Tata Steel's Journey Part 2 – Setting HR standards and Acquisition Hiccups

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Hope you liked reading Part 1 of the Tata Steel’s Journey. Today, let’s see how Tata Steel faced the tumultuous pressure posed by their rising costs and their workforce.

Early Separation Scheme (ESS) – A Game changer

TSL proposed a brilliant Early Separation Scheme (ESS) to manage the wage situation. Under this scheme, the entire workforce was divided into three segments. For age group greater than 55 years, they would continue to get their existing salary until the company retirement age of 61 years. Those between 45 and 55, would get 1.2x to 1.5x their salary until retirement. The rest (less than 45) would get 1.5x their wages until retirement. If they passed away before retirement, their families would continue to receive full payment until the retirement date. Also, free medical services to people and families living in Jamshedpur and free medical insurance for people living outside Jamshedpur.

Singh, then deputy president of the union called it the best workforce scheme in India. The management aimed at retaining high performing people. Industry peers were shocked at this and joked around that either TSL has too much money or too little brain. However, as usual, Ratan Tata was not at all bothered.

One would think how this process was helpful, considering the massive pay-outs for good number of years. The key savings for TSL was not caring about the constant increase in salaries due to inflation and market parameters, instead focussing on only the fixed salaries to be given till retirement. Over and above the savings in PF, payroll duties and free housing facilities contributed towards a long-term cost optimization.

This was a decade long exercise and target was to bring down the number to 40k from 80k.However, the management made sure that this figure was never disclosed as it might cause an uproar in the labour unions at that time.

• From Industrial Relations to Human Resources ManagementSimilar scheme was setup for the 6000 managerial level employees. Consultants were hired to start an initiative which was called Performance Ethic Programme (PEP) with an objective to transform from Industrial Relations to Human Resource Management practices. Key Result Areas (KRAs) were introduced along with 360-degree review process. Managerial and leadership assessment techniques were implemented to identify employees for speedy promotions. Those getting relieved were provided professional help with their CVs and finding jobs elsewhere in the industry. The 1.5 years long process resulted in reduction of 1,000 managers.

• Workers’ Reactions

ESS scheme was a revolutionary step in TSL’s journey. By 2006, the labour force had come down to 38,000. In just a decade, over 40k workers had left and that too happily. Of these, 10k were through attrition or retirement, and death. The rest of the workers accepted the scheme. It was unheard-of in the corporate world where workforce left the company year after year, without any uproar or fall in production. The workers used to celebrate their last day the company through a feast.

• Global Recognition & Key Takeaways

This was considered as one of the iconic decisions by any company to downsize its workforce and had featured in the Forbes in 2012. This stood out at par with landmark initiates taken by iconic companies like Apple, Ford, etc.

Apart from the curtailment in workforce, this step brought this company a lot of international goodwill. These practices do come at a short-term financial costs but do serve as strong case studies for many companies to emulate. In order to take such moves, leadership should be strong and should not fear about the opinions of other corporate leaders.

 Tata Steel’s Acquisitions Spree

Tata Steel Corus Acquisition – Failure or Success: The constant UK love of Tatas

In 2007, when TSL acquired Corus, things looked good on paper. In the first year, Corus made a billion pounds of EBITDA. What followed in 2008 was something no one imagined (The Global Financial Crisis). The European markets took a very long time to stabilize & recover.  

When TSL acquired Corus, it was 18 MTPAa facility. That was brought down to 11 MTPA through sale of struggling assets and restructuring.

What went wrong?

At the time of acquisition, TSL in India was 4 MTPA and Corus was 18 MTPA. So, it was always an uphill task for TSL to take care of an enormous 18 MTPA operation which was spiralling downwards.

Lessons Learnt the Hard way – Aspirational Mistake?

• Timing is crucial: In the early 2000s, the team at TSL had combed through a number of potential M&A deals from the US, Europe, and Asia. Corus was at that time a penny stock and available for 10% of the value that Tata Steel eventually signed up for. Unfortunately, this was the management transition period from JJ Irani to B Muthuraman, leaving a gap in  consensus building for TSL’s globalisation strategy. In 2006, LN Mittal bought Arcelor, that spurted the Tata’s; however, by then, the commodity cycle was at its all-time high, and commodity asset prices had skyrocketed.
• Finding the Red Flags: Tata Steel was caught up in a bidding war with CSN even after signing a negotiated deal with the Corus management. The Corus guys were forced to take the latest higher offer to their board members, and the Corus board decided a bidding auction. That should have been considered as a red flag for the Tatas. Bidding auction is prompt, and the effects are usually seen later on because it becomes a prestige issue at the negotiation table. TSL eventually closed the deal at 30% more than the original negotiated purchase price.
• Cash is king: Doing an all-cash deal leveraged by debt was a huge mistake. A part equity deal would have helped them financially. Over and above, allowing the Corus management team to exercise their stock options led to loss of interest in the business.

• Changing power equation: Since decades, the cost economics of the steel industry was such that the cost of making steel accounted for 70% of the total costs, and the cost of raw materials the balance 30%. But during the bull run, that began to change in the global commodity market—and the equation completely reversed, with raw materials contributing for more than 70% of total costs and 30% for the cost of steel making. Steel stalwarts were not happy  about this and were not accepting that miners had the upper hand. Sadly, the steel giants could not anticipate this changed industry dynamics.
• Goodwill vs Good-Will: After taking over, the Tatas relied too much on the incumbent group CEO Philippe Varin and his core team to independently run operations for the first couple of years, knowing that they had exercised their vested stock options. This helped Tatas to score highly on goodwill, however, due to loss of interest in the business the true price of this step showed up a decade later, when losses in UK  exceeded a million pounds per day. Tatas had to sell part of its assets at meagre values, with all the debt still on its books.
• Exit or cut your losses: By 2012, UK steel assets were spiralling out of control, and it required decisive action. Yet the group was restraining its management from taking hard decisions and actually confronting the working unions. The rationale was that Tatas had many other business interests (JLR) in Europe and any hard move would have repercussions on its other businesses.

Some also argue that it was Cyrus Mistry (during the management transition) who highlighted these concerns in a broader way. The Corus acquisition was one of the biggest legacies of the Ratan Tata era. In the end, as JJ Irani pointed, Corus as an Aspirational Mistake.

In part 3 of this case study, we dive deeper into Digital Initiatives at Tata Steel facilities and will also see how the new CEO is steering TSL for the next leg of its growth – especially with the acquisition of stressed steel plants. Do Check Part 3

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