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When People Management is not a Prime Responsibility,

Business Downfall is Inevitable

The Danger of Measuring Managers by Cost Reduction

Dr. Shridhar Lolla

CVMark Consulting

Early Draft , Needs Editing

Mar 2011,
Bangalore, INDIA

(This caselet belongs to ‘respecting the business’ series of CVMark. It is based on real
life experience at TaroFoods- a health food firm; and several other companies )

Key words: people management, cost cutting, layoff, human resource management, focused execution,
entrepreneur, entrepreneurship, investment, funding, business rules, business fundamentals, built to last,
capacity building, entrepreneurial behavior, first generation entrepreneur, value system, culture, focusing

Definition: Prime Rule (n)= Non negotiable rules

Prime Rule #020:

20.1 A Business is built to create value (revenue); it is not built to save cost.
20.2 Providing a secured future for people now as well as in future is the prime
responsibility of any business.

This is a sequel to following caselets:

0. The Saga of Startups

1. When sales Staff quit, Clients switch over
2. Sales is the prime responsibility of entrepreneurs
3. Not Succumbing to Pricing Pressure
4. Entrepreneur Agrees to do Sales
5.Temptation of taking large orders
6.Pitching Business Idea within 3 minutes
7. Startup Carnival
8. Taking Funds NOW or LATER
9. Not Succumbing to the temptation of every opportunity


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Description of the Situation

The flagship plant of a large company contributes to around Rs 2000 Crore to the top line
and Rs 500 Crore to its Operating Profit. Controlling cost has always been one of the
strategy of Management in order to ensure good profit.

In due course of the time leaders of the organizations became aggressive and expanded
capacity of the plant. As a result operations of the plant became complex, and managing
people became one of the key challenges for the management. It hired a high end HR
consultant to get a direction to meet this challenge. This was the early days, when the
business world was abuzz with the concepts of core strength and core activities. The

Consultants applied this concept to gradually out source the non core activities, and much
of the people related activities were identified as non core activities.

That was the time when the management took decision to out source a significant part of
the non core activities to third party vendors. Historically till then, all work within the
plant was done by its permanent staff. The work that was out sourced contributed a
significant part of the workflow of the plant, where hygiene and safety were expected to
be of highest standards and non negotiable. These staff were, therefore adequately trained
in classrooms and in the plant, by the managers. Bringing the outsourced staff to speed
was not trivial. Never the less, the organization did shift responsibility of ‘people
management’ to the vendor and of course, it apparently saved some cost. The rule of out
sourcing, therefore, became a norm across all functions. With time the demand for
outsourced staff only increased, and became almost 70% of total staff strength in the
plant. Supplying such a large number of bodies to the plant on regular basis became a
lucrative business for the third party vendors, as well.

As business is never static, difficulties in managing operations while facing the ever
tougher competition, led to ever high focus on cost reduction. The Management realized
this, and understood that over 1000 temporary staff work in this plant. From management
effort point of view, this group of staff became its prime target to reduce cost. The
pressure to maintain profit and the pressure to cut cost was so high that, the management
took a decision to cut down the temp staff by 50%. Their estimate had showed that for the
current level of business, they had over staffed themselves. It amounted to a saving of
over Rs 3 Crore, that in comparison to any other cost control measure was substantial.
And the permanent staff were persuaded to stretch themselves to take care of any
reasonable shortfall. The permanent staff grudgingly succumbed to the pressure of the
management. They would often stretch themselves beyond schedule shift timings, just to
save their jobs.

Contrary to the management perception, the industry was growing at over 15%, that was
significantly high compared to historical average. This led several other players to get
into the business and create competition in several fronts. As the time passed, several
other plants mushroomed around, and the vendors business of supplying temp staff
became much more lucrative. The growing demand meant that other companies started

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tapping into the resource pool of the plant. As the vendor started obliging other
organizations, availability of bodies to the plant started suffering. The competitors started
paying more to the bodies and obviously the vendor’s interest (that was on labor
arbitration) was inclined towards competitors. The plant started experiencing a shortage
of temp staff in the range of 15-20%.

As the summer approached, the shortage of outsourced staff on day to day basis started
increasing. With already the temp staff at its skeletal minimum and its permanent staff
over stretching themselves, the regular variation in the availability of outsourced staff led
to stoppages and delay of critical machines, once a while. It became clear that this
variability was affecting its productivity. There were days when the productivity of its
critical machines were affected as much as 25%. Within months, it became clear that not
all is well with the plant’s productivity. The trend projected that this would lead into at
least 25 such low productive days in a year.

What is the effect of Management Decision?

Here is the analysis of the decision to cut the out sourcing staff on the financials of the
Rs Crore Rs Crore Rs Crore
Revenue 2000 Yearly salary of os staff 7.2 Per day revenue, RsCr 6.7

Truly VariableCost 500 50% reduction in staff salary 3.6 Productivity loss on certain days 30%
Revenue loss per low proctvty day 2.00
OE 1000 Expected increase in Profit 3.6 # low productive days per year 25
Yearly loss of revenue 50
Operating Profit 500 Expected Operating Profit 503.6 Expected operating profit 450

# outsourced staff 1000
Truly Variable Cost= cost of material, sales commission, transportation cost
30% loss in productivity on leveraged resources due to non availability of outsourced staff

The management had thought that by reducing out sourced staff by 50% , it will save Rs
3.6 Crore and make significant contribution to the company’s bottom line. The end effect
was actually in the opposite direction. The plant lost much more than Rs 50 Crore, that is
more than 15 times deviation on the negative side. Also, the vendors lost faith in the
company and the relationship soured to the level that the outsourced staff did not have
good feeling about working for the company.

What is the core problem?

Every company in the world vouch for its people. They will defend their ‘quoted’
philosophy that people are heart of their organization. However, not many actually
recognize importance of people in the organization. Which means that what most of the
organizations (and their management) say and widely publish, do not act in reality.
If only, organizations recognize importance of people, can they respect the notion that
people are integral to their business. They will also recognize that people are real integral

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assets and in order to manage this asset, managers across functions need to have ‘people
management’ as their necessary skills.

By outsourcing work that was a large and essential part of the workflow, the plant had
actually cut down a major part of the responsibility of the managers and the general level
of people management skill fell down badly. (Sounds familiar with most of the service
organizations !)

The problem was that managers felt that they have difficulty in managing people; which
meant that the management had reached a stage, where its skill to manage people as per
the demand of the business became out dated and it needed to update its skills. However,
it did not take the natural course of meeting the challenge head-on by solving the problem
by upgrading its skills and policies.

Firstly management did not recognize their role in soling the problem, probably because
they did not think that people are their key assets and ‘people skill’ is a key skill of
management. Without recognizing that managers need to update their skills on an
ongoing basis to meet new challenge of a growing organization, the organization failed to
recognize the need of the business.

Secondly, the goal of a business is to make money and not to save money (cost). The
management some where failed to recognize this basic aspect. Hence the company by
placing an excessive attention on cost, made its strategy sound like ‘saving’ cost is the
prime responsibility of the managers and that the bottom line dependent on cost cutting
than increasing Revenue.

Non recognition of the above two aspects led to management decision to outsource
resources as well as cut down staff, just because they failed in their main responsibility
which is to grow the company (increase revenue).

What is the direction to Solution

Every Business is built to achieve an objective and in order to get closer to its objective,
it must sell more things (more value). That is, the company must grow its revenue on an
on going basis and this growth must be faster than increase in its cost. People missed the
point. Whether it is stable or unstable or highly competitive market, revenue generation is
the prime responsibility or management and their energies must first be focused on this.
And to generate revenues by creating and delivering values, people are the prime agents.
By targeting cost cutting, although it seemed to justify some one’s job, the management
only took the company backward.

Good businesses, even in the worst time increase their effort in creating more value and
in upgrading their people’s skills. They know that in order to increase bottom line
significantly , you do not need to shake the company, rather a small increase in revenue
is enough. And it is always possible to be ‘cost effective’ by means other than cutting

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people’s jobs. Check the following, the amount of benefit a 10% increase in sales does to
the bottom line of the company.
A 10% increase in sales is a ‘business as usual’( BAU) growth for most of the companies.
A 10% increase in sales does not, therefore, normally require any increase in major
investment or operating expenses. Of course, a proportionate increase in truly variable
cost does take place.

Have a look at the table below; because of the above practical logic, a majority of
revenue earned from the increased sales passes on to the profit. Hence the profit,
increases by 18%, by almost Rs. 90 Crore, while the business as usual is carried out.
Rs Crore Rs Crore Sales up by 10% from
Revenue 2000 Revenue 2200 Rs 2000 Crore to Rs
2200 Crore.
Truly VariableCost 500 Truly VariableCost 605 Operating profit up by
18% up from Rs 500
OE 1000 OE 1005 Crore to Rs 595 Crore.

Operating Profit 500 Operating Profit 590

What does it tell. Increasing sales even at business as usual pace has significant power to
keep the business and its stakeholders growing on an ongoing basis (Any doubt, why
sales people are the highest paid folks in an organization !). However, this most important
lever is often overlooked by managers. Succumbing to myopic tendency, managers shift
their focus on Expenses and Cost, that have by far the limited impact on company’s
performance; but has a devastating impact on its sustainability.

Way ahead !

So the direction of solution is clear. Focus in value creation and delivery. And protection
of the resources (primarily people) that create and deliver value is a key responsibility of

But right now, the company is in real danger. It had been training the temp staff, but
competitors were snatching them away. Further, the temp staff and its own staff were
loosing the enthusiasm and desire to work for the company. The variability in the
reported temp staff was fluctuating wildly.

The company reverted its decision on cost focus, increased the salary for temp staff and
went to the market to get sufficient staff backup. But no one was biting the bullet. The
pull from competitors was very strong. The few staff, who were being supplied by the
vendor were awfully poor in their skill sets to add any substantial value in near term.
So what do you do when you are in such a situation. The temp employee market was
actually looking like a spot market, where the HR team on daily basis liaisons with the
vendors about the number of bodies required, negotiates terms and passes onto the plant.
No doubt, the vendor was on cloud 7.

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The situation is like this: The wages of the temp staff was low. The skill set required was
not deep but the absence was sufficient to cause disruption to business. There was no
long term agreement with vendors since the company was not sure of the number of
bodies as it was on a cost reduction drive. The so, vendor was reluctant to guarantee a
degree of availability. Restoring confidence of Vendor was not easy.

When the team interacted with the Vendors, unpleasant issues surfaced up. The vendor’s
staff did not want to go to this plant because they felt that they were being treated as labor
coolies. They said that the facilities given to them was inferior in nature, compared to the
generally acceptable levels and what is given to their permanent staff of the same rank.
There was discrimination of ‘them and us’ type. They also raised safety concerns. Of
course they wanted a reasonable level of stability in their work and did not want to be
plugged and played like a mechanical device.

The company had to relook into its policies. It conversed with the vendor and restored the
confidence that they were for a win win situation. They also gave assurance that they
would not take knee jerk decisions, and protect interest of the vendor on the long term. In
order to assure this, the company informed the vendor about the improved type of
facilities and working environment they would provide to the temp staff. These also
included the transportation, uniform, canteen and rest room facilities. They committed to
the enhanced safety environment. The team went ahead to contribute to the corpus of
vendors to secure education and health insurance of the staff. The company assured the
vendors that there is no difference in the behavior and personal engagement with its own
and the vendor staff; and that it considers vendor staff as human and individual as their

The commitment from the organization was a turn around commitment that very few
organizations could think of. This was in reality meant placing the ‘vendor as partner’
concept into action. The company had at the end realized that the temp staff although
may not be in its direct roll, it has a responsibility towards the local society for it exists
there. Its shareholders wholeheartedly approved the approach of integrating local
responsibilities into organizational culture, although it meant significant expenses.

Three months down the line, the plant was back on roll. The non availability of temp staff
reduced to zero. The vendor always maintained surplus staff. The productivity of the
plant had improved significantly. The temp and permanent employees had increased trust
and the vendor bent backward to see that the plant productivity did not suffer due to
scarcity of staff. The competitors did try to lure the vendor, but the vendor created an
absolute wall of confidentiality and committed not to succumb to the temptation of
passing one customer’s resource to another.

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Too often, we see too many cases of people layoff. This is painful and is degenerating
into a dangerous practice across industries. And every one knows that the people who are
laid off, are seldom responsible for the problems that force companies to take such
drastic measures. Check the news columns for the names of companies who resort to this
tactics and you would be surprised. You would find that most of these companies would
have won awards for best places to work and their HR practices would have got
international awards for most caring organization and best people centric policies.
Why is that organizations claim ‘employees’ as their key assets and ‘employee first’ as
their belief; but succumb to the tactics of knee jerky lay-offs.

This clearly shows that what management ‘speaks’ and what it ‘does’ are different and
probably, it is under severe conflict.

A necessary condition for an organization to build an ever flourishing company, is that it

secures the jobs of its employees, now as well as in future. If it can not, then, the
management is not capable of taking the business towards its goal.

For it to secure jobs of its employees and it to invest in their future, it is important that the
organization does not see employees as its cost but necessary ingredients for today’s and
tomorrow’s success. This can only happen if the revenue (value addition) of the company
grows much faster than its operating expenses. And this will happen only if management
is predominantly focused on creating value addition and in ever improving its value
proposition to its clients, than on cost reduction.

There are two reasons why management succumbs to lay offs.

0. Management forecasts its revenue based on projections that are long term enough to be
accurate. It derives all its actions and resource mobilization on these forecasts.
1. It builds resources including manpower based on these unreliable forecast ( do not we
hear that organizations have increased recruitment by 1000s)
2. In reality, the revenue falls below commitment made to stake holders.
3. Managers blame low revenue to market conditions.
4. But since they need to keep their job and stakeholders happy, they look for the next best
5. Cutting down employee cost is the easiest and quick approach to ensure profit, in most of
the geographies

People resist, government intervenes, media cries; but managers and stakeholders sail
ahead happily. Unfortunately, stock markets reward such moves. Market conditions
improve sand the cycle of recruitment begins.

So why are the managers hired? To do good when market is up and to cut cost when the
market goes down. Is there any effect of this on employees and long term prospects of

Copyright © 2010, CVMark Consulting, All rights reserved. 7

One of the shining stars of Nasdaq, has been ranking very high on best places to work
year on year. The promoters of the company had built a culture that forced employees to
spend 24 hrs on work if it requires. When the melt down began, the company that was too
arrogant to sense the storm. But soon its management started seeing the prospects of
reduced revenues. It started a layoff drive.

When the issue was raised by media and it became evident that there is public outcry, the
organizations resorted to stupid mechanics. It declared laid off employees as voluntary
resignations. It started cutting salary of its employees for every 30 minute delay in
coming to office. Employees (who are officer and managerial staff) were forced to work
10 hrs. Any body leaving on scheduled time were seen were sneered at. Employees
sensed that the big brother is watching. Last quarter saw a huge attrition. Actually, the
most preferred company of India, lost more employees than those joined. Management
sensed the alarm and sacked the top management and is now approaching and doing
lateral recruitment at the middle levels across the industry to rebuild its HR culture.

When an article on the company about its rethinking of HR policies appeared in the
online version of one of the repute financial magazines, employees of the company
commented on this as follows:
The company has only one objective - How can rich (the names of promoter) become more rich (by few millions of dollars) and everyone else (3-8 yrs experience
and others) get rich (exaggerating here) by few pennies.

The main problem with the companies today is, they are very aggressive, when needed they want to pay like anything, and when they do not need want to lay Off.....
They will be paying more in searching and getting same talent. All the companies now need to plan better now.. to get back their employees.

HR guys and heads of dept are very aggressive in policies, these guys forced employees leave in the name of performance(comparative rating) during recession time
even though employees did their job and client paid the billing for the employees, but at the same time general managers and above people got rewarded for all the
bad tricks they did.

HR in most companies in India have failed to create policies/practices that attract and retain top talent. . In many companies there is a unholy nexus between
recruitment consultants and HR, to on board their candidates for a percentage cut of their search fees. So they tune internal HR rewards policies to frustrate best
performers so that they get fed up and leave, to generate attrition and back fill from external consultants. . In many organizations, HR teams are too much aligned
with top management that they act as their puppets and fail to drive good employee practices. . In many organizations they drive useless HR initiatives that either do
not deliver anything or only make matters worse. . In other words, HR teams in India are working similar to the corrupt guys elsewhere. Good companies will suffer
unless the bad guys from HR are cleansed out & punished.

The issue with our company (and other big similar companies) is that they grew too big too fast thereby not able to put right frameworks or people practices in place.
They tried to circumvent it by borrowing practices from some standards. Another issue is that many folks who had no managerial or leadership talent got promoted to
the manager post only because the firm hired 10000 freshers per year. Unfortunately, many of the managers/team leads don't have the necessary background (no fault
of theirs) in terms of appropriate experience or training. Many folks who really are interested in doing great technical work were being pushed into being managers
because that was the only way to move up the ladder. This is not just our company problem but a pan-India industry problem and what our company is proposing is a
knee-jerk reaction. The HR folks in our industry need to think the problem through and then take appropriate measures.

As on date there are more than 40 comments on the outrage of employees against the HR policies of this reputed company.

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CVMark Consulting is an independent business-innovation research agency based in Bangalore, INDIA.
It handholds entrepreneurs and promoters in road testing their business ideas and in delivering
breakthrough performance.

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This caselet captures description and direction of solution to generic problem faced by business owners. It
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Factual material contained herein is obtained from sources believed to be reliable, but the publisher is not
responsible for any errors or omissions contained herein. Opinions are those of CVMark and are based on
research conducted for this report. CVMark holds no responsibility for decisions made on the basis of
content of this report.

CVMark Consulting
Bangalore, INDIA


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They get their business idea road tested by CVMark.

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