In bad times, keep your flock together

The Indian economy is facing serious headwinds, with the Finance Minister acknowledging that the economy is challenged due to global and domestic factors.

The rupee has lost more than 13 per cent in a quarter and the investors in stock markets are poorer by 25 per cent in dollar terms. The GDP growth of 4-5 per cent is almost half of what the country has enjoyed during the recent boom period.

That jobs become scarce when the economy is down is obvious. The current situation can be compared with the post-Lehman phase of 2008.

Organisations have already commenced job cuts. Earlier this month, the education solutions provider Educomp announced 3,500 job cuts as part of a cost optimisation programme. TV18 Broadcast, a media major, reduced staff strength by nearly 30 per cent.

Auto sector sales are down by 13 per cent compared with the same period last year, which has resulted in adjustment in staffing levels. There are reports of layoffs in sectors such as auto ancillary, hospitality and investment banking, among others.

Unorganised sector

When gripped by economic crisis, it is only natural to compare the slowdown with previous slumps, particularly the last. The 2008 GFC (Global financial crisis) almost threatened the capitalist structure of the global economy. Giants such as Lehman Brothers and Bear Stearns collapsed and many other reputed organisations needed bailouts.

Eventually, the financial crisis hit the Indian shores and the results were devastating. Nearly 5,00,000 Indian employees lost their jobs in the 2008 downturn. And this count is of people in the organised sector.

One of the oddities of the Indian labour market is that 90 per cent of the participants are in the informal or unorganised sector, where reliable statistics is hard to obtain. Given this context, the actual number of job losses was likely to be much higher.

The 2013 scenario is different. The US economy is steadily gaining strength. There are reports of a large part of Europe emerging out of prolonged recession.

During the last global recession, the Emerging Markets (EM) were seen as saviours, whereas this time around the EMs are struggling. The strong performance of western economies may result in higher consumer confidence, which will aid export-oriented Indian companies. Rupee depreciation will also benefit exporters in general, and the software industry in particular. Indian IT companies depend hugely on Western markets.

These factors are likely to split the Indian labour market into two disparate parts. One section of the labour market will flourish, whereas the other will face significant challenges.

Given the turbulence in the Indian financial markets, the debt burden in the infrastructure sectors and the free fall of rupee, many sectors will suffer stress due to squeeze in profit margins.

Belt-tightening translates into job reduction. This is because personnel expenses is one of the large cost components for industries; for services companies, it is the single largest component, sometimes amounting to 35-40 per cent of the overall cost.

Where the axe falls

Companies under financial pressure normally take a graded approach to cost management.

The first to be struck off the list are office parties, picnics, and such employee welfare activities. As the next move, CFOs and financial controllers shift their attention to travel expenses. This begins with an embargo on business class travel and eventually leads to a total freeze on air travel. Along with this, the training calendar is paused, as in times of crisis, training tends to take a back seat.

There may be tight control on new hiring or even total halt on fresh recruitment. Organisations will analyse the cost savings on all the above mentioned initiatives. If they are inadequate, tougher measures such as wage freeze, layoffs of first wave temporary/casual labour and eventually the core staff are undertaken.

Layoffs have a long-term impact on the image of the company and employee morale. In organisations which have witnessed multiple rounds of layoffs, employees live in perennial anxiety fearing the worst.

Layoffs are painful, both for employees who have lost their jobs and for the ‘surviving’ employees. There are well-documented studies on employees who have managed to keep their jobs suffering from “survivor’s guilt”. This makes them unproductive, which again results in attrition.

Organisations use varied approaches to the layoff process. Many adopt LIFO- Last In First Out, which essentially means the axe falls on the newest recruits. There are also instances of companies following FIFO- First In First Out.

The rationale here is — the more senior the employee, the more handsome the cost saving. The downside of this approach is a huge loss of experience and institutional knowledge.

The Indian economy and the workforce were insulated against downturns for a long time; things started changing only in the last two decades. Still, mass layoffs are a relatively new phenomenon in the Indian context.

ATTITUDE TOWARDS staff

There is a social stigma attached to losing a job and this is complicated by the absence of a social security net, which is available for workers in the developed world. Many western countries provide strong safety net both in terms of unemployment benefits and training assistance to equip people to find a new job.

Benefits from the government are unfortunately not available to Indian workers. Some organisations provide two-three months’ salary as compensation and the more generous ones provide six-nine months of salary. These measures provide a financial cushion.

Rare are the organisations which approach layoffs in a humane fashion by offering not only financial support but also counselling and career transition assistance. Few companies have made a conscious effort to take on outplacement as a responsibility. In a globalised economy, business cycles are inevitable. Many organisations as listed entities are accountable to their shareholders, who will vote with their feet if the next quarter results are not impressive. The management is under constant pressure to keep costs under control.

Layoffs have a huge human cost and should be used only as the last resort, after exhausting all available options. There are appreciable examples of enlightened senior management teams taking significant voluntary salary cuts, which to some extent delayed or even prevented layoffs. Grateful employees reciprocated these gestures with commitment and loyalty.

Dealing with an economic crisis, thus, calls for a collaborative effort, so that minimum harm is done to the morale and life of the employee.

(The author is former CEO, Randstad)

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