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VRS Troubles

In February 2001, India's largest public sector bank (PSB), the State Bank of India (SBI) faced severe opposition from its employees over a Voluntary Retirement Scheme (VRS). The VRS, which was approved by SBI board in December 2000, was in response to Federation of Indian Chambers of Commerce and Industry's (FICCI)1 report on the banking industry. The report stated that the Indian banking industry was overstaffed by 35%. In order to trim the workforce and reduce staff cost, the Government announced that it would be reducing its manpower. Following this, the Indian Banks Association (IBA)2 formulated a VRS package for the PSBs, which was approved by the Finance ministry. Though SBI promoted the VRS as a Golden Handshake,'its employee unions perceived it to be a retrenchment scheme. They said that the VRS was completely unnecessary, and that the real problem, which plagued the bank were NPAs3. The unions argued that the VRS might force the closure of rural branches due to acute manpower shortage. This was expected to affect SBI's aim to improve economic conditions by providing necessary financial assistance to rural areas. State Bank of India - The VRS Story - Next Page >>>

1] The Federation of Indian Chambers of Commerce and Industry (FICCI) was founded in 1927. It is an apex business organization in India, with a membership of several thousand chambers of commerce, trade associations and industry bodies spread across the country. It represents over 2,50,000 business units. 2] Indian Banks Association is an apex body, of a voluntary nature for banks in India. It was started in 1926 and its members include Public Sector Banks, Private sector banks, Foreign banks having offices in India, Urban-Cooperative banks, Developmental Financial Institutions, etc. The main goal of IBA is to see implementation of efficient and progressive banking principles in the country. 3] Non performing Assets (NPAs) are loans on which interest payments have been due for more than one quarter (3 months) and in the case of monthly installments have been due for more than 3 installments. The unions also alleged that the VRS decision was taken without proper manpower planning. In February 2001, the SBI issued a directive altering the eligibility criteria for VRS for the officers by stating that only those officers who had crossed the age of 55 would be granted VRS. Consequently, applications of around 12,000 officers were rejected. The officers who were

denied the chance to opt for the VRS formed an association SBIVRS optee Officers'Association to oppose this SBI directive. The association claimed that the management was adopting discriminatory policies in granting the VRS. The average estimated cost per head for implementation of VRS for SBI and its seven associated banks worked out to Rs 0.65 million and Rs 0.57 million respectively. As a result of the VRS, SBI's net profit decreased from Rs 25 billion in 1999-00 to Rs 16 billion in 2000-01.

Background Note
The SBI was formed through an Act of Parliament in 1955 by taking over the Imperial Bank. The SBI group consisted of seven associate banks: State Bank of Hyderabad State Bank of Indore State Bank of Mysore State Bank of Patiala State Bank of Saurashtra State Bank of Travancore State Bank of Bikaner & Jaipur The SBI was the largest bank in India in terms of network of branches, revenues and workforce. It offered a wide range of services for both personal and corporate banking. The personal banking services included credit cards, housing loans, consumer loans, and insurance. For corporate banking, SBI offered infrastructure finance, cash management and loan syndication4. Over the years, the bank became saddled with a large workforce and huge NPAs. According to reports, staff costs in 1999-2000 amounted to Rs 4.5 billion as against Rs 4.1 billion in 1998-99. Increased competition from the new private sector banks (NPBs) further added to SBI's problems. The NPBs had effectively leveraged technology to make up for their size. Though SBI had 9,000 branches, a mere 22% of those (1935 branches) were connected through Internet.

Abstract:
The case 'The State Bank of India VRS' is intended to provide a detailed insight into the developments after leading Indian public sector bank SBI decided to implement a VRS. The case examines in detail the reasons for SBI's employees protesting against the VRS and the postVRS scenario.

Issues:
How poor manpower planning led to problems with the bank's VRS

The Protests
The SBI was shocked to see the unprecedented outcry against the VRS from its employees. The unions claimed that the move would lead to acute shortage of manpower in the bank and that the bank's decision was taken in haste with no proper manpower planning undertaken. They added that the VRS would not be feasible as there was an acute shortage of officers (estimated at about 10000) in the rural and semi-urban areas where the branches were not yet computerized. Moreover, the unions alleged that the management was compelling employees to opt for the VRS. They said that the threat of bringing down the retirement age from 60 years to 58 years was putting a lot of pressure on senior bank officials to opt for the scheme...

The Post VRS Days


According to reports, SBI's total staff strength was expected to come down to around 2,00,000 by March 2001 from the pre-VRS level of 2,33,000 (Refer Table III). With an average of 5000 employees retiring each year, analysts regarded VRS as an unwise move. By June 2001, SBI had relieved over 21,000 employees through the VRS. It was reported that another 8,000 employees were to be relieved after they attained the retirement age by the end of 2001. Analysts felt that this would lead to a tremendous increase in the workload on the existing workforce...

Voluntary Retirement Scheme


Businesses some times undergo recessionary conditions and demand for the product may drop or production may become unviable due to various reasons like environmental laws, economic downturn, technological obsolescence or others. Or some times a certain skill set may become redundant due to technological advances or reorganisation of business. Excess staff thus needs to be retrenched.

However, labour laws in India dont allow hire and fire policy. Unions create problems and any downsizing efforts are met with ferocious resistance. Voluntary Retirement Schemes have born out of such requirement. Under this scheme, employees are offered a handsome monetary package proportionate to number of years of service or balance years, which ever is less, if they opt to take retirement. It is also called Golden Handshake because employee and employer part ways happily by exchange of handsome compensation. VRS schemes have been mostly lapped up by the employees over-enthusiastically while simultaneously meeting stiff opposition from trade unions. Trade Unions resistance is motivated because while individual employees benefit from it, trade unions stand to lose all the way. Reduction in staff of company reduces trade unions membership, contributions and strength. But VRS raises a valid legal question. While the staff which collects its golden coins and leaves is benefited, who is going to do the tasks left behind by them? People who have stayed back are going to be burdened with retirees jobs; and for what? It effectively changes their service conditions which, as per the law, can not be changed without their consent. And why should they give consent if they have nothing to gain from it? VRS exercises have not always been successful. If the compensation package is not attractive enough, as was the case with HLL Sewri plant, where only 9 (yes nine only) people opted for VRS. In contrast, Hindustan Ciba Giegys VRS was most successful with 100% employees opting for the scheme and thus allowing the company to close the plant. 2

The Winning Edge Compiled by Chhaya Sehgal If the terms of VRS are not properly designed, it may backfire completely as had happened with SBI. During VRS, the companies target a certain section of redundant or non performing employees but often end up with a double whammy. In most cases, VRS is opted for by the most competent among the employees. Thus, the company loses a large amount of capital as compensations along with competent and productive workforce and increases its non performing to performing workers ratio. Therefore, it is essential that filters be installed in scheme to ensure that only targeted group of employees is eligible to opt for VRS. But it is

essential that filters be installed prior to launching the scheme. Any changes in scheme after it has been launched and employees have given their options are sure to hit the hornets nest and defeat the very purpose of painless separation. That precludes a one size fits all VRS scheme. The VRS schemes need to be tailor made for each organisation.

STEPS IN DESIGNING A VRS SCHEME:


1. Identify the groups and people; company wants to retire. 2. Identify the groups/skill sets/key people that company would not like to retire. 3. Design a scheme that will make only desired group eligible and exclude the key groups and people. 4. If you plan to retire only a percentage of employees, dont make it so attractive that people fall over each other to grab it. 5. It is good idea to keep the compensation package marginally low and plan to keep the scheme open for longer periods so that people leave gradually allowing a transition period for operations to settle down with fewer people. However, in the initial period, a time and number cap should be announced as a safety net against any unexpected rush for the scheme due to some unforeseen reasons. Time can be later extended as required. There have been instances where schemes have been kept open for years.

6. In case it is evident that scheme has not succeeded in attracting the target group and instead key personnel are opting for it, it is better to scrap the scheme completely under the excuse of unions resistance rather than modifying the eligibility conditions. Scheme can be re-launched after a year or so with modified conditions. But under no circumstances attempt should be made to alter the eligibility criteria mid way. Such action will fail the very purpose of the VRS which is meant to effect a painless separation for both the sides.

Case Study State Bank of India The VRS Story


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The Winning Edge Compiled by Chhaya Sehgal Overview In February 2001, Indias largest public sector bank (PSB), the State Bank of India (SBI) faced severe opposition from its employees over a Voluntary Retirement Scheme (VRS). The VRS, which was approved by SBI board in December 2000, was in response to Federation of Indian Chambers of Commerce and Industrys (FICCI)*1+ report on the banking industry. The report stated that the Indian banking industry was overstaffed by 35%. In order to trim the workforce and reduce staff cost, the Government announced that it would be reducing its manpower. Following this, the Indian Banks Association formulated a VRS package for the PSBs, which

was approved by the Finance ministry. Though SBI promoted the VRS as a Golden Handshake, its employee unions perceived it to be a retrenchment scheme. They said that the VRS was completely unnecessary, and that the real problem, which plagued the bank were NPAs. The unions argued that the VRS might force the closure of rural branches due to acute manpower shortage. This was expected to affect SBIs aim to improve economic conditions by providing necessary financial assistance to rural areas. The unions also alleged that the VRS decision was taken without proper manpower planning In February 2001, the SBI issued a directive altering the eligibility criteria for VRS for the officers by stating that only those officers who had crossed the age of 55 would be granted VRS. Consequently, applications of around 12,000 officers were rejected. The officers who were denied the chance to opt for the VRS formed an association SBIVRS optee Officers Association to oppose this SBI directive. The association claimed that the management was adopting discriminatory policies in granting the VRS. The average estimated cost per head for implementation of VRS for SBI and its seven associated banks worked out to Rs 0.65 million and Rs 0.57 million respectively. As a result of the VRS, SBIs net profit decreased from Rs 25 billion in 1999-00 to Rs 16 billion in 2000-01. BACKGROUND NOTE The SBI was formed through an Act of Parliament in 1955 by taking over the Imperial Bank. The SBI group consisted of seven associate banks: State Bank of Hyderabad State Bank of Indore State Bank of Hyderabad State Bank of Mysore

State Bank of Patiala State Bank of Saurashtra State Bank of Travancore State Bank of Bikaner & Jaipur 4 Conclusion VRS was implemented in order to reduce the excess staff that dealt mostly with the routine work. Technological up gradation has enabled it so that the work can be done with less manpower. The advent of ATM's has rendered even many of branch offices redundant. Many studies have indicated that a large number of those who opted for VRS were in the officer cadre. VRS was also intended to improve the performance of the 'weaker banks' (banks whose efficiency was low). It was however found that the numbers of personnel opting for VRS from low performing banks were less. It is always desirable to carry out the Human Resource Planning before implementing the VR scheme. Studies have indicated that especially in banks where VRS was first introduced, little or no manpower planning seems to have been done. This has resulted in a massive exodus from certain branches of PSB's. There existed a situation where the entire staff of a branch has left through VRS. This meant new staff having to be deployed into a branch where no one would know how the business was carried out previously. The guidelines issued by the Government of India stipulated that it was the banks management's prerogative to accept or reject a request for VRS. In reality this was not done 8

The Winning Edge Compiled by Chhaya Sehgal in many banks. One of the ways the scheme could have been implemented would have been by exempting certain categories from VRS. Punjab National Bank exempted the IT professionals, forex dealers and other experts from VRS. The problem of specialists leaving the bank in large numbers was further compounded by the fact that others also opted out because of the fear of increased workload after VRS.

Case study discussions


There are some factual inaccuracies in the case. FICCI had nothing to do with VRS in SBI. All companies opting for VRS normally have option to amortize the cost of VRS over five years. SBI also had this option. However, being a profit making bank, the board decided to write off entire cost in one go rather than carry it in the balance sheet. Had the cost been amortized, profit would have been seen to be falling to Rs 23.2 billion from Rs 25 billion, which would not have looked so alarming. The last paragraph of the case study talks about the reasons for theS U CCES S of the VRS story in SBI. But was VRS a success in the SBI in the first place? Success of any scheme can not be measured by absolute numbers who opted for the scheme but by fulfilment of the objective of the scheme. VRS is not a cheap proposition. It costs any company a fortune. In the present case itself, in the very first year in partial fulfilment of VRS scheme, the compensation package cost SBI Rs 9 billion (Decrease in profits compared to previous year, assuming that there was no growth in profits in

that year). Another few billions were spent in subsequent years. Such huge sums of money are

spent by the companies with two primary objectives: (a) Get rid of the dead wood of the organisation without any labour trouble, and (b) Improve the functioning of the organisation. In case of SBI, both the objectives were squarely defeated. (Second aim has been more often
defeated than met in all cases of VRS). To begin with, VRS scheme set the unions and the officers

on the war path with the management and there was mayhem with court case and work to rule, etc. Trade unions response can be excused considering their vested interest against VRS
(Lesser the strength of employees, lesser the members and therefore lesser the unions strength and lesser the contributions) and that it presented an opportunity to them to press for better compensations.

Moreover, their contention that employees were being forced to opt for VRS was proven wrong when there was more than desired, rather intimidating, response for VRS. However, officers protest was completely of managements own making. After making the offer and employees exercising the option, it was manifestly wrong to change the conditions of VRS. It is like offering a quietly standing elephant a sugarcane and then trying to snatch it back. You are risking your life. Secondly, rather than targeted clerical staff, it was majorly opted by the officer cadre and even among them, the specialists like forex dealers, treasury managers, etc. The purpose of 9

The Winning Edge Compiled by Chhaya Sehgal removing the deadwood was defeated and company ended up paying the billions to lose their key personnel. Another misleading issue is about the NPA figures. SBIs 7.18% NPA look disconcerting against 0.77% NPAs of HDFC Bank. However, figures dont tell the whole story. The comparison itself is wrong. You dont ever compare an elephant with mouse. SBI was operating in a different paradigm compared to private banks. Private banks had freedom to choose their debtors. They were operating with a small base and niche customer segment in big cities. SBI had 9000 branches with the responsibility of social banking. Company had to follow the political dictates of directed lending to marginalised sections of the society and political class with nil or inadequate securities. Another issue was that SBI was the oldest bank. Incorporated originally as Imperial Bank of India in pre-independence era and later in 1955 converted to SBI, its NPAs were accumulated over decades. As per prevailing accounting practices, NPAs were not written off or provided for for decades. Also, interest on NPAs were regularly calculated and booked as asset in the balance sheet. Thus, NPAs kept swelling. Basel committee recommendations and Narsimhan committee report were out before Private banks set their foot and could start on a clean slate. It is quite possible that HDFC was following different accounting practices compared to SBI. Thus, this NPA monster was probably to a large extent created by the accounting policies besides the directed lending that was so rampant in pre 1990 era. And finally comes the issue of mindset and prevailing norms. Each era has its own customs and taboos. It is grossly inappropriate to judge an event or person in the past against standards followed in todays society. The so coooool dresses of today would have been scandalous a few decades back. Simalrly, in the days when SBI accumulated all those NPAs, social banking was the norm and no one batted

an eye lid against NPAs. Even after it became the dirtiest profanity in banking dictionary in the liberalisation years, the old timers could not change their mind set overnight. Preparation and application of prudential credit worthiness norms and changing of employees mindset took some time. Today, SBIs NPAs have fallen to just 1.7% of the deposit. (However, this statement conveniently hides the fact that lot of NPAs have been securitied to a corporation created for the purpose). Comparison of internet connectivity of SBI branches commented upon in the case was also discussed. It was another case of wrong comparison. HDFC with barely 61 branches in large cities was being compared with SBI which had 9000 branches spread across length and breadth of the country and penetrating even the remotest locations in the country where people had not even heard of telephone leave alone internet. New private banks started their operations in fully computerised era and their branches, employees, procedures were all fully IT friendly from day one. In case of SBI, every thing, right from procedures to employees, had to be converted into IT compliant. And conversion is many fold tougher job than new creation. One of the logics given for VRS was high average of SBI at 45 years (approx). It needs to be appreciated that public sector banks had almost 800% growth between 1969 and 1990 when RRBs were started and given a boost by public sector banks as sponsoring banks. Large part of this growth had taken place in few years after 1969 (nationalisation of banks by Mrs Gandhi). Those people had led to this increase in average age of employees. Given everything stated
above, was the average age really too high? Assume that average age of an employee was 25 years when he was inducted in to service and retired at the ripe old age of 60 years. Even if recruitment process was absolutely regular and gradual, average age would ank

Introduction
This case highlights the challenges faced by the Bata Management in the wake of changing market trends in the form of increased competition from the local players as well as the constantly increasing threat of Chinese imports. Bata had traditionally targeted the lower middle and middle class segments of the society and was now contemplating changes in its strategy to be able to survive in the market.

Analysis of Batas Current Market Position


With the evolving market and changing market dynamics Bata was being given a tough time by its local competitors and other footwear being imported from China. Bata management feared that they would not be able to survive because they could not compete with the low cost Chinese products, hence they embarked on a plan to enter the premium segment of the market to be able to survive, because they felt competition from Chinese products there would be much less. However, in my opinion, their management in the year 2001, made a mistake by committing to go after the premium segment as well, without realizing the fact that their image would be hurt and could get diluted because they were moving into a domain for which their activities were not aligned. Other than the activities too we have to consider the Brand image that Bata had developed over the past 40 odd years of its existence in Pakistan, and this image was by no means that of a brand which could boast about having premium footwear products, in fact Bata was just meeting the basic functional needs of its middle class customers. Therefore their strategy does not seem to be at all well cut out, as from most of their activities it appears that once they were challenged they resorted to a fire fighting approach and tried their hand at almost all possible arrangements, without gauging the fit of the activities to their strategy. It may be concluded that Batas management made the fatal error of just enjoying their successes whilst the market was not mature, but when the competitors kicked in and the market approached maturity, they were left in the lurch because of not having made clear trade offs in terms of image, activities & internal coordination and then had to pay the price. Their current predicament has been analyzed in detail using a strategy framework below.

Target Customers
Bata had traditionally been targeting the middle strata of the society in Pakistan. In precise terms they were focused more on the lower middle and middle classes. Due to the changing market dynamics the competition had started undercutting their prices and Bata was thinking of shifting its focus towards the higher premium end of the market as well. This basically resulted in it pursuing practices, through which it could not focus its efforts.

Identity Middle Class families were being offered footwear by Bata as they had shoes ranges for
school going children, young men, and even some offerings for women. It can be inferred about the customers that these would be spending roughly around Rs. 300 to Rs. 1500 for a normal purchase.

Behaviors In terms of the behavioral aspects Batas target customers could be quite price

sensitive, demanding value for money, looking for utilitarian needs to be met, and not excessively conscious about the shoe lasting for ages and being very sturdy, yet at the same time demanding adequate quality footwear which they can trust to last for a season or two. Bata may also be categorized as a store where usually entire families visit together because of the various offerings that Bata has to offer to them.

Value Proposition for the Customers


If analyzed for the value that Bata was providing to its customers their value proposition may be categorized as follows.

Reasonable quality at low or reasonable price

Footwear for the entire family

Footwear catering to various functional needs e.g. sports, casual footwear, formal-semi formal

Conveniently accessible outlets in various parts of the country

Prior to entry of local players and the Chinese imports, some sort of social visibility could also be associated with Bata, as it was one of the two major brands in the country then.

Position of the Firm Variety Bata although traditionally had product lines catering to the middle class segment of the
society, yet recently it had also targeted the higher income segment with certain products.

Needs In terms of the needs, Bata was in a way successful in positioning itself as a brand having
stores with products to meet the needs of almost all members of the family, since it had product ranges for children, men, women etc.

Access Bata had positioned itself by employing various distribution channels (retail as well as
wholesale) to enhance its access for the customers. Their nationwide retail network was one of their key strengths.

Sustainability of the Position

Initially Bata as has been elaborated was positioned as brand offering footwear products for the entire family members and for the people belonging to the middle class. But when its management decided to also tap the premium segment of the market, their decision may be categorized as one which cast doubts about the sustainability of Batas desired position in the market.

Image In my opinion Batas image would be diluted as a result of it pursuing various segments and
trying to cater to their needs. Its traditional positioning would also be impacted and there would be chances of Bata not being able to provide an experience fit to its customers as per their expectations.

Activities The sort of activities which they employed e.g. manufacturing in-house as well as
outsourcing, having four categories of outlets (A,B,C,D) catering to various segments of the society from upper to the lower ones, selling through retail as well as the wholesale channel, would not help in any way at conveying a consistent image to its customers. Hence it can be stated that they failed to make any particular trade offs as far as the key activities were concerned.

Internal Coordination With Bata engaging a wide array of activities and practices it would be
almost impossible to maintain internal coordination and hence achieve optimization.

Sustainability of Competitive Advantage


The competitive advantage for Bata based on what they are currently planning to do i.e. trying to offer something for each and every segment would render them pretty uncompetitive. The various levels of fits, that a firm should strive for, would not be easily achievable for Bata given their current moves. The first requirement of having the activities consistent with their strategy would be tough to attain

since with the decision of going after the premium segment, they would be having strategies based on operational excellence as well as dwelling the fact that they would be having product leadership to an extent too, since the premium product seekers look for this as well. Once it would be difficult for them to have the 1st level fit, at that point it would be just impossible to foster the 2nd or the 3rd levels of fit as with conflicting strategies having the activities reinforcing each other and optimizing them would be out of question.

Proposed Future Strategy


I would recommend that Bata should exit from the lower end segment and focus more on the middle and upper middle class of the society, because of the growth in numbers of people belonging to these segments and also because of the rising incomes of its target customers. The market overall is one which is becoming mature and people are quite quality conscious now. Bata in order to deal with the threat of the Chinese imports would have a strategy focusing primarily on customer intimacy as it would be aiming to enhance its brand equity and provide a complete experience for families

who come to shop there. Another positive for Bata will be that the customers, who are more aware now, usually do not associate quality and reliability with Chinese products, where as Bata can use its brand to fill this void. Bata should not be pursuing the very high quality and premium products under its Bata brand because of the fact that Batas image has been created over its existence of around 40 odd years and trying to just move out of its current segment of the middle and upper middle class people and trying to capture the higher end of the market overnight can be an uphill task for Bata to say the least. In order for this strategy to be executed the following decisions would need to be implemented in these three key areas.

Manufacturing
Bata can dwell on its international presence which is its competitive edge and develop a select band of ABUs in Pakistan by importing its best practices from abroad to be able to handle the manufacturing requirements for slightly trendier lines with lesser volumes. It can also utilize its regional expertise e.g. in Malaysia for rubber based shoes and in China for artificial leather shoes and use their expertise and economies of scale to be able to meet the needs of the product lines for which they had some sort of a cost disadvantage and those which are targeting the middle and upper middle class consumers.

Distribution
In terms of distribution Bata should lay emphasis on the company owned stores and maybe the K- scheme stores because these are the stores in the retail channel where they can have the most impact by bringing up systems and providing training to the staff present at these stores. Since their access based positioning is to their advantage they can also get maximum out of the franchises by raising their stakes and maybe institutionalizing practices such as having the inventory owned by the franchisees, to make them push the sales of their products whilst making sure that staff present at the franchises is also trained. This will enable Bata to provide a consistent experience to its target customers at all the outlets and enable it to leverage its brand equity. With regards to the wholesale channel, they can conveniently move out of that and stop having their footwear at the independent shops, because having that can dent their chances of maintaining a proper image for their brand.

Brands
Considering the fact that the Bata brand has traditionally been targeting the middle class customers, it would be appropriate for Bata to use its Bata brand name only with its traditional product offerings. It would be better advised to move out of the fashion footwear for women, as again prospective buyers in