4 Case StudyBy Group III on Organizational Redesign of BPCL

______________________________________________________________________ _ Sub:- Organizational Redesign at BPCL.

Group Members:-Role Numbers:-023, 053, 086, 131, 168 & 182 Presentation by group on 19th October in the class

Organizational Redesign at Bharat Petroleum Corporation Limited: The Challenge of Privatization During his annual inspection visit to one of the refineries during mid-2001, Mr S. Behuria, the

Chairman of Bharat Petroleum Corporation Limited (BPCL), wondered if the corporation would

survive impending privatization or if its ownership would change. How could he motivate employees to be ready for upcoming competition in 2002 when state-owned enterprises in India would be privatized? Would workers deal with the momentum of the proposed organizational redesign process or would everything crumble with full deregulation of the petroleum industry?

Background History of the Company Bharat Petroleum Corporation Limited (BPCL), a government-owned company incorporated under the Companies Act, 1956, is in the business of refining, storing, marketing and distributing of petroleum products. The paid-up capital of BPCL is Rs 300 million 1, of which the Government of India (GO I) holds 66.2%. The balance (33.8%) of the equity is held by foreign institutional investors, financial institutions, employees, and other investors. The history of BP CL dates back to 1975 when the GO I, pursuant to an agreement, acquired Burmah-Shell Refineries Limited (BSR). The Burmah-Shell Oil Storage and Distributing Company ofIndia Ltd (BSM), a foreign company established in England in 1928, was in the business of distribution and marketing of petroleum products in India. Burmah-Shell Refineries Limited was renamed Bharat Refineries Limited (BRL) in 1976 and to BPCL in 1977. Burmah-Shell Refineries Limited was incorporated in 1952 as a company under the Companies Act in 1913 in Bombay. Between 1991 and 1994, the Gal had disinvested part of its holdings to financial institutions and BPCL employees. As a result, the equity holding of the GOI was reduced to 66.2%. The GOI planned to fully divest its share by the end of 2002.

Crisis Bharat Petroleum Corporation Limited operates in the retail, lubricant, liquid petroleum (LPG) and aviation fuel sectors. With the ongoing liberalization process in India, sectors like LPG and lubricants have been deregulated. Bharat Petroleum

Corporation Limited owns one refinery in Mumbai, which has a capacity of 7-8 million tons, and it sells about 16 to 18 million tons of crude per year. As the market is controlled in the retail business, there is a national pool of oil, controlled by the Oil Coordination Cell (OCe), which distributes crude to the three main oil retailers in India. There is one private firm in the industry, Reliance Petroleum, which cannot openly compete in the market, but which has its own refinery. The output generated from its refinery is bought and distributed by one or more of the three state owned enterprises (SOEs), i.e., BPCL/Hindustan Petroleum (HPCL), and Indian Oil Limited (IOL), all three of which had enjoyed a monopoly under the administered pricing mechanism (APM) of the GO 1. With full deregulation of the industry proposed in 2002, the market structure will change and there will be open competition in the industry. One of BP CL's senior managers reflected, 'In the lubricants sector BPCL had a market share of 12-16%. In 1999, when the lubricants market was deregulated, BPCL's market share came down to 4%. There is worry about what will entail when the entire sector is deregulated. ' Retention of market share would be a serious threat with the entry of new local (private) and global players in this sector in the country. Bharat Petroleum Corporation Limited ought to redesign itself and shift from a SO E mindset operating under a regulated market to an lean, agile, competitive, and customer-oriented player to compete for market share.

Industry Environment and Market Structure The business environment saw many changes after the initial phase of deregulation. India's petroleum retail sector (Table 2.7) is currently dominated by SOEs, and private domestic firms such as Reliance and Essar Oil have been barred from tapping the market directly. This market structure faces impending change. With new private investment, both BPCL and HPCL will be well positioned to attract

1 All

figures and data are at the time the case was written, that is before 2002.

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Table 2.7:K ey Players in the O il Industryndia! in I M ar k e t Sahre

84% state-owned

Refining Capacity (barrels per day, bpd) 620,000bpd

66% state-owned"

180,000bpd

20%

HPCL

51 % state-owned"

295,000bpd

Indo Burmah Petroleum (IBP) Reliance Industries

Controlling 33% stake held by IOC Privately owned

-

Essar Oil

Privately owned

Company

Ownership

Indian Oil Corporation (IOC) BPCL

* Controlling 25% stakes due to be sold off (source: www 1 All

540,000bpd

55%

20% 5% Presently barred from access to the marketing! retail sector

21O,000bpd refinery due to be commissioned in 2004 .indiainfoline.com).

figures and data are at the time the case was written, that is, before 2002.

investment and increase their market share at the expense ofIOC, the leader. Naturally the concern remains that the strategic sale of HPCL will simply be palmed off to SOEs, as in the case of Burmah Petroleum. India's demand for petroleum products is expected to increase after liberalization, and is therefore attracting the attention of multinational oil companies and other private Indian players. Domestic private firms are trying to complete the construction of their refineries to exploit future prospects. This is bound to increase competition in this lucrative sector. This will mean a significant loss in the market share of the SOEs. Deregulation would also bring other changes, such as the determination of product prices by import parity prices. Margins set by competitive pressures will be more volatile and highly uncertain. Dealers and distributors may shift their allegiance and consequently, the existing firms may lose retail sites and LPG warehouses. Firms may react by offering

minimal facilities in their highway segment of retail outlets to keep costs low and reduce lead times. Trained and experienced manpower in the industry will be lured away by the new entrants. Non-fuel offerings such as convenience stores and ATMs are likely to be threshold activities, especially in metros and urban markets. One of BPCI1s managers summed up, 'The increasing demand for hydrocarbons in India is a tremendous opportunity. The major concern is the possible and inevitable loss of market share due to an increase in the number of players in the market place. The greatest challenge will be to retain our customers and remain profitable.'

Redesign Strategy A BPCL manager reflected on strategy, 'Our broad . strategy is to win in the deregulated environment, focus on customer service, and improve our profitability. In order to beat the competition, a very

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strong customer focus is needed in the whole organization. It is necessary to understand and respond quickly to customers' needs and expectations. The speed at which the staff responds in the market will determine the success of the corporation. The measure of success in the competitive scenario will be customer loyalty. The whole organization has to align itself to meet customer requirements and to acquire new competencies and skills.' In the refinery sector, which is still regulated, BPCL has a capacity of 7-8 million tons, whereas it sells about 16 to 18 million tons of crude per year. To address this gap, BPCL acquired Kochi Refineries, which has a capacity of about 8 million tons and is looking to expand opportunities in the refinery business. Following the international model, oP" portunities into related and unrelated diverse fields in the non-fuel sector are experimented. Bharat Petroleum Corporation Limited hired the internationally renowned consultancy firm McKinsey to formulate a strategy for retailing effectively and for opening convenience and grocery stores. The deregulation of the industry forced top management to realize that BPCL had to focus on its customers and make decisions faster. That would be possible only by de-layering the hierarchical organization and by empowering its staff. Two senior managers pointed out, 'Most employees do not understand the nature of the business, what we are doing. Our core competence is not refining crude oil but selling products. This is where the market will be after deregulation. The aim of redesign was to be ready for change. This meant changing ourselves to be tuned to the external changes. Our national competitors are Reliance and MRPL (a joint venture by the Birla Group of Companies) and foreign competitors will be Castrol, TotalElfFina, BP, and ExxonMobil, as was witnessed with the deregulation of the lubricants sector.' Organizational redesign started in 1998 with the help of consultancy firm Arthur D. Little and its group of consultants. They formed a project group with over 30 people drawn from different functions and regions with a general manager as their leader. It was called Project CUSECS, meaning

customer service and cutomer satisfaction. Their main thrust areas were better customer service, profitability, creation of strategic business units (SBUs), and division of the organization into regional units. The redesign of BPCL saw the change of the organization structure from a functional to a divisional enterprise with six SBUs spread over four geographical regions (north, south, east, and west). Before the redesign at the corporate level, the structure was functionally oriented, consisting of the functions of sales and distribution, information systems (IS), marketing, and HRM. In this structure, although the depots reported to the divisional manager, there was very little coordination at the field level amongst the sales officers and the operational officers. One of the senior managers summed it up, 'The functional structure made it difficult for senior managers to focus on developing and implementing strategies for particular business such as lubricants and LPG. It created a bottleneck between the process of strategy formulation and its implementation'. The redesigned structure had six SBUs: (1) refmery; (2) retail; (3) industrial/commercial; (4) lubricants; (5) LPG; and (6) aviation. The HRM function (both human resource services and human resource development) played a critical role in the redesign process. As one of the members of the board of directors pointed out, 'BPCL has undergone a very interesting HRD-powered transformation process ... it was orchestrated by Mr. Arun Maira and his team from Arthur D. Little. Instead of providing BPCL with a package of vision, strategy, structure, process ... he asked the management to carry through a very broad visioning exercise. Some 2500 managers participated. It resulted not only in a clear corporate vision, identification of shareholders, and statement of core values, but visions were collectively evolved by each function, department, branch, and section. This envisioning and agenda setting was facilitated by trained individuals, many of them volunteers from functions other than HRM.' The main theme of the vision is 'Business partner first, business partner last.' The themes vary for each SBU. For the lubricants SBU, it is 'Survive today, to be there in the future'; for the retail SBU

Human Resource Environment 115 it is 'People above oil . We care for you, we exist because of you .' The necessity and the competencies required for the redesign were summed up by a senior manager, 'Competition is with both national and multinational companies. The key to compete is to deliver quality products at a cheaper price, cut costs, and keep costs in control . There should be a concern for financials by all stakeholders with a profit building motive and sustaining the bottom line. The required functional competency is in selling and distributing products. Customers, both internal and external, should be satisfied. The challenge is to manage this situation with effective leadership at all levels.' The redesigned organization has four elements: (1) corporate centre; (2) SBUs; (3) support services; and (4) lateral thinking mechanisms. The corporate centre has four directors (marketing, finance, refineries, and personnel). The marketing director and his team of eight members are responsible for leading and coordinating the brand building and brand management functions of the SBUs . The finance director and his team of six members are responsible for leading and coordinating the strategy development effort at the corporate level . The directors facilitate the SBUs in developing and integrating their respective strategies across the businesses. They also assist top management in optimally allocating resources while managing the business portfolio. The support services are HRM, finance, IS, and engineering and projects (marketing). Executives in each embedded unit report to the head of that SBU . For example, the embedded HRM function in the LPG SBU reports to the head of the LPG SBU. Dedicated teams called shared services perform the support tasks that have enterprisewide or region-wide implications and that are not business-specific. This is done to bring down the operating costs of these services by pooling some of the activities outside the business. Before the redesign, the organization was 'to tally hierarchical', according to some executives. Today, it is mostly participatory and team -based

with absolute delegation of authority. An example of this is the new performance management system; it is open. Most personnel understand the role they have to play. One of the managers pointed out, 'The attitude shift has taken place in a span of three years only'. Bharat Petroleum Corporation Limited recruited generalists and trained them to be specialists. Most senior managers at BPCL are generalists; only a few are specialists. One of the managers pointed out , 'Due to the historical recruitment structure, the personnel are generalists while we need bright specialists like MBA graduates. If we cannot look into this, there would be a wide gap as 70% of our recruits are not as good as our competitors; they are average. The profile, experience and expertise for the job are not there .' One of the vehicles used for facilitating the change process has been communication. Plenty of communication workshops have been conducted, in which staff from various locations, irrespective of their positions in the organization, have participated. This has brought about much better understanding and commitment to the change process.

Human Resource Management at BPCL: 'It is a great place to work' The HRM function has been classified along with the other support services like finance and information systems. The support services are organized into three types of structures: (1) embedded support services; (2) shared support services; and (3) corporate services. Before the redesign, the regional HR manager was responsible for all the functions in the region, and all the personnel in the region reported to the regional manager. The regional manager had a very formal relationship with the corporate HRM department . Now, each SBU has HRM personnel known as 'Embedded HRM' who assist the SBU in HRM issues like transfers, organizational learning, performance appraisal, and discipline. The embedded HRM departments •administer the performance management system; •plan the workforce;

116 Strategic Human Resource Mana

gement

• design functional training programmes and _ deliver them; •anchor organizational learning; •transfer workers within business units; and •manage discipline. The shared services entail support tasks that have enterprise-wide and region-wide implications. They are not confined to being business-specific and are transactional in nature. All SBUs and entities share teams performing these tasks. Pooling some of the activities together outside the businesses leads to economies of scale. The HRM services team in each region is headed by the head of regional services, who is supported by the HR manager (employee relations), responsible for recruitment of non-management staff. The role of the HRM function is to provide support to the main business. The HRM function should provide information and support pro actively. It should know the business the company is in. It should not concentrate only on HRM practices, but also implement those practices in helping the business.

Recruitment Process Recruitment at BPCL takes place mostly at the entry level. The company believes in building its human potential rather than buying it from the market. Until now it was seen as a lifetime job, and people worked their way up to management. The redesign entailed strengthening the field force to boost marketing and customer focus. The consultants advised a 50% increase in the sales force and frontline staff, but without any additional recruitment. The sales force was increased by redeploying management staff from the back office and retraining them. After the initiation of the redesign process, there has been a hiring freeze. Recruitment is done only for specialized and new jobs. Competency mapping will be introduced. Selection within the organization is done by matching the job profile and appraisal. Scope for promotion is limited at BPCL. The average age at BPCL is 35-40. A promotion can be expected only

after three years. There is a system of job-rotation. To occupy a responsible position, an executive needs to have work experience in at least three departments. One of the managers reflected, 'There is no clear cut policy on promotion'.

Retraining and Redeployment Retraining and redeployment play a very important role after the redesign process. It is a part of the business strategy to redeploy and transfer personnel. The excess workforce is trained and redeployed. But the decision to redeploy is not taken ad hoc. Retraining and redeployment is discussed first with the personnel and then carried out. This is a big challenge, as employees do not want to be redeployed. One of the senior managers pointed out, 'After the implementation of an ERP system in the areas of dispatch, logistics, project, and HRM, there is a surplus in the workforce. We were trying to find new opportunities and to train the excess workforce to absorb them where they can build new competencies' .

Performance Management System The extensive team-based structures proposed by Arthur D. Little were pilot-tested with six retail projects. Visionary leadership and planning (VLP) workshops were held to clarify shared visions, document the current situation, and devise concrete plans for bridging the gap between vision and reality. During the redesign process, the consultants understood that the new organization needed new competencies and a new minds et to make the redesign successful. The functional perspective needed to be changed into a team-based, collaborative, crossfunctional mindset. It was a-difficult task. Employees were invited to participate in learning experiences through the foundations of learning (FO L) programme, which was designed to develop their abilities to work in high-performing cross-functional teams. One example of the many observations is: 'In one of the questions, before the new performance management system (PMS), there were four options in the performance appraisal system on the question of the dependability of the subordinate:

Human Resour ce Envir onment

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(1) gener ally dependable; (2) dependable; (3) mostly

loyalty index, cycle time of retail eng ineering projects , securit y of sites, and morale of staf f.

dependable; and (4) trustwo rthy. Supervisors who did not know the difference between these terms could hamper the career of a bright subordinate as the term s are ambiguous and can be represented in different wa ys.' One of the managers reflected, 'One of the critical elements in the success of a redesign of an organization is the reward process. The onl y reward for good performance we have toda y is promotion. As the number of vacancies is always limited, all eligible staff in a job group cannot be promoted. Rewarding good performers/teams is a solution to achieve pe rformance . A task force is looking into a reward structur e that has a comb ination of monetar y and non-monetary reward .'

A series of activities were t aken by consultant s to implement the redesign m echanism and link it to performance. The performance of retail sites was monitored closel y. Dramatic improvements were seen in the resolution (and pre vention) of customer complaints , as well as the reduction of open item s (accounts recei vable). Product ivity and operating efficienc y increased ; the increa se was-felt throughout the units. Both managerial and non-m anageri al personnel understood the need of the hour aft er going through an intense communication proc ess and felt the need to do their best to save their company from imminent competition .

Rightsizing/retaining BPCL is a public enterprise; there is no scope of rightsizing. Hence, efforts are made to retrain and redeploy personnel from dep artments that have a surplus of workforce. A current e xample is in the refiner y after the implementation of ERP . One of the managers pointed out, 'Volunt ary retirement schemes (VRS) should come in immediately . We should have a policy like that ofIndian Oil Company , where employees have a choice to opt for VRS. Interviews are held for the employees who opt for VRS scheme . These interviews form the basis for deciding whether VRS should be given or not . lac does not give VRS to an emplo yee if he /she wants to quit , and just let him/her quit . This will br ing some scope for new recruitment of profession als within the company .' Changes in performance Bharat Petroleum Corporation Limited decided to measure performance in both financial and customer satisfaction terms. Financial performance was measured by return on capital employed (RaCE ), return on investment (ROI), and internal rate of return (IRR). Customer satisfaction was measured b y market share and customer lo yalty index. The index was constructed on the basis of periodic customer surveys. The capabilities of ke y business (corporate and business strategies, IS plan , brand strategy, and HRM strategy ) were gauged b y the quality of their outputs . For example , the retail SBU measures its pe rformance by assessing return on capital employed, customer

The redesign process , the reinforcement of HRM strategie s, and the communic ation exercises together redu ced absenteei sm, improved morale, and he ightened employees' co-operation with management . Emplo yees felt that th ey had to put in their be st to fight the challenge . Thissaw the beginning of inno vations in product , process, systems, and management at all level s.

Constraints Some nationalistic and protectionist ministers ha ve opposed the planned sell -off because the go vernment will be relinquishing much of its influence over the pricing of fuels , a particularly sensitive issue that has precipitated unrest and caused criticism of pa st governments , and be cause they feel that the companies will not b e sold at a fair price. The process of privatization has so far raised only Rs 50 billion (US $1 billion), ag ainst a governmental target ofRs 120 billion (US $ 2.4 billion).

Future Outlook and Implications Along with Reliance and Essar Oil , foreign op erators such as Shell , BP, ExxonMobil , and Petronas are expected to bid for con trolling stake s. Private investment will then enable investment in marketing and retail infrastructure, which should lead to improved service levels, if not lower prices . The surge in the companies ' share phces reflects

118 Strategic Human Resource Management

investor confidence that the biggest hurdles have now ?een navigated and should help the Indian

government to get its privatization agenda back on track after several months of uncertainty.

Questions 1.What changes have occurred in the business environment after liberalization and after the deregulation of the LPG and lubricant sectors? 2.What were the major HR challenges confronted by BPCL after liberalization? . 3. What changes were introduced by BPCL in HRM as part of the redesign strategy? How did these changes benefit BPCL? According to the case study, what are the elements critical to the success of a redesign strategy? 4.What steps can be adopted by BPCL to achieve its long-term vision and to beat the competition

resulting from deregulation? Give evidence from the case. 5.Critically evaluate the role of HRM in transforming BPCL from being a state-owned enterprise in a regulated market to a competitive, customer-oriented firm. 6.To what extent do you think the HR function plays a critical role in supporting organizational changes? 7.Given the future outlook of the petroleum sector, what role can the HRM function play in ensuring that BPCL continues to remain competitive?