There have also been increasing concerns about the organisational effectiveness of the post-downsized anorexic organisation.

The benefits, which organisations claim to be seeking from downsizing, centre on savings in labour costs, speedier decision making, better communication, reduced product development time, enhanced involvement of employees and greater responsiveness to customers (De Meuse et al. 1997, p. 168). However, some writers draw attention to the obsessive pursuit of downsizing to the point of selfstarvation marked by excessive cost cutting, organ failure and an extreme pathological fear of becoming inefficient. Hence trimming and tightening belts are the order of the day (Tyler and Wilkinson 2007)

Downsizing is a commonly used euphemism which refers to reducing the overall size and operating costs of a company, most directly through a reduction in the total number of employees. When the market is tight, downsizing is extremely common, as companies fight to survive in a hostile climate while competing with other companies in the same sector. For employees, downsizing can be very unnerving and upsetting.

Firing Employees and Laying Off Employees: Be Respectful

Understand the Effects of Downsizing On Your Business
Firing employees due to non-performance is difficult; laying off employees due to poor business performance is harder. The effects of downsizing are significant; understand employee rights termination practices. No one likes firing employees or laying off employees due to a work slowdown. No one. It is an emotional time for the employee and even for the employer. Before you fire or lay off employees staff in your employ, make sure it is the right decision.

Employee Morale During Downsizing

Kettley P Report 291, Institute for Employment Studies, July 1995 print-friendly page research for the IES Research Networks The downsizing of employing organisations has become widespread. The experience of living with the possibility of redundancy, and watching others leave, has become part of the working experience of many UK employees. How can organisations hope to maintain staff morale in such circumstances? IES, supported by its Research Club, examined this issue with the help of major employing organisations, through workshops, and structured discussions. The outcome is a report which examines the nature of the concern about maintaining morale during downsizing, and how organisations are addressing this concern.

Why morale matters

Of course employees will feel unsettled during downsizing. However, just accepting loss of morale as an inevitable consequence may undermine the very productivity gains intended by the change. So employers should seek to minimise the unwanted impact of downsizing. They also need to recognise the extent to which the manner of managing such change affects how employees feel about the change, and their future relationship with the company. Downsizing can threaten employees sense of well being in several ways. They may see the company as having behaved unjustly or unfairly. They obviously feel less secure. They may also lose the belief that their contribution to the business will be rewarded in future.

These responses may easily threaten business performance. Survivors of downsizing can become unduly risk averse and narrowly focused, and therefore less creative and open to change. But morale is not a simple concept. It consists of many facets and may be manifest in many outcomes. These outcomes include: whether employees stay with the organisation whether they achieve organisational or personal goals whether they are able to adopt new working practices and learn new skills how they respond to customers It is a useful start to identify specific outcomes of morale which the organisation wishes to address. The organisations involved in the study suggested three common strands to a strategy for influencing morale. They were the ability to: anticipate likely employee response identify interventions to impact morale monitor and evaluate morale and the impact of actions taken.

Anticipating employee response

A number of risk factors were identified as indicating circumstances in which downsizing was most likely to hit morale. They included: failure to convince the workforce that job reductions were necessary apparent lack of clarity or unfairness in deciding on individual redundancies lack of care over redundant staff lack of alternative career development options if promotion becomes unlikely changes which leave survivors unclear of what is expected of them, or how they will acquire the new skills they may need

managers who are unwilling or unable to provide adequate time and support to individuals. Anticipating impact also means understanding that individuals in different job groups or career stages may respond differently to downsizing. Although it is often difficult to address interventions to particular workforce groups, they can sometimes be tailored with varying needs in mind.

Interventions to build morale

It is difficult to target interventions with any precision to influence morale. However, the participating organisations identified several broad kinds of action which they saw as particularly relevant. Communicating with employees during downsizing is vital. Conveying the reasons for such a painful change is central. Employees need to understand the business reason for reducing headcount, and how the change will be managed. Breaks in communication are seen as sinister, and lead to rumours. Attempts to deny the reality of the painful aspects of the change are seen as insensitive. So communication has to be honest in dealing with the negative feelings of employees. It is important to communicate throughout the period of change, not just at the beginning. Giving direct support to the survivors as well as the victims of downsizing leads to other types of intervention. They may address such areas as Stress Management and Careers Counselling. Organisation Development initiatives may be used to try and improve the effectiveness of the emergent organisation. They may include work to rebuild relationships between and within groups and departments, often through team building activities. Enhanced access to training and work experience may be needed to help staff adjust to new job demands. Performance Management often needs attention to ensure that staff feel that the new demands are realistic in terms of the reduced staff resource. They also need to be clear what is expected of them in the new organisation. Reward strategies may also need realigning, but there is a lack of clarity at present about the link between alternative reward strategies and morale. The employees relationship with their line manager may have a significant effect on how well they cope with downsizing. For line managers to support staff effectively at a time of difficult change, they in turn have to feel as though they know how to handle queries and problems. It can

help for managers to share their concerns with their peers and discuss how to deal with staff issues. Some companies use regular forums for managers to do this throughout the change period, and avoid them feeling isolated.

Monitoring and evaluation

Evaluating the success of attempts to influence morale during downsizing is not easy. There is a natural tendency not to want to ask people how they are feeling when you expect negative responses. Also we know relatively little about cause and effect in the area of morale. Ownership of the issue may be difficult to establish senior management itself often being in a state of flux during periods of downsizing. Many managers believe or like to believe that the general level of staff morale is outside their control. There are indeed many limitations to controlling morale including the variation in individual response, the impact on individuals of what they see happening to other employees, and the variation in response over time. Separating the impact of different interventions can be difficult, and downsizing is seldom the only organisational change going on. In spite of the difficulties of evaluating the impact of specific responses on morale, organisations are using a range of measures to monitor some of the outcomes of morale. For example, staff turnover, absence from work and performance indicators (eg customer service) are often monitored numerically. Softer measures of attitudes and perceptions of employees are obtained through the increasing use of employee attitude surveys. These can be used both to identify variations in response within the workforce, and track changing perceptions over time. Managers need to understand how employees are feeling in their part of the organisation as well as in aggregate. Upward feedback is another way of collecting information on employee morale and response to initiatives. It can also be used as a starting point for improving relationships within teams in the wake of downsizing. This report has started to examine some of the ways in which organisations are seeking to combat the more detrimental effects of staff reductions on the morale of those who remain. There are inherent limitations to controlling morale, and to our understanding of cause and effect in this area. However, the practical experience of the organisations involved in this study points to some ways of structuring thinking and actions.

HRM THE IMPACT OF DOWNSIZING TO EMPLOYEE MORALE 1.0 Introduction

Many companies, large and small, have downsized during the last few years in response to the slumping economy, technological advances, and shifts in corporate priorities. The prime impetus of most downsizing efforts are the desire for an immediate reduction costs and increased levels of efficiency, productivity, profitability, and competitiveness (Farrell and Mavondo, 2004).

A single definition of downsizing does not across studies and disciplines. It is clear that it means a contraction in the size of a firm's workforce. Cascio (1993) posits that downsizing is the planned elimination of positions or jobs whose primary purpose is to reduce the workforce, while Gandolfi adds that a myriad of terms have been used euphemistically in reference to downsizing including "brightsizing" and "rightsizing".

1.1

History

Organizational downsizing as a change management strategy has been adopted for more than two decades. In the 1980s and early 1990s, it was implemented primarily by firm experiencing difficult economic times (Gandolfi, 2006 and 2007). Since in mid-1990s, downsizing has become a leading strategy of choice for a multitude of firms around the world ( Mirabal and De Young, 2005). Back in the mid-1970s, Charles Handy first predicted that the technological revolution would transform the lives millions of individuals through process he aptly termed 'down-sizing' (Appelbaum, Evarard, and Hung 1999). While few understood his prediction at the time, we know that downsizing has adopted as management technique on the global scale (Macky, 2004). Firms have implemented downsizing as a "reactive response to organizational bankruptcy or recession" ( Ryan and Macky,1998). Downsizing has transformed hundreds of thousands of firms and governmental agencies and the lives of tens of millions of employees around the world (Amundson, Borgen, Jordan, and Erlebach, 2004).

1.2

Overview Impact of downsizing

Downsizingand even the threat of downsizinghas placed considerable stress on work environments. Most business and organizational researchers believe that cycles of downsizing also called resizing, depending on your perspectiveare not a short-term phenomenon but a reality that is here to stay. (Kenneth P. De Meuse and Mitchell Lee Marks, 2003). They added, employees can be traumatized by layoffs, their own or those of co-workers. The loss of work can have a devastating impact on people's lives and can also damage, if not destroy, the relationship an organization has with the people who remain. They include that, the management is in the undesirable position of having to motivate and energize staff members who are as concerned about their future with the organization as they are with the work. Downsizing is a challenging solution to a complex problem and has the potential to affect the business as well as employee morale and productivity. (Erica Siegel, 2009)

1.3

Psychological contract breach

Kenneth P. De Meuse and Mitchell Lee Marks (2003) suggested that, one useful concept that has relevance to the issue of layoffs is known as the "psychological contract" that exists between employees and their employer. In contrast to formal contracts that spell out in

writing expectations between employees and the organization, psychological contracts are more informal and address, in large part, the beliefs that employees have about their relationship with their employer. Much of the psychological contract involves trust, commitment and respect that can develop only over time. They added that, downsizing and the resulting layoffs often violate this psychological contract and can create intense feelings in employees who believe that they or their co-workers have been wronged. These emotions may be demonstrated through angry outbursts or other overt acts or by withdrawal and lack of motivation to work. Dealing with employee resentment over psychological contract breaches is a challenge for any manager. Front-line managers are particularly challenged because of their inability to control what happens at the top. It is not practical for managers to believe or to communicate that they can keep layoffs from occurring or to assure people their jobs are safe. However, managers can do a few things to help employees remain motivated to do good work.

2.0

Process involved in the implementation of downsizing

The downsizing literature reveals that a number of distinct implementation strategies have been identified. Cameron, Freeman, and Mishra (1991, 1993) have conducted one of the most extensive and systematic studies of corporate workforce downsizing and reported three major findings regarding downsizing implementation strategies. First and foremost, they identified and differentiated between three distinct types of downsizing implementation strategies. That is, a workforce reduction strategy, an organization redesign strategy, and a systemic strategy. The workforce reduction strategy often referred to as the layoff strategy. It encompasses activities, such as layoffs, retrenchments, natural attritions, early retirements, hiring freezes, golden parachutes, and buyout packages. This strategy is frequently implemented in a reactive manner as a cost-cutting measure and may serve as a short-term response to declining profits. While for the organization redesign strategy focuses predominantly upon the elimination of work, rather than reducing the number of employees. It encompasses activities, such as abolishing functions, eliminating hierarchical levels (delayering), groups, divisions, products, redesigning tasks, consolidating and merging units, and reducing overall work hours. Organization redesign strategies are commonly regarded as being difficult to implement quickly as this requires some advanced analysis of the areas concerned. The systemic strategy is fundamentally different from the former two strategies in the sense that it appears to embrace a more holistic view of organizational change. Thus, downsizing ought to embrace all dimensions and aspects of the organization, including suppliers, customer relations, production methods, design processes, and inventories. Systemic strategy focuses primarily upon changing the organization's intrinsic culture and the attitudes and values of its employees.

2.1

Resource & Technology

During hard time especially when economy downturn, most organization will make a decision to keep operation cost at minimum. Normally they will go for downsizing. The resource that can be applied for downsizing might be outsourcing and collaboration as an alternative.

2.1.1

Outsourcing

Normally company will practice outsourcing as alternative to recruit. There are few advantages of outsourcing which is clearly improved business focus, more productive use of time and resources, and guidance from experts from across the business spectrum. It allows company to focus on the core competencies and provides administrative relief from many employer-related responsibilities, so they can concentrate on developing strategies that provide you a competitive advantage.

2.1.2

Collaboration

Collaboration is a process of participation through which people, groups and organizations work together to achieve desired results. Common factors and characteristics have been identified by research as influencing the collaborative process, including the skills of leadership, communication, sustainability, unity, participation, and a history of successful accomplishments (Hogue, et al, 1995; Keith et.al, 1993).

2.2

Downsizing Model

2.2.1 Implementation plan. The degree to which downsizing implementation strategies are applied is driven by the magnitude of the mandated reductions. Modest reductions are almost always accomplished by pro rata reductions across the affected agencies and are generally accommodated through attrition. Large workforce reductions, on the other hand, require planning involving multiple concurrent activities--including strategic planning, labour-management relations, communications, and human resources.

2.2.1.1

Strategic Planning.

The impact of downsizing should be incorporated into the organization's strategic plan to maintain a consistent understanding of the future of the organization and how it will get there. The degree to which this has been done among the agencies represented in our study varies greatly. When numeric goals are established for downsizing--as was done in the Federal Workforce Restructuring Act of 1994--it appears that downsizing drives the strategic planning process. Labor-management relations. Organizations with unions secure union

involvement as early in the planning process as possible, and that involvement continues throughout the downsizing process. The union is an important participant in gaining employee acceptance of the changes that will be necessary as a result of the required cuts.

2.2.1.2

Communications.

Communication--early and often--among management, employees, customers, and affected communities is a key ingredient in successful downsizing. The implementation plan should identify how this will be accomplished.

2.2.1.3

Human Resources.

The element involving the greatest use of resources in downsizing is the process for handling human resources. Typical activities in this area include:

A workforce demographics review, to include retirement and other loss projections and assessments of the age, diversity, and skills of the workforce;

Assessment of available options to avoid involuntary separations, such as hiring freeze, buyouts, early retirement, retraining, and relocations;

Detailing FTE (Full Time Equivalent) reductions by year, location, program, occupation, position, and person;

Providing career transition/job placement assistance;

Providing assistance for survivors of downsizing; and

Ensuring that an adequate retraining program is in place.

Functional reviews and process reengineering.

Although some agencies conducted functional crosscutting reviews in their efforts to reengineer processes, we found that, at most agencies, this has been done after the fact as a reaction to downsizing instead of employing reengineering in the planning process.

Monitoring.

Most agencies include monitoring systems in downsizing plans, either in the form of preexisting reviews or reviews designed specifically to assess progress in achieving downsizing goals. Some agencies produce reports that can then be used as guides for future downsizing activities. Wherever the workforce reduction allows, human resource options are reviewed with annual budget preparation. A reassessment is done of the requirement for RIFs, and FTEs are reallocated among sub organizations

2.3

Workforce

For workforce, the actions HR can do as part of downsizing to look over the structure of the organization are as follow: Try to reduce or terminate the foreign worker. Give priority to the local workers to remain in the organization. (Employment Act 1955) If still exceed organization capacity, then could proceed to termination of local workers.

LIFO (Last in, First Out) If possible try to keep the most long serving employees as their compensation is higher & costly to company.

VSS (Voluntary Separate Scheme which is employee is offered a package to volunteer to withdraw from the organization. This is normally practice to avoid unfair decision to employee especially when they just lost their job. Normally will

Multitasking could also be implemented. This require individual to perform several tasks that is similar or practical to their expertise. Thus it can save costs of hiring new employees.

Terminate unnecessary position or department that doesn't need more than it requires. Try to minimum personnel in each area but widen the job scope. This is the best method to face critical situation especially during bad economy downturn.

2.4

Operational activities

At the operational activities, there are certain things can be applied to ensure operation cost can be cut to minimum but still maintain optimum production. As operation involves cost and very expensive these are the things could be done. Firstly try to reduce overtime as this is an extra cost to company that have to bear. Control over this will lead to better operation cost control. Next, working hours could be reduced as well as salary. This is to be fair and equivalent to what they did and receive. Company can also extend to a level of reduce the working days in a week from 6 days to 5 or 4 days. But ensure the operation per month must be at least 12 working days. Lastly, for products that are low on demand should be stop and focus on manufacturing high demand product. This is to avoid unnecessary surplus stock that will cost the company if it can't be sold.

Employee Morale During Downsizing Layoff affect not only those workers whose employment is terminated, but also the 'survivors' of the downsizing process, whose continued efforts remain vital to organizational success (Brockner,1992). They can somehow feel the shock and disappointment of the colleagues being laid off(Tom Mochal, 2003). The remaining employees can experience burnout because they have to bear the burden of a heavier workload and required to perform more work with fewer co-workers. Especially in the tough economic times, the company may not be able to pay bonuses or merit increases. (Erica Siegel, 2009) Job insecurity produced by the downsizing process could generates stress, which in turn may manifest itself in dissatisfaction, intent to leave the organization, greater absenteeism, higher turnover, and disability claims (Boroson and Burgess, 1992; Koco, 1996; Mishra and Spreitzer, 1998; Tombaugh and White, 1990) It is general accepted that it is not easy for any organization to manage changes in its structure and system due to downsizing exercise. Any changes resulted from the exercise often lead to the unsecured feeling by the remaining employees. Many people respond well to adversity and use adversity as a learning experience. Others allow adversity to get the better of them. They may begin looking for another job, but only half-heartedly. Once they find a new position, they begin to live in fear of a second layoff. This fear can then easily affect performance, pushing them toward another layoff scenario based on performance issues.

Ever since downsizing of organizations had became a widespread, Institute for employment studies in United Kingdom supported by its Research club, had taken an initiative to examined this issue with the help of major employing organizations, through workshops and structured discussions. The outcome is a report, which examines the nature of the concern about maintaining morale during downsizing and how organizations are addressing this concern (Kettley P, 1995). In this report, we are going to present the outcome of the IES studies. 3.1 Why Morale Matters

During downsizing, employees will feel unsettled. However, just accepting loss of morale as an inevitable consequences may undermine the very productivity gains intended by the change. So, employers should seek to minimise impact of downsizing as to avoid employees' from seeing the decision made on downsizing to be unjustly or unfairly. They also need to recognize the extent to which the manner of managing such change affects how employees feel about the change, and their future relationship with the company Downsizing can threaten employees' sense of well being in several ways, as they obviously feel less secure and have anxiety feelings of whether their contribution to the business will be rewarded in the future or not. These responses may easily threaten the business performance. Survivors of downsizing can become unduly risk averse and narrowly focused and therefore less creative and not open to change. According to the IES studies, morale consists of many facets and may be manifest in many outcomes. These outcomes include:

Whether the employees stay with the organization

Whether they achieve organizational or personal goals

Whether they are able to adopt new working practices and learn new skills

How they respond to customers IES also implies that it is a useful start to identify specific outcomes of morale, which the organization wishes to address. The organizations involved in the study suggested three common strands to a strategy for influencing morale. They were the ability to:

Anticipate likely employee response

Identify interventions to impact morale

Monitor and evaluate morale and the impact of actions taken.

3.1.1

Anticipating employee response

A number of 'risk factors' were identified as indicating circumstances in which downsizing was most likely to hit morale. The included:

Failure to convince the workforce that job reductions were necessary

Apparent lack of clarity or unfairness in deciding on individual redundancies

Lack of care over redundant staff

Lack of alternative career development options if promotion becomes unlikely

Changes which leave survivors unclear of what is expected of them, or how they will acquire the new skills they may need

Managers who are unwilling or unable to provide adequate time and support to individuals. Anticipating impact also means understanding that individuals in different job groups or career stages may respond differently to downsizing. Although it is often difficult to address interventions to particular workforce groups, they can sometimes be tailored with varying needs in mind. 3.1.2 Interventions to build morale The second factor that could be used as strategy to influence morale is identifying intervention. According to the study, it is difficult to target interventions with any precision to influence morale. However, the participating organizations identified several broad kinds of action, which they saw as particularly relevant. Communicating with employees during downsizing is vital. Conveying the reasons for such a painful change is central. Employees need to understand the business reason for reducing headcount, and how the change will be managed. Breaks in communication are seen as sinister or threatening and could lead to rumours. Attempts to deny the reality of the painful

aspects of the change are seen as insensitive. Therefore, communication has to be honest in dealing with the negative feelings of employees. The study also highlighted, it is important to communicate throughout the period of change, not just at the beginning. Giving direct support to the 'survivors' as well as the 'victim' of downsizing leads to other types of intervention. They may address such areas as Stress management or Career counselling. Organization Development initiatives may be used to try and improve the effectiveness of the emergent organization. They may include work to rebuild relationships between and within groups and departments, often through team building activities. Enhanced excess to training and work experience may be needed to help staff adjust to new job demands. Performance Management often needs attention to ensure that staffs feel that the new demands are realistic in terms of the reduced staff resource. They also need to be clear what is expected of them in the new organization. Reward strategies may also need realigning, but there is a lack of clarity at present about the link between alternative reward strategies and morale. The employee's relationship with their line manager may have a significant effect on how well they cope with downsizing. For line managers to support staff effectively at a time of difficult change, they in turn have to feel as though they know how to handle queries and problems. It can be of help for managers to share their concerns with their peers and discuss how to deal with staff issues. Some companies use regular forums for managers to do this throughout the change period, and avoid them feeling isolated. 3.1.3 Monitoring and evaluation

The third suggestions by IES to become strategically in influencing morale are monitoring and evaluating morale and the impact of actions taken. Evaluating the success of attempts to influence morale during downsizing is not easy. There is a natural tendency not to want to ask people how they are feeling when you expect negative responses. Also we know relatively little about cause and effect in the area of morale. Ownership of the issue may be difficult to establish even senior management itself often being in a state of flux during periods of downsizing. Many managers believe or like to believe that the general level of staff morale is outside their control. There are indeed many limitations to controlling morale including the variation in individual response; the impact on individuals of what they see happening to other employees, and the variation in response over time. Separating the impact of different interventions can be difficult, and downsizing is seldom the only organizational change going on. In spite of difficulties to evaluating the impact of specific responses on morale, organizations are using a range of measures to monitor some of the outcomes of morale. For instant, staff turnover, absence from work and performance indicators (e.g., customer service) are often monitored numerically. 'Softer' measures of attitudes and perceptions of employees are obtained through the increasing use of employee attitude surveys. These can be used both to identify variations in response within the workforce, and track changing perceptions over time. Managers need to

understand how employees are feeling in their part of the organization as well as in aggregate. Upward feedback is another way of collecting information on employee morale and response to initiatives. It can also be used as a starting point for improving relationships within teams in the wake of downsizing. To conclude, IES report mentions that their report has started to examine some of the ways in which organizations are seeking to combat the more detrimental effects of staff reductions on the morale of those who remain. There are inherent limitations to controlling morale, and to their understanding of cause and effect in this area. However, the practical experience of the organizations involved in the study points to some ways of structuring thinking and actions.

The employees positive approach On the employees perspective Tom Mochal (2003) advised; when you are caught up in a layoff, make sure you do the followings:

Leave your current company on a positive a note as you can. Who knows, they may want you back some day.

Get over the emotional side of the layoff as quickly as possible.

Stay positive it's the most critical aspect in surviving a layoff. Your probably didn't have any control over your layoff, but you do have control over your job search. You also have control over your emotions. Learn from the past, but let it go. Be positive and focus on your next opportunity.

Look at as many opportunities as possible, as soon as possible. Hit the pavement, the want ads, the internet, etc.

Actions to be taken by Management in curbing the crisis Kenneth P. De Meuse and Mitchell Lee Marks (2003), had suggested few steps to be considered by management in curbing the crisis. They put forward the idea that, under the planning process, the management team should think of the best possible ways to motivate employees in facing a downsizing environment. It is important for management to understand

of what makes employees upset. Amongst the issues are financial security, employment status, family commitment or any other related matters that relates to loss of income and benefits. The most significant issue, employees' are afraid of the situation being betrayed by the management. They include the followings measures that can be considered in the implementation of downsizing: 4.1 Open Communications

Often, rumours are more unbearable than the truth. Managers should be sensitive to the rumours spread among employees'. It is more appropriate if the upper level management or the human resources personnel to help filter the fact from fictions. An official session conducted to all employees as to provide feedback about the future plans of the organization. Although the news may not be good, but certainly employees will appreciate any information that comes from a credible source. Employers often avoid telling employees they will be laid off until the last moment. This action creates an environment of mistrust from surviving employees and opens the organization up to liability regarding wrongful termination. Employees who feel they were blindsided by the termination often look to the legal system for retribution. Companies often risk losing efficiencies and cost savings from undergoing layoffs if there is not proper attention given to the remaining workforceand the lodging industry is no exception. Often surviving employees feel mixed emotions of relief and guilt that they survived the layoff, but that their co-workers were not as fortunate, and apprehension that they may still be at risk.

Management in each sector, from room service and guest relations to food and beverage and maintenance, must recognize these emotions if they want to ensure that its own individual work force remains focused and productive. Employers often avoid telling employees they will be laid off until the last moment. This action creates an environment of mistrust from surviving employees and opens the organization up to liability regarding wrongful termination. Employees who feel they were blindsided by the termination often look to the legal system for retribution. There is often a period of adjustment, and managers should recognize this by empathizing with their remaining workforce and listening to their concerns. Managers should also be aware that rumors can be more damaging than the factual reasons the company makes certain decisions. Employees may even assume more layoffs are inevitable and begin spreading rumors which can have a negative impact on productivity. Honestly communicating with employees, even when it is bad news, is often better then the remaining uncertainty.

Educate everyone to sustain focus on performance

In order to overcome the negative feeling of employees, it is important for all managers to help their employees to remain focus at work. Managers should acknowledge the frustration and concerns of employees as well as find ways to maintain employees' confidence. It would be appropriate for every manager to educate employees that a downsizing exercise is a shared problem, not one for employees to deal with individually.

Support employees who choose to leave Separation may be the best option for employees whom are not able to overcome their negative feelings toward downsizing exercise. Ideally the management should work out a training plan that will lead to new employment opportunities for those who wants to leave. That will be useful for employees to develop new skills for other jobs within the organization or outside the organization. The best way to handle employees' morale is to give advance notice possible (Tom Mochal, 2003). This is important for employees' to prepare mentally as well as physically. Employees' who are mentally prepared are generally more calm and gracious when the notice is given. They don't express anger or burn bridges during those last days on the job. With advance notice, employees' can update their resume, start looking at the job market, and start to cut back on their personal expenses.

Tom Mochal (2003) added, employees' whom views the exercise from the positive perspective would react positively. They would be able to learn what they can, hence move forward. They may become more prepared by doing a better job of keeping their skills up to date. They may decide that they need to become certified in their skill sets. They may decide to move into consulting positions. Once they understand the basic point, they may lead to more options and a better chance for success in the long term.

The Downsizing Dilemma

Erica Siegel (2009) has outlined eight important steps to be considered by companies who are contemplating layoffs. She added, it's important to be aware of some fundamentals. Companies that take the time to plan and prepare for downsizing find they're able to minimize the impact. Here are the steps to consider:

4.4.1

Make smart decisions now

If a layoff is likely to occur eventually, evaluate other options. For example, you can realign existing personnel to cover current vacant positions, or you have solid performers take on additional responsibilities of poor performers and use attrition to make the necessary cuts. (It is important to document any training the poor performers received.) If you have a front desk worker who could succeed in the position of concierge, combining the two positions can reduce payroll expenses and ensure continuity in the workforce.

Reduce the risk of litigation. There are federal, state and even local laws that govern layoffs. Make sure you are aware of those that may affect your organization.

Recognize the human side of downsizing. How downsized employees are treated directly affects the morale and retention of your remaining high-performing employees. A study in the Academy of Management Journal found that employers who experience layoffs often see an increase in voluntary turnover among employees they wanted to retain.

Keep things familiar If there was always a Monday morning staff meeting, keep the Monday morning meeting in place. After a layoff, employees will experience a heightened sense of insecurity, so being able to rely on certain areas of familiarity can have a positive effect on productivity.

Recognition and rewards. Although company might have tough time to pay bonuses or merit increment, but many recognition programs can be implemented as a substitution to let employees know you're aware of the added burden and that you appreciate their hard work.

Future goals. Communicate the strategic direction of While layoffs may become a necessary action for an organization, being prepared can set the stage for a more positive outcome. In the lodging industry, the best advice is to be smart plan and communicate and you can steer clear of avoidable risk. The organization with employees and each employee's role in helping the company achieve those successes. By communicating with employees about their future in the organization and the company's goals, employees will feel more vested and connected to the organization.

Recommendation - Learning from the Past Downsizing started to become a management issue way back in mid 1970s. Downsizing was practiced as an initiative to reduce cost and as a way to eliminate the non performer staff with the economic recession. According to Franco Gandolfi, in the Reflecting on Downsizing: What Have Managers Learned?, there are five downsizing lessons for executive contemplating a downsizing strategy : Lesson 1 : Organization should be fully prepared strategically and proactively for downsizing in terms of the HR plans, policies and programs a year before executing the downsizing which indirectly allows minimal disruption and pain among the surviving and the departing workforces. Lesson 2 : Managers should provide adequate training and supports to survivors in order to proactively prepare the workforce for change and help individuals cape successfully with downsizing. Lesson 3 : Managers must be pay considerable attention to survivors because these survivors are mentally and physically stressed with the downsizing practiced to their colleagues. The survivors faced with aftershocks of downsizing. Managers need to make sure that the survivors receive counselling, support, help, honest as well as unbiased information. Lesson 4: Managers must thoroughly counting the downsizing cost because there is always an indirect and hidden cost in practicing downsizing. Miscalculation of cost can result in the organization facing loss of gain due to underestimation. Lesson 5 : Manager should consider downsizing as a last resort in encountering bad economy stage. There are other practices that can be carried out in order to survive in the economical recession such as reduce workweek, hiring freezes, natural attrition, limited overtime pay and etc. According to Asuman Akdogan, in The Effects of Organizational Downsizing and Layoffs on Organizational Commitment: A Field Research, downsizing represents a strategy managers implement that affects the size of the organization's workforce, its cost and the work processes. The effect of downsizing are members worried about their future and employment, they believe that their workload will increase because of layoffs and remaining employees believe that downsizing politics are enforced unfairly. In order to minimize the effect, Akdogan outlined few strategies and can be carried out by managers as stated below :

Form a well-organized downsizing plan

Maintain core competencies while experiencing the downsizing process

Make all employees both remaining and those leaving to participate in the downsizing process

Inform all employees about the downsizing process

Basically, both writers have common idea on the action to be taken by managers should include from the perspective of the organization as a whole, from the perspective of the employees who are lay off and from the perspectives of the survivors. The process of downsizing itself created a self protective mood among employees. So, it is important for managers to ensure the organization is run on a minimal effect of downsizing and thus increasing returns in the organization in line with the main purpose of executing downsizing at the first place.

Conclusion This report has examined some of the ways that organizations may consider to combat detrimental effects of staff reductions on the morale of those who remain. What they proceed from the applied approaches and plans will impose a bigger impact towards the remainders on their perception of the organizations current situations. The experience of living with the possibility of redundancy and watching others leave has become part of the working experience of many employees. How can organisations hope to maintain staff morale in such circumstances? In that case, the organisation is responsible to do something that may treat the situation by looking seriously into employee's morality who retain in the organisation. Through an actions that equivalent to managing stress and de-motivation, the organisation can communicate effectively with the leavers and survivors. But between these two groups, the attention should be more towards the survivors as to treat their anxiety on the job security and company's survival. It is recommended that the company or organisation which had came down with downsizing as a survival loom, will look into learning the details involved in directing, executing, participating in or preparing for a Reduction In Force (RIF). In this case, they should covers determination of competitive areas and levels as well as the establishments of retention registers. The survivors or retainers or retainers must be educated by the employers to stay focus on their performance and prepare them for the evitable. Apart from that, the employer should also look into the rewards and recognitions without jeopardizing the employees' trust and at the same time ensuring the organizations on-going survival in the market.

On the other hand, the employees who are leaving or intending to leave must be put into consideration about their welfare. Perhaps, a good practice of layoffs will foster their unemployment for a time being before they proceed with another job in other organizations. Finally, it is also a must for the organisation to paid balanced attentions on the organizational abilities in coping with downsizing issues from the monetary and non-monetary aspects as guaranty to survive in the industry. Perhaps, the attention on the employee morale will be weighted as the same in supporting the organisation survival to pursue their objectives in the future.

REFERENCE "The Effects of Organizational Resizing on the Nature of the Psychological Contract and Employee Perceptions of Contract Fulfilment" by Scott W. Lester et al in Resizing the Organization, Managing Layoffs, Divestitures, and Closings: Maximizing Gain While Minimizing Pain, edited by Kenneth P. De Meuse and Mitchell Lee Marks (2003). Tom Mochal (Aug 11, 2003), Tags: Workforce management, Professional development, Recruitment & Selection, Tom Mochal, layoff..., job, career, adversity (Web resource: http//www.search.techrepublic.com.com/ search/Tom Mochal.html)

Erica Siegel (2009), "The Downsizing Dilemma", SPHR, Oasis Outsourcing (Web resources: http://www.oasisadvantage.com)

Brockner J. 1992. Managing the effects of layoffs on survivors. California Management Review 34: 9-28. Wayne F. Cascio, "Downsizing: What Do We Know? What Have We Learned?" Academy of Management Executive, Vol. 7.

Daniel C. Feldman and Carrie R. Leana, (1994). Better Practices in Managing Layoffs. Human Resource Management, Summer, ,

Cooper, Cary L. and Ronald J. Burke. The Organization in Crisis: Downsizing, Restructuring, and Privatization. Blackwell, 2000.

Gandolfi, F. (2008). Reflecting on Downsizing : What Have Managers Learned?. S.A.M. Advanced Management Journal, Vol. 73, Iss.2;pg.46,11 pgs

Akdogan, A. (2009). The Effects of Organizational Downsizing and Layoffs on Organizational Commitment: A Field Research. Journal of American Academy of Business, Cambridge. Hollywood, Vol. 14, Iss. 2; pg. 337, 7 pgs Koco L. 1996. Downsizing spurs disability claims, survey finds. National Underwriter 100: 2728, 32. Mishra AK, Spreitzer GM. 1998. Explaining how survivors respond to downsizing; the role of trust, empowerment, justice, and work redesign. Academy of Management Review 23: 567588. Tombaugh JR, White LP. 1990. Downsizing: an empirical assessment of survivors' perceptions in post-layoff environment. Organization Development Journal 8: 32-43. Adams, G.R., & Schvaneveldt, J.D. 1991. Understanding Research Methods 2nd Edition Longman Publishing Group. Appelbaum, S.H., Delage, C., Labibb, N., & Gault, G. 1997. The survivor syndrome: aftermath of downsizing. Career Development

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Human resource accounting

Human Resource Accounting is a method to measure the effectiveness of personnel management activities and the use of people in an organization. Approaches to Human resource accounting was first developed 1691 the next stage was during 1691-1960 and third phase post-1960. There are two approaches to HRA. Under the cost approach, also called human resource cost accounting method or model, there is a) Acquisition cost model and b)replacement cost model. Under the value approach there are a) present value of future earnings method, b) discounted future wage model, c) competitive bidding model

cost approach
This approach is also called as acquisition cost model.This approach is developed by Brummet, Flamholmay tz and Pyle but the first attempt towards employee valuation made by a foot ware manufacturing company R. G. Barry Corporation of Columbus, Ohio with the help of Michigan University in the year 1967 . This method measures the organizations investment in employees using the five parameters: recruiting, acquisition; formal training and, familiarization; informal training, Informal familiarization; experience; and development. this model suggest instead of charging the costs to p&l accounting it should be capitalized in balance sheet.the process of giving an status of asset to the expenditure item is called as capitalization. in case of human resource it is necessary to amortize the capitalized amount over a period of time. so here one will take the age of the employee at the time of recruitment and at the time of retirement. out of these a few employee may leave the organization before attaining the superannuation. This is similar to a physical asset. e.g.:- If company spends one lakh on an employee recruited at 25 years, and he leaves the organization at the age 50, he serves the company for 25 years (his actual retirement age was 55 years). The company has recovered rupees 83333.33 so the unamortized amount of rupees 16666.66 should be charged to p&l account i.e.
100000\30=3333.33 3333.33*25=83333.33 100000-83333.33=16666.67

This method is the only method of human resource accounting which is based on sound accounting principals and policies.
[edit] Limitations The valuation method is based on false assumption that the dollar is stable. Since the assets cannot be sold there is no independent check of valuation. This method measures only the costs to the organization but ignores completely any measure of the value of the employee to the organization (Cascio 3).

It is too tedious to gather the related information regading the human values.

[edit] Replacement Cost approach

This approach measures the cost of replacing an employee. According to Likert (1985) replacement cost include recruitment, selection, compensation, and training cost (including the income foregone during the training period). The data derived from this method could be useful in deciding whether to dismiss or replace the staff.
[edit] Limitations Substitution of replacement cost method for historical cost method does little more than update the valuation, at the expense of importing considerably more subjectivity into the measure. This method may also lead to an upwardly biased estimate because an inefficient firm may incur greater cost to replace an employee (Cascio 3-4).

[edit] Present Value of Future Earnings

Lev and Schwartz (1971) proposed an economic valuation of employees based on the present value of future earnings, adjusted for the probability of employees death/separation/retirement. This method helps in determining what an employees future contribution is worth today.

According to this model, the value of human capital embodied in a person who is y years old, is the present value of his/her future earnings from employment and can be calculated by using the following formula: E(Vy) = Py(t+1) I(T)/(I+R)t-y
T=Y Y

where E (Vy) = expected value of a y year old persons human capital T = the persons retirement age Py (t) = probability of the person leaving the organisation I(t) = expected earnings of the person in period I r = discount rate
[edit] Limitations The measure is an objective one because it uses widely based statistics such as census income return and mortality tables. The measure assigns more weight to averages than to the value of any specific group or individual (Cascio 4-5).

[edit] Value to the organization

Hekimian and Jones (1967) proposed that where an organization had several divisions seeking the same employee, the employee should be allocated to the highest bidder and the bid price incorporated into that divisions investment base. For example a value of a professional athletes service is often determined by how much money a particular team, acting in an open competitive market is willing to pay him or her.
[edit] Limitations The soundness of the valuation depends wholly on the information, judgment, and impartiality of the bidder (Cascio 5).

[edit] Expense model

According to Mirvis and Mac, (1976) this model focuses on attaching dollar estimates to the behavioral outcomes produced by working in an organization. Criteria such as absenteeism, turnover, and job performance are measured using traditional organizational tools, and then costs are estimated for each criterion. For example, in costing labor turnover, dollar figures are attached to separation costs, replacement costs, and training costs.

18.2 WHAT IS HRA?

The American Accounting Associations Committee on Human Resource Accounting (1973) has defined Human Resource Accounting as the process of identifying and measuring data about human resources and communicating this information to interested parties. HRA, thus, not only involves measurement of all the costs/ investments associated with the recruitment, placement, training and development of employees, but also the quantification of the economic value of the people in an organisation. Flamholtz (1971) too has offered a similar definition for HRA. They define HRA as the measurement and reporting of the cost and value of people in organizational resources. As far as the statutory requirements go, the Companies Act, 1956 does not demand furnishing of HRA related information in the financial statements of the companies. The Institute of Chartered Accountants of India too, has not been able to bring any definitive standard or measurement in the reporting of human resources costs. While qualitative pronouncements regarding the importance of Human Resources is often made by the chairmen, in the AGM, quantitative information about their contribution

is rarely recorded or communicated. There are a few organizations, however, that do recognize the value of their human resources, and furnish the related information in their annual reports. In India, some of these companies are : Infosys, Bharat Heavy Electricals Ltd (BHEL); the Steel Authority of India Ltd. (SAIL), the Minerals and Metals Trading Corporation of India Ltd. (MMTC), the Southern Petrochemicals Industries Corporation of India (SPIC), the Associated Cement Companies Ltd, Madras Refineries Ltd. , the Hindustan Zinc Ltd. , Engineers India Ltd, the Oil and Natural Gas Commission, Oil India Ltd., the Cement Corporation of India Ltd. etc.

18.3 WHY HRA ?

According to Likert (1971), HRA serves the following purposes in an organisation: l It furnishes cost/value information for making management decisions about acquiring, allocating, developing, and maintaining human resources in order to attain cost-effectiveness; l It allows management personnel to monitor effectively the use of human resources; l It provides a sound and effective basis of human asset control, that is, whether the asset is appreciated, depleted or conserved; l It helps in the development of management principles by classifying the financial consequences of various practices. Basically, HRA is a management tool which is designed to assist senior management in understanding the long term cost and benefit implications of their HR decisions so that better business decisions can be taken. If such accounting is not done, then the management runs the risk of taking decisions that may improve profits in the short run but may also have severe repercussions in future. For example, very often organisations hire young people from outside on very high salaries because of an immediate business requirement. Later on, however, they find that the de-motivating impact of this move on the existing experienced staff has caused immense long term harm by reducing their productivity and by creating salary distortions across the organisational structure. HRA also provides the HR professionals and management with information for managing the human resources efficiently and effectively. Such information is
25
Human Resource Accounting

essential for performing the critical HR functions of acquiring, developing, allocating, conserving, utilizing, evaluating and rewarding in a proper way. These functions are the key transformational processes that convert human resources from raw inputs (in the form of individuals, groups and the total human organization) to outputs in the form of goods and services. HRA indicates whether these processes are adding value or enhancing unnecessary costs. In addition to facilitating internal decision making processes, HRA also enables critical external decision makers, especially the investors in making realistic investment decisions. Investors make investment decisions based on the total worth of the organisation. HRA provides the investors with a more complete and accurate account of the organisations total worth, and therefore, enables better investment decisions. For example, conventional financial statements treat HR investments as expenditures. Consequently, their income statement projects expenditures to acquire, place and train human resources as expenses during the current year rather than capitalizing and amoritizing them over their expected service life. The balance sheet, thus, becomes distorted as it inaccurately presents the total Assets as well as the net income and, thereby, the rate of return which is the ratio of net income to the total assets. HRA helps in removing this distortion. Furthermore, in a business environment where corporate social responsibility is rapidly gaining ground, HRA reflects the extent to which organisation contributes to societys human capital by investing in its development. Finally, in an era where performance is closely linked to rewards and, therefore,

the performance of all groups/departments/functions needs to be quantified to the extent possible, HRA helps in measuring the performance of the HR function as such.

18.4 HISTORICAL DEVELOPMENT OF HRA

The traces of a rudimentary HRA can be found in the Medieval European practice of calculating the cost of keeping a prisoner versus the expected future earnings from him. The prisoners in those days were seen to be the general property of the capturing side. Consequently, after the victory a quick decision regarding whether to capture a prisoner or to kill him had to be taken based on the costs involved in keeping him and the benefits accruing from killing him. However, these represented very rough measurements with limited use. The development of HRA as a systematic and detailed academic activity, according to Eric G Falmholtz (1999) began in sixties. He divides the development into five stages. These are : First stage (1960-66): This marks the beginning of academic interest in the area of HRA. However, the focus was primarily on deriving HRA concepts from other studies like the economic theory of capital, psychological theories of leadershipeffectiveness, the emerging concepts of human resource as different from personnel or human relations; as well as the measurement of corporate goodwill. Second stage (1966-71): The focus here was more on developing and validating different models for HRA. These models covered both costs and the monetary and non-monetary value of HR. The aim was to develop some tools that would help the organisations in assessing and managing their human resource/asset in a more realistic manner. One of the earliest studies here was that of Roger Hermanson, who as part of his Ph.D. studied the problem of measuring the value of human assets as an element of goodwill. Inspired by his work, a number of research projects were undertaken by the researchers to develop the concepts and methods of accounting for
26
Intellectual Capital Accounting

human resource. Third Stage : (1971-76) This period was marked by a widespread interest in the field of HRA leading to a rapid growth of research in the area. The focus in most cases was on the issues of application of HRA in business organisations. R.G. Barry experiments contributed substantially during this stage. (R.G.Barry Corporation:1971) Fourth Stage (1976-1980): This was a period of decline in the area of HRA primarily because the complex issues that needed to be explored required much deeper empirical research than was needed for the earlier simple models. The organisations, however, were not prepared to sponsor such research. They found the idea of HRA interesting but did not find much use in pumping in large sums or investing lot of time and energy in supporting the research. Stage Five (1980 onwards) : There was a sudden renewal of interest in the field of HRA partly because most of the developed economies had shifted from manufacturing to service economies and realized the criticality of human asset for their organisations. Since the survival, growth and profits of the organisations were perceived to be dependent more on the intellectual assets of the companies than on the physical assets, the need was felt to have more accurate measures for HR costs, investments and value. An important outcome of this renewed interest was that unlike the previous decades, when the interests were mainly academic with some practical applications, from mid 90s the focus has been on greater application of HRA to business management. Different types of models to suit the specific requirements of the organisations have been developed incorporating both the tangible and the intangible aspects. Also, larger number of organisations actually began to use HRA as part of their managerial and financial accounting practice. Today, human and intellectual capital are perceived to be the strategic resources and therefore, clear estimation of their value has gained significant importance. The

increased pressures for corporate governance and the corporate code of conduct demanding transparency in accounting have further supported the need for developing methods of measuring human value. In India, human resource valuation has not yet been institutionalized though, as mentioned above, many public as well as private have adopted HRA.

18.5 INFORMATION MANAGEMENT IN HRA

Like any accounting exercise, the HRA too depends heavily on the availability of relevant and accurate information. HRA is essentially a tool to facilitate better planning and decision making based on the information regarding actual HR costs and organisational returns. The kind of data that needs to be managed systematically depends upon the purpose for which the HRA is being used by an organisation. For example, if the purpose is to control the personnel costs, a system of standard costs for personnel recruitment, selection and training has to be developed. It helps in analyzing projected and actual costs of manpower and thereby, in taking remedial action, wherever necessary. Information on turnover costs generates awareness regarding the actual cost of turnover and highlights the need for efforts by the management towards retention of manpower. Accountability in the management process is often enhanced when information
27
Human Resource Accounting

involving an evaluation of managerial effectiveness is generated. Finally, information on the intangibles like intellectual capital/human capital becomes necessary to measure the true worth of the organisation. This information, though un-audited, needs to be communicated to the board and the stockholders.

18.6 MEASUREMENTS IN HRA

The biggest challenge in HRA is that of assigning monetary values to different dimensions of HR costs, investments and the worth of employees. The two main approaches usually employed for this are: 1. The cost approach which involves methods based on the costs incurred by the company, with regard to an employee. 2. The economic value approach which includes methods based on the economic value of the human resources and their contribution to the companys gains. This approach looks at human resources as assets and tries to identify the stream of benefits flowing from the asset.

18.7 THE COST APPROACH

Cost is a sacrifice incurred to obtain some anticipated benefit or service. All costs have two portions, viz., the expense and the asset portions. The expense portion is that which provides benefits during the current accounting period (usually the current financial year), whereas the asset portion is that which is expected to give rise to benefits in the future. Arriving at a clear distinction between the two, however, remains an accounting problem even today (Flamholtz, 1999). Two types of costs are of special importance in HRA. These are original or historical cost, and replacement cost. The historical cost of human resources is the sacrifice that was made to acquire and develop the resource. These include the costs of recruiting, selection, hiring, placement, orientation, and on the job training. While some of the costs like salaries, for instance, are direct costs, other costs like the time spent by the supervisors during induction and training, are indirect costs. Sometimes, opportunity cost method, that is, a calculation of what would have been the returns if the money spent on HR was spent on something else, is also used. However, this method is seen to be not as objective as desired. Hence its use is restricted to internal reporting and not external reporting. The replacement cost of human resources is the cost that would have to be incurred if present employees are to be replaced. For instance, if an employee were to leave

today, several costs of recruiting, selection, hiring, placement, orientation, and on the job training would have to be incurred in order to replace him. Such costs have two dimensions- positional replacement costs or the costs incurred to replace the services rendered by an employee only to a particular position; and personal replacement cost or the cost incurred to replace all the services expected to be rendered by the employee at the various positions that he might have occupied during his work life in the organisation. Though replacement cost method can be adapted for determining the cost of replacement of groups, this method is used essentially to determine the replacement cost of individuals. Other cost based methods that may be used are the standard cost method and the competitive bidding method. In the standard cost method, the standard costs associated with the recruitment, hiring, training and developing per grade of
28
Intellectual Capital Accounting

employees are determined annually. The total costs for all the personnel signify the worth of the human resources.

18.8 THE ECONOMIC VALUE APPROACH

The value of an object, in economic terms, is the present value of the services that it is expected to render in future. Similarly, the economic value of human resources is the present worth of the services that they are likely to render in future. This may be the value of individuals, groups or the total human organisation. The methods for calculating the economic value of individuals may be classified into monetary and non-monetary methods.

Monetary Measures for assessing Individual Value

a) Flamholtzs model of determinants of Individual Value to Formal Organisations According to Flamholtz, the value of an individual is the present worth of the services that he is likely to render to the organisation in future. As an individual moves from one position to another, at the same level or at different levels, the profile of the services provided by him is likely to change. The present cumulative value of all the possible services that may be rendered by him during his/her association with the organisation, is the value of the individual. Typically, this value is uncertain and has two dimensions. The first is the expected conditional value of the individual. This is the amount that the organisation could potentially realize from the services of an individual during his/her productive service life in the organization. It is composed of three factors: l productivity or performance (set of services that an individual is expected to provide in his/her present position); l transferability (set of services that he/she is expected to provide if and when he/ she is in different positions at the same level); l promotability (set of services that are expected when the individual is in higher level positions). These three factors depend, to a great extent, on individual determinants like
Positional Replacement Cost Acquisition Costs Learning Costs Separation Costs Direct Indirect Direct Indirect Direct Indirect Cost Cost Costs Costs Costs Costs Cost of Cost of Separation Loss of Cost of Promoti Trainers Pay Efficiency vacant on or Time prior to position Transfer separati during from on search within Recruitment Formal Selection Training Hiring and orientation

Placement On the job Training

s s s s s s s s s s s s s s s s s s s s

The Cost Approach 29

Human Resource Accounting

activation level of the individual (his motivation and energy level) and organizational determinants like opportunity to use these skills or roles and the reward system. The second dimension of an individual value is the expected realizable value, which is a function of the expected conditional value, and the probability that the individual will remain in the organisation for the duration of his/her productive service life. Since individuals are not owned by the organisation and are free to leave, ascertaining the probability of their turnover becomes important.
Detriments Elements of of conditional conditional value value Skills Activation level Promotability Productivity Transferability Individualss Conditional Value Individuals Expected realizable value to a formal organization Satisfaction Probability of maintaining organizational membership Organization Role Rewards Hypothesized determinant Hypothesizad interaction A subset Possible determinant
s s s s s s s s s s s s s s s s s

Individual

The interaction between the individual and organizational determinants mentioned above, leads to job satisfaction. The higher is the level of job satisfaction, the lower is the probability of employee turnover. Therefore, higher is the expected realizable

value. b) Flamholtzs Stochastic Rewards Valuation Model The movement or progress of people through organizational states or roles is called a stochastic process. The Stochastic Rewards Model is a direct way of measuring a persons expected conditional value and expected realizable value. It is based on the assumption that an individual generates value as he occupies and moves along organizational roles, and renders service to the organisation. It presupposes that a person will move from one state in the organisation, to another, during a specified period of time. In this model, exit is also considered to be a state. Use of this model necessitates the following information: 1. The set of mutually exclusive states that an individual may occupy in the system during his/her career; 2. The value of each state, to the organisation;
Flamholtzs Model 30
Intellectual Capital Accounting

3. Estimates of a persons expected tenure in the organisation 4. The probability that in future, the person will occupy each state for the specified time. 5. The discount rate to be applied to the future cash flows. A persons expected conditional value and expected realizable value will be equal, if the person is certain to remain in the organisation, in the predetermined set of states, throughout his expected service life. The main drawback of this model, however, is the extent of information required to make the necessary estimates of the values of the service states, the expected tenure, and the probability that the individual will occupy the state for the specified period of time. However, if this information can be made available, this model emerges as one of the most sophisticated models for determining the value of individuals. c) The Lev and Schwartz Model As mentioned earlier, the Lev and Schwartz model is the basic model employed by Indian organisations (see Table 1.and 2). According to this model, the value of human capital embodied in a person who is y years old, is the present value of his/her future earnings from employment and can be calculated by using the following formula
TYT

E (Vy) Py (t 1) I (T) /(I R)t y where E (Vy) = expected value of a y year old persons human capital T = the persons retirement age Py (t) = probability of the person leaving the organisation I(t) = expected earnings of the person in period I r = discount rate The basic theme of Lev, Schwartz model is to compute the present value of the future direct and indirect payments to their employees as a measure of their human resource value. While doing so, the common assumptions set by the Indian companies are the pattern of employee compensation, normal career growth, and weightage for efficiency. Moreover, companies adapt this model to their practical requirements by making necessary alterations. For instance, different organisations use different discount rates for ascertaining the present value of future cash flows. This method of accounting is basically oriented towards measuring changes in the employees value rather than employers gains from the employees. Unless the employees payments are directly linked to employee productivity or the company performance, the changes in the value of employees will not reflect the changes in the employees contribution. As pointed out by Prabhakara Rao (1993) under the Lev, Schwartz model, the value of human resources will be more or less increasing, even if the organisations continuously incur losses/decrease in profitability. The attitude and morale of the employees, the contribution of the employees to the organisation,

and such other factors are out of the purview of the Lev, Schwartz model. Table 1: Lev and Schwartz Model
SAIL BHEL MMTC Years Number Value Number Value Number Value 1984-85 74464 1216 206414 9581 3638 96 1985-86 75915 1358 206198 9589 3760 121 31
Human Resource Accounting

1986-87 74918 1588 203292 10828 3830 140 1987-88 74813 1827 197296 12013 3862 158 1988-89 75116 2183 194872 12725 3825 174 1989-90 74436 2673 193223 15790 3825 196 Note :Adapted from Prabhakar Rao (1993) Table 2: NTPCs Human Resource Value,94-95 ( discount factor of 0.12) Category No. of Per Capita Total Value employees (Rs. lakhs) (Rs Crores) executives 6841 17.76 1215 supervisors 3010 15.11 455 workmen 12445 13.71 1705 Total 22296 15.14 3375 Source: Annual Report.

d) Hekimian and Jones Competitive Bidding Model In this method, an internal market for labour is developed and the value of the employees is determined by the managers. Managers bid against each other for human resources already available within the organisation. The highest bidder wins the resource. There is no criteria on which the bids are based. Rather, the managers rely only on their judgement.

18.9 NON-MONETARY METHODS FOR DETERMINING VALUE

The non-monetary methods for assessing the economic value of human resources also measure the Human Resource but not in dollar or money terms. Rather they rely on various indices or ratings and rankings. These methods may be used as surrogates of monetary methods and also have a predictive value. The non-monetary methods may refer to a simple inventory of skills and capabilities of people within an organization or to the application of some behavioral measurement technique to assess the benefits gained from the Human resource of an organisation. 1. The skills or capability inventory is a simple listing of the education, knowledge, experience and skills of the firms human resources. 2. Performance evaluation measures used in HRA include ratings, and rankings. Ratings reflect a persons performance in relation to a set of scales. They are scores assigned to characteristics possessed by the individual. These characteristics include skills, judgment, knowledge, interpersonal skills, intelligence etc. Ranking is an ordinal form of rating in which the superiors rank their subordinates on one or more dimensions, mentioned above. 3. Assessment of potential determines a persons capacity for promotion and development. It usually employs a trait approach in which the traits essential for a position are identified. The extent to which the person possesses these traits is then assessed. 4. Attitude measurements are used to assess employees attitudes towards their job, pay, working conditions, etc., in order to determine their job satisfaction and dissatisfaction.

18.10 MEASUREMENTS OF GROUP VALUE

32

a) The Likert and Bowers Model: Causal, intervening and end-result variables. Likert and Bowers propose causal,
Intellectual Capital Accounting

intervening, and end-result variables, which determine the groups value to an organization. Causal variables are those which can be controlled by the organization. These variables include managerial behaviour and organisational structure. Intervening variables reflect organizational capabilities and involve group processes, peer leadership, organization climate, and the subordinates satisfaction. Both, the causal and the intervening variables determine the end result variables of the organization. Figure 1 illustrates the elements used to measure human organisational causal and intervening variables. The end-result, dependent variables reflect the achievements of the organization or the total productive efficiency in terms of sales, costs, earnings, market performance, etc. They are dependent on the causal and the intervening variables.
Figure 1: Elements used to measure human resource organisational causal and intervening variables.

MANAGERIAL AND PEER LEADERSHIP Support Friendly; pays attention to what you are saying; Team Building Listens to subordinates problems; encourages subordinates to work as a team encourages exchange of opinions and ideas Goal Emphasis Encourages best efforts; maintains high standards. Help with work Shows ways to do a better job; helps subordinates plan, organize and schedule; offers new ideas, and solutions ORGANISATIONAL CLIMATE Communication flow Communication flow is amicable Decision making Subordinates know what is going on; superiors are practices receptive. Concern for persons Subordinates are involved in setting goals; decisions are made at levels of accurate information; persons affected by decisions are asked for their ideas; know-how of people of all levels is used. Influence on department The organization is interested in individuals welfare; tries to improve working conditions; organizes work activities sensibly. Technological adequacy From lower level supervisors, employees who have no subordinates. Motivation Improved methods are quickly adopted; equipment and resources are well managed. Differences and disagreements are accepted and worked through; people in organization work hard for money, promotions, job satisfaction and to meet high money, promotion, job satisfaction and to meet high expectations from others and are encouraged to do so by policies, working conditions, and people. GROUP PROCESS l Planning together, coordinating efforts. l Making good decisions solving problems l Knowing jobs and how to do them well l Sharing information l Wanting to meet objectives l Having confidence and trust in other members l Ability to meet unusual work demands. SATISFACTION
33
Human Resource Accounting

With fellow workers; superiors; jobs; this organization compared with others; pay; progress in the organization upto now; chances for getting ahead in the future. Source: Rensis Likert and David G. Bowers, Improving the Accuracy of P/L Reports

by Estimating the Change in Dollar Value of the Human Organization, Michigan Business Review, March 1973. b) Brummet, Flamholtz, and Pyles economic value model The Brummet, Flamholtz, and Pyle model follows the principle that a resources value is equal to the present worth of the future services it can be expected to provide, and therefore it can provide a basis of measuring the value of a group of people. According to this method, groups of human resources should be valued by estimating their contribution to the total economic value of the firm. Thus a firms forecasted future earnings are discounted to determine the firms present value, and a portion of these earnings is allocated to human resources according to their contribution. c) Hermansons unpurchased goodwill model According to Hermanson, the unpurchased goodwill notion is based on the premise that the best available evidence of the present existence of un-owned resources is the fact that a given firm earned a higher than normal rate of income for the most recent year. Here Hermanson is proposing that supernormal earning are an indication of resources not shown on the balance sheet, such as human assets. Even though his method of valuing human resources is explicitly intended for use in a companys published financial statements rather than for internal consumption, this would necessarily involve forecasting future earnings and allocating any excess above normal expected earnings to human resources of the organization. However, the assumptions would be subject to the uncertainties involved in any forecast of future events. This method suffers from several limitations: Firstly, since the methods limits recognition of human resources to the amount of earnings in excess of normal, the human resource base that is required to carry out normal operations is totally ignored. As a result, the value of human assets will be an underestimation. Secondly, the method only uses the actual earnings of the most recent year as the basis for calculating human assets, thereby, ignoring the forecasts of future earnings that are equally relevant for managerial decision making. d) Human organizational dimensions method Based on the Likert-Bowers model of groups value to an organization, discussed earlier, this method is based on the relationship among causal, intervening and end-result variables. The causal variables influence the intervening variables, which, in turn, determine the organizations end result variables. Hence changes in the key dimensions of organisation can be used as dependable indicators for forecasting future changes in productivity and financial performance. Monetary estimations of changes in human value of organisations. For computing a monetary estimate of the expected change in the value of human organization, the following steps are suggested: 1. Measure the key dimensions of human organization, using a Likert scale at specified time periods. These are in non-monetary measurements. 2. The scaled responses to questionnaire items called scores are then standardized by statistical methods to take into account the degree of variability of the set of responses. This is done for responses in each time period.
34
Intellectual Capital Accounting

3. The difference between two standardized scores from one period to the next is then calculated. This difference (called delta) represents the change in an index of specified dimensions of the human organization. 4. From present changes in dimensions of the human organization, the expected future change in end result variables is estimated. Specifically, for a given variable the delta is multiplied by coefficient or correlation between that variable and the end result variable. This provides an estimate in standard scores of the anticipated change in the end result variable attributable to a change in the human organisational dimension believed to cause that change.

5. Lastly, the standard scores are converted into the measuring monetary units for the end result variables. Likert points out that changes in the productive capability of a firms human organization cannot be assessed correctly unless periodic measurements of causal and intervening dimensions of that organization are taken regularly. Current profit and loss reports often encourage us to believe that changes are occurring. When profits increase, it is often assumed that the human organization has become more productive, but steps taken to maintain earnings or prevent losses may actually result in a decrease in the productive capability of the human organization. There is some controversy about the validity and reliability of this method. According to Flamholtz, future research on this method is necessary because its validity and feasibility have not yet been established. Likert, however, maintains that the method is feasible where reliable and valid measurements of the coefficients are available. e) Methods for valuation of expense centre groups Flamholtz proposes three methods for valuation of expense centre groups. In all these measures, the surrogate value is used for estimation. The three methods are: 1. Capitalization of Compensation 2. Replacement Cost Valuation, and 3. Original Cost Valuation Capitalization The capitalisation method involves capitalizing a persons salary and using it as a surrogate measure of human value. This value may be ascertained for groups as well as individuals. The value of the group is essentially the aggregate value of the individuals compromising the group. Capitalization of compensation method is not considered an ideal method of group valuation because it ignores the possible effects of synergy. However, this method may be used to arrive at an approximation of a groups value to the firm. Replacement cost valuation The replacement cost of a group is defined as the sacrifice that would have to be incurred today to recruit, select, hire, train and develop a substitute group capable of providing a set of services equivalent to that of a group presently employed. This method involves considerable subjective estimates, which reduce its validity and replicability. Original cost valuation The original cost valuation method involves estimation of the original cost of recruiting, selecting, hiring, training, and developing a firms existing human
35
Human Resource Accounting

organization. The need for using original costs to value groups arises out of the necessity of estimating the cost of developing an effectively functioning team. Teamwork is essential for effective communication, decision-making, coordination and several other critical organisational processes. Yet, when the original costs are used to make an estimation of the value of the expense centre, the costs of generating this teamwork are largely ignored. Outsourcing

Overview
A precise definition of outsourcing has yet to be agreed upon. The term is used inconsistently. However, outsourcing is often viewed as involving the contracting out of a business function - commonly one previously performed in-house - to an external provider.[2] In this sense, two organizations may enter into a contractual agreement involving an exchange of services and payments. Of recent concern is the ability of businesses to outsource to suppliers outside the nation, sometimes referred to as offshoring or offshore outsourcing (which are odd terms because doing business with another country does not mean you have to go offshore.[3][4][5][6][7]) In addition, several related terms have emerged to grasp various aspects of the

complex relationship between economic organizations or networks, such as nearshoring, multisourcing[8][9] and strategic outsourcing.[10] One of the biggest changes of recent years has come from the growth of individuals using online technologies to use outsourcing as a way to build a viable service delivery business that can be run from virtually anywhere in the world. The preferential contract rates that can be obtained by temporarily employing experts in specific areas to deliver elements of a project purely online means that there is a growing number of small businesses that operate entirely online using offshore outsourced contractors to deliver the work before repackaging it to deliver to the client. One common area where this business model thrives is in provided website creating, analysis and marketing services. All elements can be done remotely and delivered digitally and service providers can leverage the scale and economy of outsourcing to deliver high value services at vastly reduced end customer prices.

[edit] Reasons
This section is in a list format that may be better presented using prose. You can help by converting this section to prose, if appropriate. Editing help is available.
(October 2010)

Organizations that outsource are seeking to realize benefits or address the following issues:[11][12][13][14]
Cost savings The lowering of the overall cost of the service to the business. This will involve reducing the scope, defining quality levels, re-pricing, re-negotiation, and cost restructuring. Access to lower cost economies through offshoring called "labor arbitrage" generated by the wage gap between industrialized and developing nations.[15] Focus on Core Business Resources (for example investment, people, infrastructure) are focused on developing the core business. For example often organizations outsource their IT support to specialised IT services companies. Cost restructuring Operating leverage is a measure that compares fixed costs to variable costs. Outsourcing changes the balance of this ratio by offering a move from fixed to variable cost and also by making variable costs more predictable. Improve quality Achieve a steep change in quality through contracting out the service with a new service level agreement. Knowledge Access to intellectual property and wider experience and knowledge.[16] Contract Services will be provided to a legally binding contract with financial penalties and legal redress. This is not the case with internal services.[17] Operational expertise Access to operational best practice that would be too difficult or time consuming to develop in-house. Access to talent Access to a larger talent pool and a sustainable source of skills, in particular in science and engineering.[3][18] Capacity management An improved method of capacity management of services and technology where the risk in providing the excess capacity is borne by the supplier. Catalyst for change An organization can use an outsourcing agreement as a catalyst for major step change that can not be achieved alone. The outsourcer becomes a Change agent in the process. Enhance capacity for innovation Companies increasingly use external knowledge service providers to supplement limited in-house capacity for product innovation.[18][19] Reduce time to market The acceleration of the development or production of a product through the additional capability brought by the supplier.[20]

Commodification The trend of standardizing business processes, IT Services, and application services which enable to buy at the right price, allows businesses access to services which were only available to large corporations. Risk management An approach to risk management for some types of risks is to partner with an outsourcer who is better able to provide the mitigation.[21] Venture Capital Some countries match government funds venture capital with private venture capital for start-ups that start businesses in their country.[22] Tax Benefit Countries offer tax incentives to move manufacturing operations to counter high corporate taxes within another country. Scalability The outsourced company will usually be prepared to manage a temporary or permanent increase or decrease in production. Creating leisure time Individuals may wish to outsource their work in order to optimise their work-leisure balance.[23] Liability Organizations choose to transfer liabilities inherent to specific business processes or services that are outside of their core competencies.

[edit] Implications
[edit] Management, the corporation and consumers [edit] Management processes

Greater physical distance between higher management and the production floor employees often requires a change in management methodologies, as inspection and feedback may not be as direct and frequent as in internal processes. This often requires the assimilation of new communication methods such as Voice over ip, Instant messaging, and Issue Tracking Systems, new Time management methods such as Time Tracking Software, and new cost and schedule assessment tools such as Cost Estimation Software.
[edit] Quality of service

Quality in terms of end-user-experience is best measured through customer satisfaction questionnaires, which are professionally designed to capture an unbiased view of quality. Surveys can be one of research.[24]
[edit] Language skills

In the area of call centers end-user-experience is deemed to be of lower quality when a service is outsourced. This is exacerbated when outsourcing is combined with offshoring to regions where the first language and culture are different.[25] The questionable quality is particularly evident when call centers that service the public are outsourced and offshored.[citation needed] Call center agents may speak a variety of the language with different linguistic features such as accents, word use and phraseology, which may make them more difficult to understand for the clients. The visual clues that are present in face-to-face encounters are missing from the call center interactions and this also may lead to misunderstandings and difficulties.[26]
[edit] Security

Before outsourcing an organization is responsible for the actions of all their staff and liable for their actions. When these same people are transferred to an outsourcer they may not change desk but their legal status has changed. They are no longer directly employed or responsible to the organization. This causes legal, security and compliance issues that need to be addressed through the contract between the client and the suppliers. This is one of the most complex areas of outsourcing and requires a specialist third party adviser.[citation needed] Fraud is a specific security issue that is criminal activity whether it is by employees or the supplier staff. However, it can be disputed that the fraud is more likely when outsourcers are involved, for example credit

card theft when there is scope for fraud by credit card cloning. In April 2005, a high-profile case involving the theft of $350,000 from four Citibank customers occurred when call center workers acquired the passwords to customer accounts and transferred the money to their own accounts opened under fictitious names. Citibank did not find out about the problem until the American customers noticed discrepancies with their accounts and notified the bank.[27]
[edit] Qualifications of outsourcers

The outsourcer may replace staff with less qualified people or with people with different non-equivalent qualifications.[28] In the engineering discipline there has been a debate about the number of engineers being produced by the major economies of the United States, India and China. The argument centers around the definition of an engineering graduate and also disputed numbers. The closest comparable numbers of annual graduates of four-year degrees are United States (137,437) India (112,000) and China (351,537).[29][30]
[edit] Public opinion

In the United States of America there is a strong public opinion against outsourcing (especially when combined with offshoring) because it leads to job displacement.[citation needed] However, outsourcing supporters[who?] draw on mainstream economics to argue that outsourcing should bring down prices, providing greater economic benefit to all.
[edit] Standpoint of labor

From the standpoint of labor, outsourcing may represent a new threat, contributing to worker insecurity, and reflective of the general process of globalization.[31] On June 26, 2009, Jeff Immelt, the CEO of General Electric, called for the United States to increase its manufacturing base employment to 20% of the workforce commenting that the U.S. has outsourced too much and can no longer rely on consumer spending to drive demand.[32]
[edit] Standpoint of government

Western governments may attempt to compensate workers affected by outsourcing through various forms of legislation. In Europe, the Acquired Rights Directive attempts to address the issue. The Directive is implemented differently in different nations. In the United States, the Trade Adjustment Assistance Act is meant to provide compensation for workers directly affected by international trade agreements. Whether or not these policies provide the security and fair compensation they promise is debatable.

[edit] By country
[edit] United States

"Outsourcing" became a popular political issue in the United States during the 2004 U.S. presidential election. The political debate centered on outsourcing's consequences for the domestic U.S. workforce. Democratic U.S. presidential candidate John Kerry criticized U.S. firms that outsource jobs abroad or that incorporate overseas in tax havens to avoid paying their "fair share" of U.S. taxes during his 2004 campaign, calling such firms "Benedict Arnold corporations".[33] Criticism of outsourcing, from the perspective of U.S. citizens, generally revolves around the costs associated with transferring control of the labor process to an external entity in another country. A Zogby International poll conducted in August 2004 found that 71% of American voters believed that outsourcing jobs overseas hurt the economy while another 62% believed that the U.S. government should impose some legislative action against companies that transfer domestic jobs overseas, possibly in the form of increased taxes on companies that outsource.[34]

Union busting is one possible cause of outsourcing. As unions are disadvantaged by union busting legislation, workers lose bargaining power and it becomes easier for corporations to fire them and ship their job overseas.[35] Another given[by whom?] rationale is the high corporate income tax rate in the U.S. relative to other OECD nations,[36][37][38] and the practice of taxing revenues earned outside of U.S. jurisdiction, a very uncommon practice. However, outsourcing is not solely a U.S. phenomenon as corporations in various nations with low tax rates outsource as well, which means that high taxation can only partially, if at all, explain US outsourcing. For example, the amount of corporate outsourcing in 1950 would be considerably lower than today, yet the tax rate was actually higher in 1950.[39] It is argued[by whom?] that lowering the corporate income tax and ending the double-taxation of foreign-derived revenue (taxed once in the nation where the revenue was raised, and once from the U.S.) will alleviate corporate outsourcing and make the U.S. more attractive to foreign companies. However, while the US has a high official tax rate, the actual taxes paid by US corporations may be considerably lower due to the use of tax loopholes, tax havens, and attempts to "game the system".[40] Rather than avoiding taxes, outsourcing may be mostly driven by the desire to lower labor costs (see standpoint of labor above). Sarbanes-Oxley has also been cited as a factor for corporate flight from U.S. jurisdiction.
[edit] European Union

Where outsourcing involves the transfer of an undertaking, it is subject to Council Directive 77/187 of 14 February 1977, on the approximation of the laws of the Member States relating to the safeguarding of employees rights in the event of transfers of undertakings, businesses or parts of businesses (as amended by Directive 98/50/EC of 29 June 1998; consolidated in Directive 2001/23 of 12 March 2001).[41] Under that directive, rights acquired by employees with the former employer are to be safeguarded when they, together with the undertaking in which they are employed, are transferred to another employer, i.e. the contractor. An example of a case involving such contracting-out was the decision of the European Court of Justice in Christel Schmidt v. Spar- und Leihkasse der frheren mter Bordesholm, Kiel und Cronshagen, Case C392/92 [1994]. Although subsequent decisions have disputed whether a particular contracting-out exercise constituted a transfer of an undertaking (see, for example, Ayse Szen v. Zehnacker Gebudereinigung GmbH Krankenhausservice, Case C-13/95 [1997]), in principle, employees of an enterprise outsourcing part of its activities in which they are employed may benefit from the protection offered by the directive.

Different Types of Outsourcing

Introduction Outsourcing is the process by which an organization contracts with another individual or company to get some of its work done. Viewed this way, most organizations go for some kind or other of outsourcing. Generally it is non-core aspects of the business that are outsourced. The firms that offer the services thus required are called service providers or third-party providers. Businesses may thus tie up with service providers for either individual processes or whole projects or operations. Outsourcing can be divided into two broad categories. They are BPO and KPO. Let us examine how each differs. BPO In BPO (Business Process Outsourcing), a particular process task is outsourced. An example would be payroll. BPO work could be either back office related or front office work. By front office functions we mean customer oriented work like marketing, answering calls, technical support and so on, whereas internal work like billing and purchase come in the back office category. Multimedia/ animation, book keeping, business consultancy, CAD/ CAM, call center, DTP, data entry, proof reading and editing, typesetting, handwriting services, marketing, medical billing and transcription, web design and development etc are all services that could be put under the BPO category. KPO

As is evident from the description, BPO activities involve carrying out standardized processes for the client. KPO or Knowledge Process Outsourcing typically calls for work that needs higher levels of involvement from the worker. The worker has to employ advanced levels of research, analytical and technical skills and has to make decisions of a higher order than BPO work. Examples are pharmaceutical research and development, patent/ intellectual property research, animation and simulation. Data research and analysis, legal services, content writing and development and database development services. KPO industry is less older and mature than the BPO sector. Apart from BPO and KPO, ITO or Information Technology Outsourcing is another major category. ITO is usually overseen by the CIO of an organization. However the CIO is often called in to manage BPO and KPO operations where no significant IT skills are involved. This is due to the expertise the CIOs would have developed in outsourcing negotiations.