DOWNSIZING VRS NAIN PUBLICATION 1 What Is Downsizing

DOWNSIZING & VRS NAIN PUBLICATION 1

What Is Downsizing? - Downsizing refers to the reduction of a company's labor force. This approach has gained popularity since the 1980 s Downsizing in any business is generally not viewed by employees or management as a positive practice Downsizing is currently one of the most popular strategies being used by organizations in an effort to survive and compete in the current business scenario. NAIN PUBLICATION 2

Downsizing Definition: Balazs (1997) feel that “downsizing is often a price paid by organizations for previous mismanagement and strategic errors in reading the market by the top management. ” NAIN PUBLICATION 3

Why Downsizing? ? ? Ø To reduce costs. Ø To become more competitive Ø To optimize resources Ø To increase in the speed and responsiveness. Ø To generate positive reactions from shareholders in order to improve valuation of stock price. Ø To Increase productivity. NAIN PUBLICATION 4

Downsizing Strategy: § Attrition: in which firms do not replace people who leave, is the simplest method. § Voluntary termination: which includes buy-out and early-retirement offers, is a second approach to downsizing a workforce. § Compulsory termination: in which departing employees are given no choice, is a third downsizing strategy. § Across-the-board cuts: A final downsizing strategy, across-the-board cuts in every department, is perhaps the least effective downsizing option. NAIN PUBLICATION 5

§ § § Factors Affecting The Selection Of A Downsizing Strategy: Time, or the expected duration of an economic downturn) Resources, such as cash resources at hand Budget, namely the financial condition of the firm) Corporate culture, for example, the institutional values and anticipated effects of cost cutting Demographics, the location of the firm/ demographics of employees the firm would like to retain or rehire Labour market, specifically the state and condition of the labour market. NAIN PUBLICATION 6

NAIN PUBLICATION 7

SOME RECENT EXAMPLES BARCLAYS With cuts of 1, 400 employees already in 2011, Barclays announced, it will layoff a total of 3, 000 staffers by the end of the year 2012. HSBC Since 2011, HSBC has already laid off 5, 000 people, but announced that plans are still in place to slash approximately 25, 000 more in near future. CITI BANK GROUP Citi has announced plans to trim its securities division as it focuses on its retail banking side. Recently, the bank said it was considering cutting head count by an additional 350 people. PEPSI The company said layoffs would be spread over 30 countries, with the U. S. workforce likely 3 percent smaller by the end of the restructuring. IBM Labor groups in Germany announced that the company was planning to cut as many as 8, 000 employees this year. That came on top of reports that IBM had fired 3, 000 U. S. and Canadian workers NAIN PUBLICATION 8

CRITICISM OF DOWNSIZING • • • The loss of highly-skilled and reliable workers and the added expense of finding new workers. An increase in overtime wages. A decline in customer service because workers feel they lack job security after layoffs. Employee attitudes that may change for the worse, possibly leading to tardiness, absenteeism, and reduced productivity. An increase in the number of lawsuits and disability claims, which tends to occur after downsizing episodes. Restructuring programs sometimes take years to bear fruit because of time it takes for employees to adjust to their new roles and responsibilities. NAIN PUBLICATION 9

METHODS OF DOWNSIZING • Termination for Cause (TFC) – Termination as a result of unlawful behavior, breaking company policies, conflict of interest, etc. • Performance-based termination (PBT) – Termination based on track record / history of poor performance, failure to deliver on job responsibilities or against business / position Objectives • Surprise / emergency layoffs (SL) – Terminating of several employees based on business needs executed without appropriate planning / analysis. • Planned reduction in work force (Downsizing or RIWF) – Terminating of several employees based on business needs carefully executed based on appropriate planning and indepth analysis. NAIN PUBLICATION 10

VOLUNTARY RETIREMENT SERVICE NAIN PUBLICATION 11

What is VRS? • VRS is one of the strategies introduced in the early 1980 s in central public sector undertakings (PSUs) • The VRS is the most humane technique to provide overall reduction in the existing strength of the employees • Its eligibility criteria varies from company to company • VRS is a scheme whereby the employee is offered to voluntarily retire from his services before his retirement date. NAIN PUBLICATION 12

Why vrs? • Due to recession in the business • Due to intense competition, the establishment becomes unviable unless downsizing is resorted to • Due to joint-ventures with foreign collaborations • Due to takeovers and mergers • Due to change of Product/Technology NAIN PUBLICATION 13

• VRS-The Golden It is the golden handshake for the employees and Handshake the only option today for the companies to reduce organization staff • 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 NAIN PUBLICATION 14

Trade Unions & VRS • Trade unions play a crucial role in introducing the VRS in any organized sector firm • 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 • Companies such as SKF Bearings, and Novartis have also been able to successfully reduce their workforce through the introduction of VRS NAIN PUBLICATION 15

• Employers refer to VRS as 'Golden Handshake' • Trade unions call it 'Voluntary Retrenchment Scheme' • For the government, it is ‘Unstated Exit Policy’ which means that an exit policy which may not exist on paper NAIN PUBLICATION 16

Advantages on - Employees • Lumpsum amount at a time • The right to accept or reject any application • The Income Tax benefit • Pension and Gratuity NAIN PUBLICATION 17

Advantages on - Employees • Retirement benefits recruiting advantage may give a • Achieving technological advancement • Improves efficiency • Responding to decline in sales and increase in cost NAIN PUBLICATION 18

Disadvantages on - Employees • Employees might face insecurity because of fear of losing their job • The efficient employees would leave the company while the inefficient may stay back • Has high immediate costs, especially because these plans tend to be generous NAIN PUBLICATION 19

Technicalities • The Voluntary Retirement Scheme is a legal way • Must have worked for the organization for minimum of 10 years • 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 • These employees won't be able to avail the benefit of Tax exemption • Employees receiving VRS can get the tax exemption for the amount of Rs. 5 Lakh NAIN PUBLICATION 20

• The Voluntary Retirement Scheme is given tax exemption as per the following limits: • Last drawn salary × 3 × completed yrs. Of services or Last drawn salary × remaining month of service which ever is higher • Rs. 5, 000 • Actual compensation received NAIN PUBLICATION 21

Example - Nokia India ü Introduced VRS for its Chennai plant ü 5000 employees opted for VRS out of 6700 employees ü VRS include 15 month salary & 1 lakh rupees as an compensation NAIN PUBLICATION 22

Conclusion v These techniques that are suggested above give the humane touch to the downsizing. v The organization still values the person v 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. NAIN PUBLICATION 23

CASE STUDY www. nainnews. com THE WORLD’S FAVOURITE NEWSPAPER - Since 2014 EMPLOYEE DOWNSIZING – TCS INDIA, It is a dream come true for many youths of our country to work for a popular MNC software firm or Indian technology (IT) company. But, the recent report of Tata Consultancy Services (TCS) employees being given the pink slips in the new year has given the workforce in the IT sector the shivers. Not only TCS, there are news reports of many well-known IT companies laying off employees, even the ones at mid-level. However, according to a senior TCS official, only the non-performing employees in the organization have been asked to leave. The official at the same time told that the company is firing 25, 000 employees. He claimed that layoffs are a part of every organization's employment policy. Regarding TCS, he also said that the impact will be on only 1 -2 per cent of the 3. 1 lakh people employed in the company. TCS is considered to be India’s biggest outsourcer. This layoff news is coming at a time when the companies are in the process of reporting their December quarter earnings. For employees in the IT sector, such news reports pave the end of a golden period for India’s outsourcing sector, which is over $100 billion worth and which employs more than 30 lakh 24 people. NAIN PUBLICATION