Case On Tata Steel

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When Crisis Led To Employee Wellbeing: The Story Of Tata Steel

Key learning from Tata Steel’s decade-long strategy to reduce its excess manpower
is that solutions to such crises come at huge institutional costs. Such outcomes may
not emerge with a focus on short-term financial benefits.

17August, 2020
by Dr. Shashank Shah

“If we don’t renovate the plant totally, ten years from now, you and I will be standing
outside the gates selling tickets to people to come and see the steel museum!”, Dr
Jamshed Irani, then joint managing director of Tata Steel confessed to JRD Tata,
then Chairman, Tata Sons, about the Tata Steel plant at Jamshedpur. JRD had a
hearty laugh but grasped the seriousness of the situation. It was the mid-1980s.
India was still under License Raj. The growth prospects of India Inc. were severely
restricted because of government policies. 

In its first 80 years of existence from 1907, Tata Steel grew from 1-lakh tonne to 20-
lakh (2 million) tonnes per annum (MTPA) production capacity. Of which, the journey
from 1 million to 2 million began only in 1958, which was facilitated by a ₹52-crore
World Bank loan, the largest granted to any country in Asia at that time. In a
conversation, Irani lamented that Tata Steel was held back at 2 MTPA production
and not allowed to modernize because public-sector steel plants were coming up at
Bhilai, Bokaro, Durgapur and Rourkela. In comparison, Japanese steel plants that
manufactured about 10 MTPA in 1958, had grown to 100 MTPA by 1980. Just
because Tata Steel existed from before independence, it was ‘allowed to’ survive,
with the threat of nationalisation looming large. It was in this backdrop that Irani
joked about the Tata Steel plant soon becoming a steel museum. 
While Tata Steel had the distinction of being India’s largest private sector company,
it also had the disgrace of being one of the most expensive steel producers in the
world. From a labour productivity standpoint, Tata Steel was producing 100 tonnes of
steel per man-year, compared to 1,000 tonnes per man-year by some of the efficient
producers in the USA. Leading consulting companies called it an ‘inefficient operator’
in a sunset industry. At a Harvard Business School executive education programme
in Mumbai in the early 1990s, several global CEOs suggested to Ratan Tata, who
had taken over as Chairman of Tata Sons, that the Tata Group should sell Tata Steel
and exit the industry as it may not be able to face international competition post-
liberalisation.

However, before passing the baton to Ratan Tata, JRD had got the necessary board
approvals, for a complete ₹4,000-crore modernization plan for the Tata Steel plant in
Jamshedpur in four phases running to the end of the century. Ratan Tata was
determined to build on that. He paid little attention to the ‘advice’ of consulting
companies and global CEOs and decided to transform Tata Steel from being a relic
of the 20th century to becoming a trailblazer in the 21st century. In the subsequent
two decades, this vision was achieved. Not only did Tata Steel become India’s
first Fortune 500 company, but also became the least-cost producer of steel in the
world. It won the Deming Prize (2008) and the Deming Grand Prize (2012), the acme
of a company’s achievements in Total Quality Management, and created history by
becoming the first and the only integrated steel company in the world to win this
award. While this journey in its entirety has a lot of learnings, in this article, I limit
myself to the people issues – the crisis and its culmination.

Genesis of the Crisis


In its journey to becoming a world-class organisation, rightsizing the labour force was
a vital element. After taking over as Chairman, Ratan Tata enquired about the
workforce size. It took a few months before the number 80,000 emerged. In the
1960s and 70s, labour was cheap and to placate the powers that be, the company
willingly gave jobs. This was the primary reason for the massive labour force at Tata
Steel. Till wages were low, that wasn’t a problem. However, in early-1980s, the wage
bill increased to ₹200 crores. JRD exploded.  

Wage agreements were linked to the public sector. With Tata Steel and SAIL being
the only two players, the wages decided during the joint meetings had to be given.
The colliery wages were governed by the coal wage board, which was again
nationalized. There was little control on deciding the wages. Moreover, as part of the
Tata culture, the company gave more than what was recommended. Furthermore,
there were redundancies galore. For example, Tata Steel had some 3,000
secretaries and office boys. All these contributed to the rising wage bill. Given that
the quantum of wages was non-negotiable, the workforce size had to be reduced to
manage costs. 

There was also a tradition at Tata Steel, once written into the agreement with the
union that every retiring worker (having completed 25 years of service) could
nominate a person (son or daughter) to take his job. It wasn’t just lifetime
employment; it was inter-generational employment! The Tata culture of not
retrenching people and its agreements with the union limited any option of laying-off
workers en masse. The socio-economic consequences of such a decision would
also be immense as there weren’t many employment opportunities in Jamshedpur
outside Tata plants. Therefore, persuading its workforce to voluntarily separate was
the only option. But why would anyone give up such a stable job at Tata Steel? The
separation option had to be even more attractive than the job! That’s what the top
HR team designed.
Candid Conversations with Employees
Irani personally addressed several meetings to share his concerns about the dire
situation. He recalled one such meeting at the plant. “After I explained my plan, one
of the workers stood up and shouted, ‘We understand why you are doing it and how
the company is gaining. But you are taking away the jobs of my children!’
Immediately, on an inspired moment, I shot back, ‘Look, if you don’t do it, your job
and my job is at stake. So, forget your children, think about yourself.’ That was the
turning point.” At another meeting, he drew a parallel with the recently installed ICU
equipment in the Tata Main Hospital. “Our company is in an ICU. You can get out of
an ICU in two ways. One is to take bitter medicine and undergo a painful surgery
with the hope that one day you would be able to walk out on your own. The other
way is not to do anything and leave it to God’s will. In that case, there is a possibility
that you will go out horizontally straight to the burning ghat. Which way do you
prefer?” The narrative was clear. The management was honest. In his presentations
with union leaders, Irani shared details about the cost, sales, profits/losses, expense
per employee, and potential expenses with the rising wage bill. He also presented
facts about competition and international benchmarks vis-à-vis the company’s
performance. The workers understood the enormity of the situation. He asked for
suggestions on possible alternatives. The workers had none. 

The Smart Separation Scheme


The solution that Tata Steel proposed to tide over the situation was the Early
Separation Scheme (ESS). According to ESS, the entire workforce was divided into
three groups. For those above 55 years, they would get their existing salary until the
retirement age of 61 years. Those below 55 and above 45 years, would get 1.2-1.5
times their salary until retirement. Those below 45 years, would get 1.5 times their
salary until retirement. If they died before the notional date of retirement, their
families would continue to receive full payment until the retirement date. As for
medical services, those who continued to live in Jamshedpur, the company would
continue to provide free medical services for them and their dependent family
members. For those leaving Jamshedpur, the company would provide free medical
insurance. Also, those accepting the severance package had to vacate company
accommodation. However, they were given three years’ time to find alternative
housing. After accepting the package, the worker could even take another job and
benefit from dual sources of income. 

The entire scheme was designed by the personnel department headed by SN


Pandey. The management’s role was limited to outlining the retrenchment policy and
giving approvals. RBB Singh, then deputy president of the Tata Workers Union
called it the best scheme in the country. The scheme was so attractive, that exits had
to be curtailed. The leadership wanted high performing candidates to remain, so they
decided who would leave and who would stay. Commenting on the lavish package,
some of Irani’s industry peers told him, ‘Jamshed, you either have too much money
or too little brain, that you have offered such a scheme!’ However, chairman Ratan
Tata firmly stood behind the initiative despite short-term risks.

Given the massive pay-out the package entailed for the company for long years, one
would wonder the quantum of money it saved. The key saving was through the
constant amount of salary paid to employees until retirement, instead of increasing
salaries based on inflation and market parameters. Added to this, the savings on
payroll taxes, contribution to pension and provident fund, savings on housing and
free facilities given to employees significantly contributed to cost-cutting.  

Throughout this decade-long exercise, Irani participated in quarterly meetings where


he addressed groups of 300-400 union representatives. They would often enquire
about the final target. Had he revealed that from 80,000, the company wanted to
reach half the number; there would have been an uproar! So, he would tell them that
he had not arrived at a final figure. To give him the benefit of doubt, he too did not
know the final figure. The HR team worked on department-wise annual targets. 

From Industrial Relations to Human Resources Management


A similar scheme was implemented for the 6,000 strong managerial workforces at
Tata Steel. Designed in collaboration with McKinsey & Company and Eicher
Consultants, this initiative was called the Performance Ethic Programme (PEP). The
key objective was to transition from Industrial Relations Management to Human
Resource Management. These managers were people who had spent decades in
the company and lived as part of one large ecosystem. To mandate them to leave for
strategic reasons was unprecedented in the Tata way of business. The company
even addressed the spouses of the employees to convince them of the imperative
behind taking such a decision. The manpower surplus was obvious. In early-1970s,
there used to be only one General Manager. By the time PEP was implemented,
there were 129 executives having the designation ‘General Manager’. Over the
years, to satisfy employees, notional promotions had been given to people doing the
same job.  

In the delayering exercise, HR processes were put in place. Key Result Areas and
360-degree reviews were introduced. The objective of reducing hierarchical layers
was to ensure quicker decision making, and speedier promotion for high-performing
candidates. Managerial competency and leadership assessment techniques were
used to identify candidates. Those getting discharged were provided professional
help with their biodata and finding jobs elsewhere. The 18-month long exercise led to
a reduction of 1,000 managers.

Workers’ Reactions
The scheme was a mega-success. By 2006, Tata Steel’s labour force had reduced
to 38,000. In just over a decade, over 40,000 workers had left happily. Of these,
10,000 were through normal attrition, retirement, and death. About 30,000 workers
accepted the scheme. It was an unheard-of initiative where thousands of employees
left the company every year, without any protests or loss of production. Instead, on
their last day, the workers would celebrate with a grand feast. 

Highlighting the success of the scheme, Irani observed, “It was not that the union
was a pet union of the management. They didn’t agree to everything we wanted. But
in this, they were with us because they could see that we were careful in selecting
the first few workers for the package. If you are successful with the first 500 or 1,000,
they spread the word. Word of mouth is far better than writing essays on the benefits
of the scheme.”

Global Recognition
In an era when mass lay-offs were commonplace in developed economies, Tata
Steel’s bold decision to engage with workers and devise an amicable approach to
downsize 40,000 workers was adjudged as one of the greatest business decisions of
all time in a special compilation by Forbes in 2012. It was considered at par with
landmark decisions taken by iconic companies like Apple, Ford, and Johnson &
Johnson. 

Key Learnings
Tata Steel’s decision not only made it globally competitive but also created
enormous goodwill as a fair corporation. In 2004, when the Tata Workers’ Union and
Management celebrated the historic occasion of 75 years of industrial harmony,
President APJ Abdul Kalam presided over the event that honoured a relationship
built firmly on cooperation and coordination.

Key learning from Tata Steel’s decade-long strategy to reduce its excess manpower
is that solutions to such crises come at huge institutional costs. Such outcomes may
not emerge with a focus on short-term financial benefits. However, they have the
power to redefine industrial practices in the long-term. To achieve this end,
leadership must be willing to sacrifice, engage with core stakeholders, and
collaboratively devise solutions in the larger interest.

Disclaimer: The views expressed in the article above are those of the authors' and
do not necessarily represent or reflect the views of this publishing house. Unless
otherwise noted, the author is writing in his/her personal capacity. They are not
intended and should not be thought to represent official ideas, attitudes, or policies
of any agency or institution.
Author: Dr. Shashank Shah

Dr. Shashank Shah has been Visiting Scholar, Harvard Business School and
Copenhagen Business School; and a Fellow and Project Director at the Harvard
University South Asia Institute. Between 2013 and 2018, he authored three books
‘Soulful Corporations’, ‘Win-Win Corporations’, and ‘The Tata Group’.

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