At a meeting of the board of directors in June 1999, the CEOs of Steel Authority of India?s (SAIL) four plants – V. Gujral (Bhilai), S. B. Singh (Durgapur), B.K. Singh (Bokaro), and A.K. Singh (Rourkela) made their usual presentations on their performance projections. One after the other, they got up to describe how these units were going to post huge losses, once again, in the first quarter1 of 1999-2000. After incurring a huge loss of Rs 15.74 bn in the financial year 1998-99 (the first in the last 12 years), the morale in the company was extremely low. The joke at SAIL's headquarters in Delhi was that the company's fortunes would change only if a VRS was offered to its CEOs – not just the workers.

SAIL was the world's 10th largest and India?s largest steel manufacturer with a 33% share in the domestic market. In the financial year 1999-2000, the company generated revenues of Rs. 162.50 bn and incurred a net loss of Rs 17.2 bn. Yet, as on February 23, 2001, SAIL had a market valuation of just Rs. 34.07 bn, a meager amount considering the fact that the company owned four integrated and two special steel plants. SAIL was formed in 1973 as a holding company of the government owned steel and associated input companies. In 1978, the subsidiary companies including Durgapur Mishra Ispat Ltd, Bokaro Steels Ltd, Hindustan Steel Works Ltd, Salem Steel Ltd., SAIL International Ltd were all dissolved and merged with SAIL. In 1979, the Government transferred to it the ownership of Indian Iron and Steel Company Ltd. (IISCO) which became a wholly owned subsidiary of SAIL. SAIL operated four integrated steel plants, located at Durgapur (WB), Bhilai (MP), Rourkela (Orissa) and Bokaro (Bihar). The company also operated two alloy/special steel plants located at Durgapur (WB) and Salem (Tamil Nadu). The Durgapur and Bhilai plants were pre-dominantly long products2 plants, whereas the Rourkela and Bokaro plants had facilities for manufacturing flat products.

In February 2000, the SAIL management received a financial and business-restructuring plan proposed by McKinsey & Co, a leading global management-consulting firm, and approved by the government of India (held 85.82% equity stake). The McKinsey report suggested that SAIL be reorganized into two strategic business units (SBUs) – a flat products company and a long products company. The SAIL management board too was to be restructured, so that it would consist of two SBU chiefs and directors of finance, HRD, commercial and technical. To increase share value, McKinsey suggested a phased divestment schedule. The plan envisaged putting the flat products company on the block first, as intense competition was expected in this area, and the long products company at a later date. Financial restructuring envisaged waiver of Steel Development Fund4 (SDF) loans worth Rs 50.73 bn and Rs 3.80 bn lent to IISCO. The government also agreed to provide guarantee for raising loans of Rs 15 bn with a 50% interest subsidy for the amount raised. This amount had to be utilized for reducing manpower through the voluntary retirement scheme. Another guarantee was given for raising Rs 15 bn, for repaying past loans. Business restructuring proposals included divestment of the following non-core assets: a) Power plants at Rourkela, Durgapur & Bokaro, oxygen plant-2 of the Bhilai steel plant and the fertilizer plant at Rourkela. b) Salem Steel Plant (SSP), Salem. c) Alloy Steel Plant (ASP), Durgapur. d) Visvesvaraya Iron and Steel Plant (VISL), Bhadravati. e) Conversion of IISCO into a joint venture with SAIL having only minority shareholding

The major worry for SAIL?s CEO Arvind Pande was the company?s 160,000-strong workforce. Manpower costs alone accounted for 16.69% of the company?s gross sales in 1999-2000. This was very high, compared with other steel producers such as Essar Steel (1.47%) and Ispat Industries (1.34%). An analysis of manpower costs as a percentage of the turnover for various units of SAIL showed that its raw materials division (RMD), central marketing organisation (CMO), Research & Development Centre at Ranchi and the SAIL corporate office in Delhi were the weak spots. There was considerable excess manpower in the non-plant departments. Around 30% of SAIL's manpower, including executives, were in the non-plant departments, merely adding to the superfluous paperwork. Hindustan Steel, SAIL's predecessor, was modelled on government offices, with thousands of 'babus' and messengers adding to the glory of feudal-oriented departmental heads. SAIL had yet to make any visible effort to reduce surplus manpower. A senior official at SAIL remarked: "If you walk into any SAIL office anywhere, you will find people chatting, reading novels, knitting and so on. Thousands of them just do not have any work. This area has not even been considered as a focus area for the present VRS, possibly because all orders emanate from and through such superfluous offices and no one wants to think of himself as surplus." With a manpower of around 60,000 in these offices and non-plant departments like schools, township activities etc, SAIL could well bring down its employee strength to less than 10,000. Reduction of white-collar manpower required a change in the systems of office work and record keeping, and a very high degree of computerisation. Officers across the organisation employed dozens of stenographers and assistants. Signing on note sheets was a status symbol for SAIL officers. From the beginning, SAIL had to contend with political intervention and pressure. Many officials held that SAIL had to overcome these political pressures. One top official commented, "Many employees do not have sufficient orders or work on hand to justify their continuance, and yet political pressures keep them going. It is time that the top management takes a tough stand on such matters. One does not have to call in McKinsey to decide that many SAIL stockyards and branch offices are redundant."

As a part of the restructuring plan, McKinsey had advised Pande that SAIL needed to cut the 160,000-strong labour force to 100,000 by the end of 2003, through a voluntary retirement scheme. Pande was banking on natural attrition to reduce the number by 45,000 within two years, but GOI's decision to increase the retirement age to 60 further delayed the reduction. Subsequently, SAIL had requested GOI to bail it out with a one-time assistance of Rs 1,500 crore and another subsidized loan of the same size for a VRS, to achieve the McKinsey targets. In a bid to 'rationalize' its huge workforce, SAIL launched a VRS in mid 1998, for employees who had put in a minimum service of 20 years or were 50 years in age or above. The scheme provided an income that was equal to 100 per cent of the prevailing basic pay and DA to the eligible employees. About 5,975 employees opted for the scheme. Of them, 5,317 were executives and 658 non-executives. Most of those who opted were above 55 years. On March 31, 1999, SAIL introduced a "sabbatical leave" scheme, under which employees could take a break from the company for two years for studies/employment elsewhere, with the option of rejoining the company (if they wanted to) at the end of the period. The sabbatical allowed the younger members of the SAIL staff to leave without pay for “self-renewal, enhancement of expertise/knowledge and experimentation,” which broadly translated into higher studies or even new employment. On June 01, 1999, SAIL launched another VRS for its employees. Employees who had completed a minimum of 15 years of service or were 40 years or above could opt for the scheme. The new VRS, which was opened to all regular, permanent employees of the company, would be operational till 31st January 2000. Its target groups included: * Those who were habitual absentees, regularly ill and those who had become surplus because of the closure of plants and mines; * Poor performers. Under the new package, employees who opted for the scheme, depending on their age, would get a monthly income as a percentage of their prevailing basic salary and dearness allowance (DA) for the remaining years of their services, till superannuation. Employees above 55 years of age would be given 105 per cent of the basic pay and dearness allowance (DA) every month. Those employees who were between the age of 52 and 55 years would receive 95 per cent of the basic pay and DA while those below 52 years would get 85 per cent of the basic pay and DA. The new scheme, like the old one was a deferred payment scheme, with extra incentive like a 5% increase in monthly benefits for each of the three age groups. By September 1999, over 4,000 employees opted for the new scheme. About 1,700 employees opted for VRS in the Durgapur steel plant while in the Bhilai, Bokaro and Rourkela steel plants. The number varied between 400 and 700. In September 2000, SAIL announced yet another round of VRS, in a bid to remove 10,000 employees by the end of March 2001. The company planned to approach financial institutions for a credit of Rs. 500 crore. Pande said: "We are awaiting the government nod for the VRS scheme, drawn on the pattern of the standard VRS by department of public enterprises. We expect to get the clearance by the end of the month." On February 08, 2001, SAIL ended its four year recruitment freeze by announcing its plans to fill up more than 250 posts at its various plant sites in both technical and non-technical categories. According to a senior SAIL official: "This recruitment is being done to ease the vacancies created due to natural attrition and those that arose after the previous VRS."

In mid 1998, in a bid to convince its employees to accept VRS, SAIL highlighted six 'plus' points of VRS, in its internal communique, Varta. They were as follows: *During the next 4-5 years, SAIL has to reduce its workforce by 60,000 for its own survival. Employees with chronic ailments, and habitual absentees, who add to low productivity, have to go first – maybe, with the help of administrative actions. * The employees may have to be transferred to any other part of the country in the larger interest of the company. * For those who started their career as healthy young men 25-30 years ago, the VRS will take care of their financial worries to a great extent, and they can discharge their domestic duties more comfortably. * VRS can be used for special purposes like paying huge sum of money for getting one's son admitted to a professional course. * VRS will give many individuals the money and time on pursuing personal dreams. * It can be a good opportunity to do social service. On December 27, 1999, SAIL initiated a company-wide information dissemination program to educate the staff on restructuring. The company drafted an internal communication document entitled “Turnaround and Transformation” and a special team of 66 internal resource persons (IRP) had been assigned the task of preparing a detailed plan to take this document to a larger number of people within the company. The 66-member team was constituted in September 1999 and was stationed in Ranchi to undergo a detailed briefing-cum-training course. A generalized module was presented to the IRP team during the course, which then summarised the root causes of SAIL's crisis and the strategies to overcome it. According to an official involved with the program: “Initiatives like the power plant hive-off or the Salem Steel joint venture will hinge on employee concurrence, particularly at the shop floor level, and therefore there has to be an intensive communication program in place to reassure employees that their interests will be protected.” The 66-member IRP team conducted half-day workshops across plants and other units based on three specific modules: * A video film conveying a message from the chairman of the company * A generalized module of the recommendations of the turnaround plan focusing on restoring the financial foundation, reinforcing marketing initiatives and regaining cost leadership * A module covering plant-specific or unit-specific issues and strategies for action The exercise was expected to cover at least 16,000 SAIL employees by the end of March 2000. A senior official at SAIL said: “The idea is that the employees covered in this phase would take the communication process forward to their peer group and fellow colleagues.” The staff education exercise was stressed upon, particularly in view of the power plant hive-off fiasco, which could not take off as scheduled due to stiff resistance from central trade unions. The problem, at the time, was that the SAIL top brass had failed to convince the employees that jobs would not be at risk because of the hive-off.

The trade unions were on a warpath against the recommendations of McKinsey. Posters put up by the Centre of Indian Trade Unions (CITU) at SAIL?s central marketing office said that the McKinsey report was meant, not for the revival or survival of SAIL, but for its burial. A senior TU leader said: “SAIL TUs so far have been extremely tolerant and exercised utmost restraint. Even in the face of scanty communication by the management of SAIL, they have not lost patience in these trying times.” The TU leaders felt that SAIL would try to bolster support for the financial restructuring proposal based on the recommendations of McKinsey. But being a government-owned company, SAIL cannot take decisions on such recommendations as the privatization of SAIL or breaking it up into two product-based companies. Even in relatively small matters the like hiving off of power plants to a subsidiary company, with SAIL being the major partner, the government had not cleared SAIL's proposal, even after months of gestation. Therefore, it was futile to think that SAIL would secure the permission of the government to sell off Salem Steel Plant (SSP) in Tamil Nadu or close down Alloy Steels Plant (ASP) at Durgapur in West Bengal. At SSP, all the TUs had joined hands to form a "Save Salem Steel Committee" and observed a day's token strike on June 24, 1999, demanding investment in SSP by SAIL, rather than by a private partner. Though TUs had no objection to voluntary retirements, they were not very happy about the situation. They were worried that employment opportunities were shrinking in the steel industry and that reduction of manpower would mean increasing the number of contractors and their workforce. After the Rourkela Steel Plant in Orissa absorbed contractors' workers on Supreme Court orders, fresh contractors had been appointed to fill up the vacancies. SAIL TU leaders were emphatic that the McKinsey recommendations were not the last word on SAIL. They felt that foreign consultancy firms were unable to appreciate the role played by major public sector units like SAIL or Indian Oil in the growth of the Indian economy. They alleged that since large public sector units had shown they could withstand the onslaught of the multinationals, efforts were being made to weaken them, break them into pieces and eventually privatize them. On February 17, 2000, workers at SSP went on a strike against the government's decision to restructure SAIL. The strike was called by eight unions affiliated to CITU, INTUC, ADMK and PMK. CITU secretary Tapan Sen said: "The unions are going to serve the ultimatum to the government for indefinite action in the days to come if this retrograde decision is not reversed. Demonstrations were held against the government's decision in all steel plants and workers of Durgapur would hold a daylong dharna. Steel workers all over the country, irrespective of affiliations have reacted sharply to the disastrous and deceptive decision of the government on the so-called restructuring of SAIL." In view of poor response to the September 2000 VRS scheme (only 2000 employees opting for the scheme), SAIL extended it till July 31, 2001. According to sources, delay in implementation of wage revision had affected the response from the employees.

1. McKinsey's recommendation is that SAIL cut its workforce to 100,000 by the end of 2003. SAIL has launched various VR schemes to meet this target. Though every time the company comes out with improved schemes there are still not many takers. What according to you could be the reasons? 2. The staff education exercise on VRS at SAIL seems to be more of a reaction to the power plant hive-off fiasco than a proactive measure. What other steps can SAIL take to educate employees about VRS? Explain. 3. According to McKinsey proposals, offering VRS to employees was the part of the restructuring plan. Do you think VRS is sufficient without restructuring or vice-versa? Comment. 4. In February 2001, SAIL ended its four-year recruitment freeze by announcing its plans to fill up more than 250 posts. Do you think this is the right move especially when a VRS is being offered to its employees? Explain.