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Layoffs needn’t be the first option

Layoffs needn’t be the first option
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First Published: Mon, Feb 02 2009. 09 18 PM IST

Turbulent times: An October photo of Jet Airways employees protesting against their retrenchment in Mumbai. The carrier later reversed its decision to lay off these employees. AP
Turbulent times: An October photo of Jet Airways employees protesting against their retrenchment in Mumbai. The carrier later reversed its decision to lay off these employees. AP
Updated: Mon, Feb 02 2009. 09 18 PM IST
The global slowdown has changed the business scenario in India and companies that were on a hiring spree in the last few years are now wielding the axe to remain competitive. Sectors such as retail, aviation and financial services, which were at the forefront of the economic boom, are expected to witness downsizing as companies struggle to survive in the face of shrinking demand for their products and services.
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“The extent to which you are bullish is directly correlated to the amount of correction (you have to make) during a downturn,” says Pothen Jacob, head, human capital group practice, Watson Wyatt India Pvt. Ltd, a part of global consulting firm Watson Wyatt Worldwide.
Turbulent times: An October photo of Jet Airways employees protesting against their retrenchment in Mumbai. The carrier later reversed its decision to lay off these employees. AP
The corrections have already started. While consolidated government data on retrenchments isn’t available, anecdotal evidence indicates that companies are increasingly cutting jobs, though they don’t always term these layoffs. The leather industry, for instance, has cut 300,000-400,000 jobs since September, according to the Council for Leather Exports.
In November, India’s biggest domestic carrier Jet Airways (India) Ltd terminated the services of 27 expatriate pilots due to fleet reduction, according to a company statement. Earlier on 17 October, the carrier had reversed its decision to lay off about 1,900 employees following protests and government concern on mass layoffs, as Mint reported on 18 October. Starting 3 November, American Express Co. began downsizing its workforce in India as part of a worldwide initiative to cut costs. Around 120-150 employees have been displaced, as reported in Mint on 4 November. Similarly, cellphone maker Motorola Inc. said its India operations would face job cuts as part of its plan to shed 3,000 jobs or about 5% of its global workforce, according to a 5 November Mint report.
Bangalore-based manufacturing companies Larsen and Toubro Komatsu Ltd and Federal-Mogul Goetze (India) Ltd have filed applications in Karnataka’s labour department, declaring their intent to lay off 365 and 1,800 employees respectively, as reported in Mint on 27 January.
Typically, when it comes to reducing expenses, people are the first cost centre companies look at. “This tendency is not limited to any geography but globally, companies tend to cut employee costs to sail through tough times,” says Jacob. This is simply because managements are often unprepared to deal with a slowdown and see cutting payrolls as the easiest way to show a leaner, but not necessarily healthier, company.
Conserving resources: Y.V. Verma (above), director, human resources, LG Electronics India, says companies tend to start issuing pink slips, cut promotion budgets, freeze expansion plans and stop hiring, knee-jerk reactions that can boomerang. Ramesh Pathania / Mint
According to the 2008-2009 Watson Wyatt Global Strategic Rewards Survey that studied 1,389 employers across the world—including 276 US employers—33% of firms in the US have not made any formal contingency plans for future economic downturns. In contrast, at least eight in 10 employers in Asia-Pacific (84%) have contingency plans in place. The most common contingency planning activity by US employers is layoffs (52%), followed by plans to restructure the organization (46%), freeze hiring (39%), give smaller pay raises (27%) and freeze salaries (13%). In contrast, only 23% of employers in India would like to resort to reducing the workforce. The contingency plans include organizational restructuring (67%), hiring freeze (62%) and lower pay increase (51%), while 10% of the employers indicated they would prefer to adopt a reduced work week and salary freeze.
“We know from previous recessions and economic slowdowns that those companies that have contingency plans in place will be in a much better position to weather the storm and bounce back when the economy improves,” says Jacob.
A downturn presents an extremely tough business environment where layoffs are seen as inevitable for survival. “This is the moment when organizations need to conserve every bit of resource to ensure that they tide over the trough,” says Arun Rao, vice-president, human resources (HR), AppLabs Technologies Pvt. Ltd, a US-based software testing company which has a 1,500-employee facility in Hyderabad.
But do layoffs make business sense in the long term, given that recessionary phases on an average do not last for more than a year or so? Says Y.V. Verma, director, human resources, LG Electronics India Pvt. Ltd, the Indian subsidiary of Korean electronic goods maker LG Electronics Inc.: “The first thing companies do during a slowdown is to stop hiring, start issuing pink slips, cut promotion budgets and freeze expansion plans. Such knee-jerk reactions may often boomerang.”
Retrenchment really depends on how bad the downturn is and on the impact of people costs on overall operational costs. Organizations look to drive operational efficiencies and people form a part of the overall scheme of things. And some companies may have a significant part of their operating costs tied up in employee costs. “Hence, there are caveats to an issue that may have stronger business need than a mere popular or emotional interpretation,” says Prabir Jha, global head, human resources, Dr Reddy’s Laboratories Ltd. “Commercial organizations have to be run as business entities, delivering appropriate returns to the shareholders.”
The pharmaceutical company has 8,000 employees. In 2008-09, it had hired 1,010 people till the October-December quarter. “We aim to add similar numbers in 2009-10. We have not made any significant change in our hiring numbers due to the downturn,” says Jha. “We are building capacity and this is part of our business plans.”
Short-term pressures cannot be ignored, argue HR mangers. Without surviving the near term, there is no long term, they say. “All of us know that there are business cycles but organizations need to survive the trough if they want to ride the next crest,” says Rao.
Even as some companies are scaling back, firms such as LG Electronics have chosen to build their businesses by consolidating their capabilities. “In a slowdown, when expectations are much more realistic, this may just be the right time to build business,” says Verma. “Keeping this in mind, we have recruited 90 to 95 candidates from business schools in 2008, which is more than the last few years.”
Challenge for managers: Watson Wyatt’s Pothen Jacob says there is a need to look at innovative ways of reducing people costs. Hemant Mishra / Mint
Several companies, including Dr Reddy’s, low-cost carrier SpiceJet Ltd, LG Electronics and Pantaloon Retail (India) Ltd, are looking at managing costs innovatively. Infosys Technologies Ltd has given letters to employees stating they can opt for an year-long sabbatical to engage in philanthropic activities, says a company spokeswoman. They would continue to draw 50% of their salary during this period. Infosys has said that while the move may have coincided with the global financial turmoil, a sabbatical should be perceived as a voluntary act by employees. According to the company’s third quarter financial report, the IT bellwether had 103,078 employees as on 31 December. It added 5,997 people in the December quarter, while 3,225 employees left for various reasons.
Laying off people is never an easy option, especially in India, say HR managers. The lack of social security systems and the social stigma attached to job loss create long-term implications for businesses. “Whether in the short term or long term, doing away with people should be the last resort,” says Sanjay Jog, chief people officer, Pantaloon Retail.
Layoffs not only lower the morale of existing employees but also impact the company’s employer branding. “The challenge for HR managers is to look at innovative ways and means to cut costs and avoid layoffs.” In September, the retailer invited ideas from staff on cost-cutting. “Some of the ideas, including one on reducing packaging costs, have helped us make savings of Rs12-13 crore,” says Jog. “We are also looking at savings of another Rs150 crore through a cut in advertising promotion and administration costs.”
Jacob says a freeze on salary, even cuts in base pay or offers of voluntary retirement to older employees are innovative ways of reducing people costs.
Surajit Banerjee, vice-president, HR, SpiceJet, says: “Luckily, we did not have to deal with significant redundancies because we did not have big expansion plans in terms of adding fleet for 2008. In addition to cutting wastages and optimizing the use of resources, we are involving all employees to pitch in at a time like this.”
SpiceJet has a staff strength of 2,200. It added 100 employees in 2008. Given the uncertain economic situation, the company will decide on hires for 2009 as it goes along, says Banerjee.
However, experts say right-sizing always makes good sense. “What do not make sense are knee-jerk reactions or when you have hired indiscriminately and (are) now firing with equal callousness,” says Ganesh Shermon, partner and head of human capital advisory service at consultant KPMG India. “But for companies which use a fair performance management system, this is an acceptable way of bringing down (eliminating) the last 10% (in the performance scale).”
For AppLabs, reviewing performance and helping people scale up is a round-the-year programme. “Today, all meritocracy-driven organizations adopt a bottom-five or bottom-10 approach and hence logically keep the clean-up operations even in the upturn,” adds Rao. Dr Reddy’s has always looked at addressing underperformance as a part of its performance philosophy. “That will continue as always. We may redeploy talent though, if required, to address any changes in business priorities,” says Jha.
But if the slowdown takes on more ominous hues, retrenchments would be the surest bet, concede experts. “If economic conditions continue to weaken, we would expect to see many companies begin to evaluate their staffing levels, compensation packages and the overall organizational structures and to implement some of their contingency plans,” says Jacob.
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First Published: Mon, Feb 02 2009. 09 18 PM IST