MAJOR IR & HR ADJUSTMENTS OF SMITHKLINE BEECHAM PHARMACEUTICAL &

THE RECENT CBA

A Term Paper in IR 204(Labor and the Economy)

Presented toDr. RENE E. OFRENEO

School of Labor and Industrial Relations, University of the Philippines

Diliman, Quezon City

In partial fulfillment of the requirements inIR 204 First Semester

Academic Year 1999-2000

ByJAIME E. NOBLE, JR.

IR 204 / 6:00-9:00 p.m., Tuesday

October 7, 1999

1

Table of Contents

pageI. Introduction. 1II. Overview of the Company a) Company’s History 2 b) The Philippine Operations 3III. Major Industrial Relations and Human Relations Adjustments 4IV. The Sandigan and its Collective Bargaining Agreement

9V. Conclusion. 13Bibliography 14

I. Introduction

Adjustment problems have occurred in many enterprises as well as the workers and trade unions due to lowering down of tariffs in some industries much faster than some economies that the Philippine is competing.

In the Philippines, the most obvious consequences to labor and trade unions have been the downsizing of some companies to reduce their labor cost. Likewise, cost-cutting measures and productivity schemes was adopted to improve the global competitiveness of the company. These consequences have dislocated workers and their families. As a result of downsizing, heavier workloads are being assumed by those who are retained. Sad to say, some companies are using globalization to bust unions.

2

On the other hand, some re-engineering is painless. These are companies that offer admirably high early retirement pay either to reduced workforce or hire better skilled workers. Some of the separated workers are given livelihood training and organized into cooperatives.

The SmithKline Beecham, a transnational healthcare company and one of the leading pharmaceutical industries in the Philippines decided to adopt the latter. This may be contrary to the current Philippine trends. The year 1984-85 and 1997-98 was year of massive lay-offs. Numerous companies adopted the involuntary retirement as a policy and culture of closures among other transnationals.

Clearly, there will always be pains in any adjustments and reengineering exercise as a consequence to globalization. In this connection, SmithKline Beecham adopted the Win-win type of reengineering by the management. Likewise, its union Sandigan adopted the option of participative involvement specifically, in the collective bargaining agreement because the adjustment programs are also meaningful to them. Together they will face the challenge of global competitiveness.

The purpose of this paper is threefold: 1) It will present the major IR/HR adjustments of SmithKline Beecham Pharmaceuticals; 2) it will assess the union and management response to those adjustments; and finally, 3) it will examine the December 1998 collective bargaining agreement of the company in the midst of restructuring. The facts for this paper are based on interviews with Lito de Guzman (Human Resources Director), Bobby Sabater (Sandigan-President), and Marlon Pasia (Sandigan-Boardmember). This was supplemented by published and unpublished materials and data’s of the company.

The company had undergone a series of adjustments. This includes the merging of SmithKline and Beecham in 1990, the acquisition of Sterling Corporation in 1996, and the recent structural adjustment which the focus of this paper.

3

II. Overview of the Company

a) Company’s HistorySmithKline Beecham, a pharmaceutical company was created by the

merger, on July 26, 1989, of two industry’s most respected names: SmithKline Beckman and Beecham Group. In just a few short years it has emerged as a global healthcare leader.

SmithKline began as a small chemical business founded in 1830 by Philadelphia brothers in law, John Smith and John Gilbert. It became Smith, Kline & Company when Mahlon Kline was named partner in 1875. Many notable discoveries were made by SmithKline scientist, including research that led to Tagamet. The world first effective ulcer treatment and the company first $ 1 billion products. For the achievement John Black was awarded three Nobel prizes in 1989. SmithKline was first to launch an effective mental health treatment, Thorazine, a sustained- released medicine, Contac and Engerix-B, the world’s first genetically engineered vaccine against Hepatitis B.

Beecham was incorporated in 1928, when it buys the Beecham Pills, business that has been founded in 1842 by Thomas Beecham. The company expanded greatly during the 1930’s when it purchases the Macleans toothpaste and lucozade energy drink, and again in the 1940’s when it established research laboratories in Brockham Park in the U.K. Beecham scientist brought worldwide fame to the Brockham Park facility in 1957, when they discovered penicillin nucleus called 6-APA. That discovery made it possible to create an infinite number of new penicillin’s that can be targeted at a pre-determined range of bacteria.1

b) The Philippine OperationsSmithKline started its operation when it was granted a license on

September 25, 1963 to manufacture, sell, and export pharmaceutical

1 Facts are gathered from press release on SmithKline Beecham’s history.

4

related products. It housed its manufacturing plant and office in Cainta with around 215 workforce.

On the other hand, Beecham Research started in 1966 management of Zuellig Pharma Corporation based in Makati. It consists of around 90 employees mostly sales people. Its products were carried out by a third party manufacturing, Interphil Laboratories in Sucat.2

Late 1980’s were crucial for both companies due to adverse economic environment. A number pharmaceutical company has been declining its local operation. They actualized their first round of structural adjustments by strategic alliance to improve cashflow, increase profitability, and increase market share in particular. Likewise, to increase productivity and global competitiveness in general. The merger of SmithKline Beecham in the Philippines was formalized on January 16, 1990 after series of integration meetings.

In 1996, the company initiated another round of adjustments, the acquisition of Sterling Corporation and its products. SmithKline Beecham decided to acquire the said company to accomplish one of its plan to come up with a new consumer products and consequently maintain the Sterling’s network markets.

Today, it boasts and maintains a manufacturing plant in Cainta that manufactures premium pharmaceutical related products for local and Asia pacific market. The company also manufactures product for Sanofi Winthrop, also a pharmaceutical company. Likewise, Interphil Laboratories was retained to manufacture other pharmaceutical products. Thus, it came out with a promise of “Simply Better”3 ways as a corporate culture and values.

III. Major Industrial Resources and Human Resources Adjustments

1)Rightsizing.

2 Ibid.3 Simply Better is SmithKline Beecham worldwide slogan.

5

This is the most common measure adopted among various enterprises to reduce the expenses of the company. Also, to reduce inefficiency and redundancy in the workplace. The idea is to come up with a truly productive company and enhance efficiency among employees.

To prevent the incidence of layoff, SmithKline Beecham carried out prevention tactics. The management adopted voluntary separation and early retirement program in response to downsizing. To facilitate the program, SmithKline Beecham offered an attractive “Early Retirement Programs” (ERPs). This is offered for any employees who want to avail of program without prior requirements. The company is offering 300% for every year of service for any employees that are interested. On the other hand, employees that are redundant, non-productive, and unable to reach the quotas were encourage and offer the same package. However, those who refused the program despite inefficiency seek refuge with the union. Since there has no urgency and severity of the need to reduce headcount, the management did not force them. An example, was the case of the janitor who refused the program despite he is redundant. At that time, the company has two janitors. So he seeks the opinion of Sandigan who advised him to stay. Today, that same janitor is with the company and earning a decent salary.

In like manner, skilled employees who really want to leave the company for awaiting employment availed. Likewise, those who want to start a new career in business opted to become entrepreneurs. Let take the case of the Sales Director. To manage his animosity to his Boss who is the General Manager, he availed of the program. Also a number of competent employees also resigned and landed a more prestigious in other company. Still, SmithKline Beecham’s downsizing program was very minimal and voluntary.

2)Overtime restrictions. To maximize regular working hours and augment cost cutting

overtime restriction was instituted. As mentioned earlier the company’s “Win-Win” formula should always be uphold.

6

In response, the Human Resource comes up with its key initiative. The program was called TGIF (Thanks God It's Friday). Here, it adopted no overtime every Friday and employees are encourage to leave the office at 4:00 p.m. to cut overtime and to be efficient on weekdays. Activities that will spillover beyond 4:00 p.m. are advised to be scheduled on another or better finish work on time. This prompted work efficiency among the employee because the company expects to have an output daily without the need for costly overtime.

On the other side of the coin, it allows the employees to spend more time with their family, relax, and ease pressure from work by leaving the office early. Thus, balancing work and family life.

This initiative also encourages employees to embark on other endeavors to enhance their over-all personality as it is said that a person with balanced outlook in life is more productive.

3)Freeze hiring.The Human Resources as the planning body around restructuring

comes out with “Freeze Hiring” policy. This was done to fully implement the reduction of employees and assess the productivity of the workers. This policy will also minimize tension with the union. In so far that the company is undergoing a couple of adjustments specifically, downsizing any hiring program may create animosity within the organization. Likewise, hiring may oppose the earlier adjustment programs pertaining to reduction of workers

4)Reduction of expenses.The company adopted several costs cutting measures. Foremost of

which was the reduction of promotional programs. Advertising being the most expensive program was largely reduced. A cut on advertising was instituted to limits expenses of company resources.

Repatriation of expats was likewise adopted. The was to optimize SmithKline Beecham Philippines workforce and not worry about

7

maintaining expats within the company. With the advent of advance telecommunications communication is within reach.

5)Out-sourcing of materials.SmithKline Beecham’s management came out with work processes'

tactics in support of restructuring. First, is when the prices of some goods are lower in other country, the tendency is for the company to import because of lower tariff and cheaper prize. With tariff on imports being low the company adopted this policy of outsourcing. Lets consider sugar instance, sugar in Thailand cost if 9 Baht almost 9 pesos in Philippine currency. While the cost of the same in the Philippines is about 25 pesos. Thus, there are no reasons not adopt the latter.

The tendency of the company to import production material is high. This program is a key element in global competition wherein an organization is progressive and innovative in various facets of the business.

6)Team building and continued improvement among employees.To intensify improvement within the organization, the company

carried out a series of team building activities and company wide training to pursue improvement among all the employees.

Clearly, organizational culture in the company was the main attraction of sound labor and management relations. It adopted no time-in and out policy for the field workers. No, on the spot checking, house audit or spot audit.

In any case of grievance the Union and Human resources will discuss details of the cases.

7)Upgrade quality of products by ISO 9002 certification and Improving customer service.

SmithKline Beecham involves in manufacturing of premium brands of product lines for Asia and the Pacific market. Therefore, to assure

8

external and internal quality standards, the company adopted international quality standards by adhering to ISO 9002 clauses.

The is now ISO9002 certified and is proud to have passed the certification audit in its first attempt. With this certification the company's customers are assured of quality products that pass the international standards.

This can be observed by; first, Establishing quality policy; second, organizing personnel; third, verify quality; and fourth, review of quality systems. Likewise, the quality policy must be easy to understand, relevant to organizational goals, and it's must be ambitious yet achievable.

The workers should prevent the occurrence of product nonconformity, they should identify and record any product quality problems, recommend solutions, verify their implementation, and control other foreseeable problems until it has been corrected.

Here adequate training for production workers and mangers is needed including equipments. Moreover, customer satisfactions are well emphasized. To increase market share to increase customer satisfaction.

However, another form of flexibility that is not given enough attention is the use of various HRD approaches to upgrade the workers in order to make them multi-skilled and more productive.4 Also, to fully implement ISO 9002, upgrading of appropriate equipment is a necessity.8)Third Party Manufacturing system.

This refers to passing the production of some products to other companies. In the case of SmithKline Beecham, some pharmaceutical products were given to Interphil Laboratories because of competitiveness and expertise

To reflect on the above restructuring goals implemented by SmithKline & Beecham we can notice a dramatic achievement. First, there was a reduction cost or expenses and inefficiency. Second, there was improve internal communication and increase in employees autonomy and decision making. Third, improve customer service and increase sales and

4 Ibid., pp. 6.

9

profitability. Fourth, there was an apparent increase in productivity among employees.

However, the impact of restructuring on workforce had increase workloads and some stress.

Table 1.1Employees Distribution

Before Downsizing5

Departments No. Managers No. of Rank & FileSales 35 180

M manufacturing 15 32Finance 15 8

Marketing 9 9Human Resources 12 4

MIS/IT 8 6Executive Office 3

Total No. of Managers = 97Total No. of Rank & File = 239 (all Sandigan members)Total No. of Managers = 336

Table 1.2Employees Distribution

Post-Downsizing6

Departments No. Managers No. of Rank & FileSales 22 203

M manufacturing 10 20

5 The figures were obtained through Marlon Pasia, above was estimates because of unavailable data.6 Figures were obtained through SmithKline Beecham’s newsletter..

10

Finance 20Marketing 13

Human Resources 12 2MIS/IT 12

Executive Office 3Total No. of Managers = 92Total No. of Rank & File = 225 (all Sandigan members)Total No. of Employees = 317

IV. The Sandigan and its Collective Bargaining Agreement

The impact of structural adjustment of labor relations is direct because it is concerned with rule setting between labor and management is directly affected by the changes in the rules in making business.7

The Philippine Labor relations system was known to be adversarial in nature specifically, the collective bargaining agreement (CBA). In fact, in the pharmaceutical industry CBA was usually done from four months to a year. In the past, the SmithKline Beecham CBA’s the traditional method of collective bargaining was used by the company thus, creating undue anxieties caused by heated discussions. Differences in positions during negotiations were prevalent. In other words, it was a “Win-Lose” environment. It was noted that this affects the morale and productivity of the employees. To paved the way of thinking on the union side, joint workshops and series of team building activities were carried out.8

Likewise, the accepted contradictory nature of labor relationship and capital characterize the control relations. This should be seen in relation to conflict and sources of conflict. Therefore, the CBA was embraced for the potential terrain of compromise, bargaining, and consensus.

Today, the relationship between Sandigan union and management were transformed. It is said in one of its newsletter that, “SmithKline &

7 Rene E. Ofreneo, Structural Adjustments and Industrial Relations, Quezon City: UP School of Labor and Industrial Relations, 1993. 8 An interview with Lito de Guzman

11

Beecham’s Labor-management relationship may be described as a partnership with willingness on both sides to embark a new approaches based on mutual trust and drive for improved performance.”9 SBEC (SmithKline Beecham Employee Council), a labor management council established in 1996 was strengthened. Its aim was to strongly unify and harmonized the company through communication, dedication, and participation.

The recently concluded social agreement10 was a very good example of beneficial relationship between management and employees. The CBA of SmithKline-Beecham was much celebrated because the negotiation was done in just four days, as opposed to the industry norm of four months. The company and union agreed to a performance-based concept of reward system for 220 CBA covered plant and sales staff, instead of usual across the board increase. This has set the climate for alignment between management and labor in the organization through more active workers' participation. This has also instilled a sense of pride and accomplishment in the company since the CBA team was responsible for introducing a change in labor-management scenario in the pharmaceutical industry and in the Philippines. Because of this achievement, the SmithKline Beecham Philippines was cited on the January 13th 1999 issue of the SCRIP.11 Similarly, it was featured among various local publications12 on late December 1998.

As an analysis for this condition, we can say that the success of the Social Agreement was anchored on team’s efforts to establish partnership with labor to shift the paradigm of the labor management negotiation process. From the traditional style where concerns of labor are opposed to the directions of management to a progressive principle-centered style where concerns of both parties are resolved through a problem solving approach and the “Win-Win” principle.13 factor was the relationship that 9 SmithKline Beecham’s article on Labor and Management 10 Social agreement was synonymous to collective bargaining, the former was preferred to be used by the company.11 SCRIP is an international publication for the pharmaceutical industry.12 Namely, The Philippine Daily Inquirer, Manila Tines, Manila Standard, and Philippine Star.13 From one of SmithKline Beecham’s Newsletter article.

12

the team built with the labor group through constant feedback and open communication with all concerned.

We can also notice that Sandigan had accepted the concept of individual performance as manifested by shifting from a guaranteed merit increase of at least 5% and a productivity bonus for at least 75% against the National Trade Sales14 concept. We can also say that Sandigan was progressive. On the contrary, it was a sign that the SmithKline Beecham’s union as servile.

Table 2.MEMORANDUM OF AGREEMENT BETWEEN SMITHKLINE BEECHAM AND

SANDIGAN15

December 1998

Merit Increases National Trade Sales Productivity Schemes

1 - 12%2 - 10% 3 - 9%

110% and above

1 - 250%2 - 200%3 - 175%

1 - 11%2 - 9% 3 - 8%

105% - 109% 1 - 200%2 - 175%3 - 150%

1 - 10%2 - 8% 3 - 7%

100% - 104% 1 - 175%2 - 150%3 - 125%

1 - 8%2 - 7% 3 - 6%

95% - 99% 1 - 150%2 - 125%3 - 105%

1 - 7%2 - 6%

90% - 94% 1 - 125%2 - 105%

14 See appendix 15 SmithKline Beecham CBA negotiations

13

3 - 5.5% 3 - 100%

1 - 6% 2 - 5.5%

3 - 5%

85% - 89% 1 - 110%2 - 100%3 - 95%

1 - 5%2 - 4% 3 - 3%

84%and below

1 - 100% 2 - Based on Nat’l 3 - Trade Sales

Legend:1 - Above standard2 - Standard3 - Below standard

Merit Increase and Productivity Schemes shall be based on the above parameters.Particulars of the CBA: An estimated increase of 9,000 Php in 3 years or around 3,000 Php a year Unproductive members are awarded 5,400 Php in 3 years (minimum) Health Insurance Life Insurance

VI. Conclusion

There are losers and winners in globalization and liberalization. Many companies are equally experiencing adjustment pains. The fast pace of liberalization and deregulation, coupled with coping-up problems under new economic regime of global competition (or under Estrada’s Administration) are dislocating plans and finances of the enterprise.

Because of globalization and intensified competition in both the domestic and export markets, industries are engage in all kinds of cost-cutting and adjustment measures. One common measure resorted to, was the search for labor flexibility, which refers to the adoption of employment practices calibrated to changes in economic cycle and technological change. More specifically, it means the ability to change employment and wage levels as the market demands; the ability to increase labor mobility;

14

the ability to make elastic use of skills; and the ability to introduce non- conventional working arrangements.16

Internal factors that motivated restructuring are cost containment, long term financial performance, and desire to grow and excel. External factors include increases in labor and material cost, competitive pressure, and technological advances.

Restructuring goals includes, increase profit, increase sales, and increase productivity. For both enterprise and their workers, there is a need to understand the dynamics of globalization and competition under this new economic regime so that both can hurdle the threats and maximize the opportunities. Common understanding of what the partners' face together can help improves cooperation for mutual gain. Desire to grow and compete put companies on restructuring mode.

Collective bargaining agreements that were mentioned are solely protection among employees.

Bibliography

Annaliza B. Calceta. “Sailing in Global Waters: A Case Study of the Strategic Alliance & IR/HR Adjustments in Three Shipping Companies”. Philippine Journal of Labor & Industrial Relations. Vol. 17, No. 1&2 (1996-1997): 23 to 43.

Bach Macaraya & Rene E. Ofreneo. Structural Adjustment and Industrial Relations: The Philippine Experience. Quezon City: UP SOLAIR.

Elena A. Enierga. “The Meralco ESOP in the Context of Industrial Relations”. Philippine Journal of Labor & Industrial Relations. Vol. 17, No. 1&2 (1996-1997): 4 to 22.

Rene E. Ofreneo. Structural Adjustments and Industrial Relations. Quezon City: UP School of Labor and Industrial Relations.

UP SOLAIR. Major IR/HR Issues And Problems In The Philippines. Quezon City: UP SOLAIR.

Various SmithKline Beecham Newsletters and Press releases, published and unpublished

16 UP SOLAIR, Major IR/HR Issues And Problems In The Philippines, Quezon City: UP SOLAIR, pp. 5.

15

Watson Wyatt Worldwide Philippines. Tactics and Processes of Corporate Restructuring: The Philippine Experience. A Survey Report in 1999.

16