"Oh no! Not another bloody change in our appraisal system. Why the hell do these ruddy HRD fellows keep trying out one damnfool technique after another on my people? And that too, to decide promotions and increments which, in any case, are going to be a sticky issue this year because of our falling profit-margins? Didn't we introduce that 360-Degree Appraisal System just last year after reading about it in some stupid management magazine? Why don't we go back to an old-fashioned slab-based increment system, which I can decide myself every year? When on earth am I going to be able to hire some really good technical people for the company? Why can't somebody tell me, for a change, how I can do that?" were the irate thoughts that surged through the mind of Raj Bakshi, the 55-year-old CEO of the Rs 1,261.20-crore Umang Steel, as he rushed to chair its Management Committee Meeting that Friday morning. Cable Corporation's Kalyan Chakravarti, Alpha Assessment Centre's Ratan Singh, and Godrej-GE Appliances' V.J. Rao patiently analyse--and suggest solutions to--his real predicament. A BT Case Study.

Management Committee Meeting, Umang Steel
DATE: January 4, 1998
TIME: 4 p.m.
VENUE: Umang Bhavan, Mumbai
PRESENT: Raj Bakshi, president and managing director; Ashutosh Acharya, vice-president (marketing); Sunil Rao, vice-president (manufacturing); Ved Prakash, vice-president (finance); Prabhakar Shetty, vice-president (HRD)
AGENDA: Employee Evaluation, Performance Measurement, People Training, Potential Appraisal

Raj Bakshi: Gentlemen, I remember the last time we met, about two years ago, to discuss a similar issue. We had then decided to introduce the 360-Degree Appraisal as one of the additional elements of performance evaluation at Umang. We were among the few companies in the country, and the only steel giant, to have adopted it. But, even as the second set of results of that experiment is trickling in, several of our senior managers appear to be disillusioned by it. Even our HRD chief, Shetty, has some reservations about it. And, true to type, he has come up with a new system, which he wants to present before us.

Let me make only one comment. In the last six years, we have made three revisions in our appraisal system. Frankly, I am not comfortable with changes of that kind. For two reasons. One, it affects the credibility of HRD; consistency is important. Moreover, a new system takes time to yield results. Also, Umang is at a critical phase of its existence. As you are all aware, steel prices dipped by 15 per cent last year. Demand growth is sluggish, at 4 per cent per annum, and our expansion plans are on hold. Our net margins have fallen from 10 per cent in 1992-93 to less than 4 per cent today. I am wary of any change that generates discord in the company at this juncture. However, as it happens, a crisis compels change. We should be open to any new idea that helps us become profitable, and competitive. It is in that context that I ask Prabhakar to take the floor.

Prabhakar Shetty: Thank you, Mr Bakshi. If I may respond, you mentioned consistency. It certainly has its merits, but only up to a point. It is true that we have revised our appraisal system three times, but each was in response to a fast-changing environment. The change that I propose now is also market-driven. As you pointed out, the demand for steel has been sluggish. But once it improves--and our Rs 360-crore expansion plans get under way--we will need people to fill various slots in our organisation. Our present appraisal system helps us evaluate performance, but gives us no clue about potential. We need a system that identifies--and develops--future managers. This will help us take on the competition when Umang expands its capacity to 1.20 million tonnes per annum (TPA). Then, our manpower strength is likely to increase by 300. Apart from promoting in-house talent, we need to hire and train the right kind of people who will allow us to stay in business in a highly competitive marketplace

Bakshi: Good. The link with strategy is obvious. Go on

Shetty: Before I go on to my proposal, let me, briefly, recount the history of appraisal at Umang. Since the commissioning of our 0.30 million-tpa steel plant at Mumbai in 1975, we had assured demand for many years. Everything was predictable--including our annual increments, which were given as a standard percentage of the basic salary, ranging between 15 and 18 per cent. There were slight variations between employees in the same grade. When we doubled our capacity in 1981--and the number of our employees rose from 500 to 800--we introduced a formal appraisal system. Everyone above the supervisory cadre was evaluated on 5 traits: commitment, communication, responsibility, integrity, and intelligence. Done by the immediate superior, this evaluation became the basis for deciding the quantum of increments and promotions

Sunil Rao: That worked well. Its only limitation was the subjective factor. But that is a common complaint against any evaluation system, however sophisticated it may be

Shetty: Of course, you can discount for it. That is what the new system will do. But let me go back to what I was saying. By the early 1990s, the domestic steel market was getting competitive. Customers were more demanding, niche segments were evolving--nothing was predictable. It was imperative to go back to good old beliefs like hard work, and get everyone to perform. So, in 1992, we switched to a Pay-For-Performance Plan--3P, in short--for all categories above the supervisory level. We identified 5 or 6 Key Result Areas (KRAs) for each of our 12 categories of employees to provide a broad framework of appraisal. Individual goals were set jointly by the appraiser and the appraisee

Ved Prakash: I remember. We tried to make the goals Specific, Measurable, Achievable, Realistic, and Time-bound. Or, SMART. But it was while articulating the intangible areas that we ran into our first set of problems. There was simply no consensus there. It was tough. But I must admit that 3P did lead to a dramatic shift in the result-orientation of Umang's managers and supervisors

Shetty: That was the idea. It was in tune with the change in the external environment. And the results were soon evident. Everyone was experiencing a sense of achievement throughout the financial year even while getting closer to the targets. By March, 1995, our turnover had climbed to Rs 430 crore--up from Rs 65 crore in 1991-92

Ashutosh Acharya: I don't think HRD should take the credit for what was essentially a concerted effort at marketing. But I have no doubt that 3P did make a difference. It had its flip side, though. For instance, I found, to my amusement, that some territory managers were trying to negotiate targets that could be exceeded to tot up impressive results at the end of the year. Joint goals in KRAs were not always successful; there was, often, acrimony on both sides. Issues outside one's control--such as logistics and manufacturing--came in handy as excuses

Shetty: You're right. The drawback of 3P was the absence of a holistic approach, and a limited time-horizon. That was why we refined it to include two additional components. We retained the performance review, as before, to evaluate an individual's on-the-job performance against the smart goals that had been set jointly. And we added Self-review and Counselling. Self-review was an individual's own assessment of the contribution he could make--and the role he could play--in the company in the next five years. The purpose was to let everyone look beyond the current year. The superior was required to conduct a feedback session with the subordinate, and advise him on the areas of improvement.

Last year, we introduced a fourth dimension to 3P: the 360-Degree Appraisal. It enabled a manager to be appraised by his subordinates, peers, and other internal customers. Although our margins have taken a tumble--largely due to declining steel prices--our turnover has increased. And our operating cost of production of cold-rolled steel has come down from Rs 17,280 per tonne last year to Rs 16,000 this year, which is close to the global benchmark of $375 (Rs 15,000) per tonne. Of course, the credit goes to Marketing and Operations. But there are clearly spin-offs from HRD initiatives. However, there is still a great deal of scepticism about 3P. Managers are beginning to dislike the idea of being assessed by subordinates. I have received letters from 30 of our managers stating that they do not want to receive feedback from the 360-Degree Appraisal in future unless we allow a face-to-face encounter with those of their subordinates who provide a negative assessment. Most of them were rated high by the Performance Review, but low by the 360-Degree Appraisal. Although it seems contradictory, that is perfectly in order. However, most managers do not see the logic

Bakshi: I don't see why anyone should resent the findings of the 360-Degree Appraisal. After all, it is not the sole determinant of managerial reward. By meeting his smart goals, an employee gets a high rating of 85 per cent to 90 per cent in the final evaluation. To be honest, I am not happy with my own personal score in the 360-Degree Appraisal! But it should remain anonymous. That is the best guarantee for objectivity. In fact, a large part of 3P is subjective

Shetty: That brings me to the new system, which will certainly reduce the subjectivity in our appraisal system: the Assessment Centre.

Rao: Goodness. Isn't that the one that the Army uses? What are we running here, a command operation?

Bakshi: Just a moment. I first heard of it from some of our collaborators. They were quite enthusiastic about it...

Shetty: The Assessment Centre is both a place and a process. It is a physical centre--which could be located in a corner of our corporate headquarters or, preferably, in independent premises--where prospective employees will be evaluated for recruitment, and existing ones appraised for potential. Still, this technique will not replace 3P; it will only supplement it. Notwithstanding its limitations, 3P still fulfils a vital need. It provides a measure by which performance can be rewarded.

Prakash: How exactly does the Assessment Centre work?

Shetty: The Assessment Centre will be part of Umang's HRD division, and consist of a core team of three specialists, who are all trained in human psychology, interviewing techniques, and group behaviour analysis. They will be assisted by managers, seconded regularly from various line or staff functions at Umang, who will serve as independent assessors. You can have anywhere between 3 and 15 people taking tests at the Assessment Centre at any time.

Usually, assesses walk into the Assessment Centre on a Monday morning, and get back to their work after two days, during which they go through a number of psychological tests, interviews, group sessions, simulated role-play, and presentations. A unique feature of the Assessment Centre is that it focuses on a person's behaviour--which you can see in a simulated group situation--rather than on traits, where judgements tend to be inaccurate. Besides, the subjective element--the bane of all appraisals--is reduced because the evaluation is done by assessors who have no direct day-to-day contact with the assessees.

There are, of course, several steps involved in putting an Assessment Centre to work even after we sign on the specialists and identify a pool of in-house assessors. The first consists of determining the parameters that constitute managerial effectiveness at different levels. The second step is the actual assessment process, where you assess an individual's capabilities against those parameters. The third is the evaluation process. And the fourth is the integration of all this information, wherein the ratings on specific parameters are discussed by the assessors, and a consensus reached on the prediction of the potential and the placement of the individual

Prakash: How about costs? What is the infrastructure and the time required to put it to work?

Shetty: The capital investment will be in physical assets, like building and furniture, and software packages. They will be required only if we decide to go the whole hog. But we can do without them for the first few years. I estimate that the recurring expenses--on the salaries and other overheads of the Assessment Centre--would be Rs 12 lakh to Rs 15 lakh a year.

Acharya: The success of the Assessment Centre will depend on getting the right people to manage it. Data interpretation is a specialised skill. We can put together a good core team by recruiting it from outside. But where do we find assessors?

Shetty: Some of the organisational development interventions we have had in the past--including Total Quality Management--have given us a pool of in-house support staff, who could be accessed by the Assessment Centre's core team. Incidentally, a number of software packages are also available in the market to help us in this process.

Bakshi: I think it is necessary to first look at companies which have implemented the Assessment Centre system. I suggest you talk to your counterparts in those companies, and identify the areas where things could flounder. It will then be easier for us to decide on whether to have one. Or not. Let us meet next month to finalise this.

Does Umang stand to benefit from the Assessment Centre technique? Is Shetty too eager to market the idea to the Executive Committee? What are the critical areas that Bakshi should examine before taking a decision? How can this approach be better than the 360-Degree Appraisal systems that Umang has been following? What are the pitfalls that the company should guard against while implementing the concept? Will the Assessment Centre fit in with Umang's business strategy in the long run?

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