave

3. Gratuity

4. Salary for the notice period

5. Cost of transfer to the hometown

CONCLUSION These techniques that are suggested above give the

humane touch to the downsizing. This is very necessary because it is not only the posts that are downsized but there are human beings involved in this process.

This process should convince them that the posts in the organization have become redundant and not the person and the organization still values the person.

Since this process involves emotions and feelings, every care must be taken by the management that the process must be carried out in such a manner that it keeps the dignity of the employees but at the same time achieves the objective in a tactful manner.