IES646

DP-110-E
Rev. 5/2017

Telefónica I+D

Traffic on the highway was heavy. The fine rain and a truck that had overturned on the central
lanes were causing a traffic jam several miles long. Alberto Galán, general manager of
Telefónica I+D, was watching the situation from the window of his office on the top floor of
the modern intelligent building that the company had commissioned from a prestigious firm
of U.S. architects. He was interrupted by a telephone call.

“Good morning, Alberto.”

Galán recognized the voice of Felipe Pérez, the company’s human resources director.

A.G.: Hello, Felipe, good morning. What’s new?

F.P.: Nothing special, except that I’m surprised at the results of the survey. You know, the
one we send to all employees every year to find out their opinion about the atmosphere
at work, how they identify with their job, personnel policies and relationships at work.
When I look at the results, I get the feeling that there are certain concerns that have
come up again and again over the past two years.

It’s as if the career plan didn’t really motivate anyone, as if people were feeling a bit
cut off from management and weren’t interested in the payment policy. In view of
these results, I feel we ought to think seriously about these issues to see if there’s
anything we need to change.

A.G.: But just a minute, Felipe. Didn’t you tell me that the career plan and the payment policy
were designed only a few years ago by an international consultancy that specializes in
human resources?

This case was prepared by Jesús Porta, research assistant, under the supervision of Professor Sandalio Gómez, as the basis
for class discussion rather than to illustrate either effective or ineffective handling of an administrative situation.
April 1996. Revised in May 2017 by Professor John Almandoz.

Copyright © 1996 IESE. This translation copyright © 1996 IESE. To order copies contact IESE Publishing via www.iesep.com.
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Last edited: 6/20/17

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 DP-110-E Telefónica I+D
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F.P.: Yes, that’s right. But that was some time ago, and the company and the people in it
have changed since then. You remember that the policies we had when we started
operating as a company in 1988 degenerated into a kind of free-for-all, and it was
decided that we’d put things in order by basing our personnel practices on a job
evaluation system. Now we’re realizing that, given the sort of work we do, basing
everything on a job evaluation system might not be the best approach.

A.G.: OK, Felipe, we’d better get to work on it then. I’m convinced that the most important
part of any research and development company is its staff, and not just in theory – it
should be noticeable to every one of us. The idea is that every employee should feel
part of the company, both as a professional and as a person. Let me have any
information you’ve got on the subject and we’ll meet after lunch.

F.P.: I entirely agree with you, Alberto. The trouble is that we’re going to need everybody’s
cooperation, and it isn’t easy to get it into people’s heads that people development is a
job for each and every one of the managers with a position of responsibility in the
organization. Look, I’ll also send you the results of some interviews that I’ve held with
a number of people on this subject over the last two weeks. We’ll talk about it again
after lunch. See you later, Alberto.

* * *

The Company
Telefónica I+D (Telefónica Investigación y Desarrollo, meaning “Telefónica Research and
Development”) is a branch of Telefónica, the Spanish national telephone company. It was
started in 1988, when the research department split off from the parent company, and grew
spectacularly in only a few years.

A decade later, the telecommunications industry was in the grip of the liberalization and
globalization process that was under way all over the world, particularly in the European
Union. This meant that the traditional operators in each country had to move from a
monopolistic system to one of free competition. Furthermore, the technological revolution
caused the number and variety of services to increase daily, thus expanding the sector.

The mission of Telefónica I+D is absolutely clear: to seek new telecommunications services and
solutions that would improve the quality of the existing ones and reduce their cost. Company staff
have to approach their work with a spirit of innovation, given that innovation is the most important
feature of any research and development company. Telefónica I+D has achieved considerable
professional prestige and is now faced with the challenge of an increasingly open market, in which
it must identify the needs of both existing and potential customers in an increasingly competitive
sector where it is essential for the company to differentiate itself from the competition.

It cannot differentiate itself through its suppliers, which offer increasingly standardized products
to all of their various customers. Therefore, in addition to maintaining its professional excellence,
the only way it can differentiate itself is by fulfilling its commitments regarding the delivery date
and price, by improving response times and by securing a higher return on investment. It is
essential for the company to understand its main customers and the business it is in: supplying

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 Telefónica I+D DP-110-E

competitive, high-quality telecommunications services. Services must be rendered in such a way

that users are aware of the quality and are given the attention they expect.

The company focuses on innovation in three different areas: services, management, and
systems. In all of these areas, it must have qualified human resources to carry out applied
research, exploratory development, product development, state-of-the-art engineering and
technical support, and sales support, as required at each moment.

The company’s capacity to develop new services has been complemented by considerable advances
in the management of these services and of the networks that support them, which account for
80% of the company’s resources. Furthermore, progress has been made with the tools and systems
used to modernize machinery, plan networks, and ensure the quality of the equipment installed.

The development of these activities requires a thorough command of key technologies in software
and multimedia capabilities. Many of these techniques are applied immediately and directly to the
different projects, and others put the company in a position to respond to future needs.

Telefónica I+D has a set of 10 basic principles that serve as a point of reference for internal
operations: satisfying customers, knowing how to say no, maintaining quality in deadlines
and services, creativity and initiative, foresight, excellent resources, unity, self-criticism and
improvement, outside technical presence, and cooperation with other centers.

The company’s different activities are grouped into projects (development, research and study),
basic techniques, and administration. Project activities are the foundation of the company’s
operations. A project is defined as a group of nonrepetitive activities carried out by a temporary
organization, which has a specific objective, its own resources, a schedule and a budget. The work
involved in these projects requires people with initiative, creativity and a high level of flexibility.

In technological service activities (microelectronics, optoelectronics, reliability and materials,

hardware and software technology, product quality, planning and methodology, software
engineering), the knowledge to be applied – because of its complexity – predominates over the
procedures. On the other hand, in technical services (hardware support, mechanics and
documentation, computer systems, communication systems, information systems, buildings,
laboratory and equipment), effectiveness is achieved through the optimal establishment and
use of the procedures required to obtain the desired results.

Basic technical activities are still centralized, which means that projects turn to them whenever
they need them. These activities perform a systematic support function.

Administrative activities include general services, accounting, budgets and costs, purchasing,
human resources, staff administration, and training and organization.

The company has sufficient capacity to satisfy the needs of Telefónica, its owner and main
client, with respect to broadband services, network intelligence services, data communications
services, narrowband ISDN services, services provided using voice technology, and public
telecommunications services. Activities aimed at maintaining Telefónica’s leadership in mobile
phone services have also increased substantially. The company is organizing these activities as
a new line of business, developing new functions and providing solutions that make it possible
to reduce the cost of operating the service.

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 DP-110-E Telefónica I+D
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So far, Telefónica I+D has come significantly closer to Telefónica’s target market by
establishing closer contact with the parent company’s marketing organization and its own
customers. Furthermore, the other companies in the group have gradually acquired greater
freedom to contract services directly from Telefónica I+D. By the time the case was written
(1996), the company’s financial performance had significantly exceeded expectations.

Telefónica I+D’s quality system – based on response times, optimization of services and a
customer-oriented approach – had been certified by the Spanish Association for Standardization
and Certification (Aenor), in accordance with the ISO-9001 standard. Response times showed an
improvement over time: the latest estimated percentage of late final deliveries was 26.85%; the
percentage of ongoing projects behind schedule was 18.52%; and the average delay of final
deliveries was 4.28%. A year before, the percentages had been 40% for late final deliveries, 24.36%
for ongoing projects behind schedule, and 9.99% for the average delay of final deliveries.

Personnel
Human resources are becoming increasingly important in the development of new
telecommunications services, as work is organized in project groups, which call for initiative,
creativity and teamwork.

The methods used for developing new services have improved considerably. In today’s
telecommunications industry, with fierce competition as a result of deregulation and the
dominance of interactive multimedia services, it is essential to ensure that the customer’s needs
are understood properly, which means that checking the service or application from the user’s
point of view has become a key success factor.

The company employed 663 people: 493 with a higher university degree, 57 with an
undergraduate degree, 101 technicians and 12 administrative staff. Some 95% of the graduates
were telecommunications engineers who had joined the company upon leaving university. The
great majority of them worked in R&D. The average age of all employees was 32 and the
average length of service at the company was eight years. Staff turnover was around 2%.

Research and development activities require sophisticated material means but even more
important are well qualified and enthusiastic people to research and develop new technologies
and products. All the company’s employees work in the same center in Madrid, which has the
modern facilities they need.

Recruitment and Selection

The fact that people are so important for R&D work means that they have to be selected very
carefully. Therefore, the company hires only really valuable people who will fit in
professionally and vocationally at Telefónica I+D.

An annual employment plan is drawn up at the start of each year. This plan specifies the
workforce that each unit should have in order to meet the agreed objectives. The plan is set
out in a document that is used for hiring staff, both students on placement and permanent
employees. Nobody can be hired for a job that is not provided for in the plan. The only possible

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 Telefónica I+D DP-110-E

exceptions are candidates with special qualifications and proven experience in R &D activities,
who require different treatment.

Different types of candidates are recruited in different ways:

a) First job. The first choice for covering these vacancies is always students on placement
(students in the final years of telecommunications engineering courses). People who
have recently completed their degree with brilliant grades (a minimum average grade
of 8 out of 10) are the second choice. The normal procedure is to select the best students
who have been working at the company for a year or two and have proven their ability
and performance.

Students on placement work a minimum of 20 hours a week doing a job that makes it
possible to assess their abilities and attitudes as objectively as possible. Each student
has a mentor, who takes care of them, assigns them work and assesses their progress,
with a written report every two months. The mentor helps the new employee settle into
their job, integrate into the company, and solve any technical or personal problems that
may arise.

The mentor is responsible for the student throughout the trial period, which ends with
a final report on the student written by the student’s immediate boss. This report is used
when deciding whether or not to hire the student as a regular employee.

b) Jobs with specific profiles. Candidates are selected on the basis of references or through
newspaper advertisements.

c) Exceptional candidates are selected on the basis of their profile and their knowledge
and experience of R&D.

Hirings of the types described in sections (a) and (b) above must always be for posts included
in the annual employment plan. The only exception is for elite candidates, who can be hired
even though the plan does not include any job for them.

Job Evaluation System

A few years earlier, a consulting firm was hired to design a new compensation policy. At that
time, it seemed advisable to apply a job evaluation system as the basis for a new compensation
policy and career development plan.

First, the different jobs were identified and defined, which was no easy task, particularly with
engineering jobs. Job definitions were based on three factors: responsibility, management and
knowledge. These three factors were then broken down according to degrees of intensity, which
made it possible to order the jobs according to their contribution to the company’s activities.
(See Exhibit 1.)

Each job was examined and points were awarded for each factor. The same factors were applied
to each job to ensure that the classification was homogeneous and consistent.

With the jobs arranged in order, it was possible to establish grades and group together jobs
that had obtained a similar score. Therefore, any particular grade could include different types

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of job. As a result of this job classification, different grades emerged for each type of activity,
producing groupings of jobs rather than a simple linear ranking.

The different grades within any given type of activity marked out a career path within the
company. The types of activity were as follows:

x R&D engineering: the classification of jobs according to their research and development
content revealed the following career path – research work, project management,
structural management (division and area), and experts.

x Basic techniques: jobs were classified according to their technical service content to mark
out the basic techniques career path, which was similar to that of R&D engineering,
except that it started with a technician instead of a researcher.

x Administrative work: career development possibilities in administrative activities were

more limited, with no clearly defined higher-level jobs.

Compensation Policy
The fixed part of each employee’s salary depends on the grade assigned to his or her job in the
job evaluation. This means that the only way to increase this part of the remuneration is
through a change of job – that is, by promotion to a higher-level job or by a major change in
the job content, which would lead to the job being reclassified.

The variable part of the salary consists of an incentive payment that each boss awards to those
of his or her subordinates who, in the opinion of the boss, have performed best during the year.
The incentives are determined each year on the basis of the budget and profits. On average,
the incentive is equivalent to 8% of the fixed part of the salary.

Objectives are set by working backward from customer commitments to establish personal
objectives for each employee. The boss discusses these objectives with each subordinate, and
the objectives to be achieved during the year are determined by mutual agreement.

Annual salary increases depend on the fulfillment of objectives. The degree to which objectives
are fulfilled is the prime reference point for assessing individual performance: it determines
the annual salary increase, which can be one or two percentage points above the consumer
price index.

Social benefits are considered a form of compensation that can stabilize the workforce by
securing employee loyalty. The benefits that the company offered its employees had increased
over the years and were considered comparable to those offered by other companies in the
industry. They were: collective life insurance (the company contributed 50% of the cost); health
insurance (the company paid 50% of the employee’s premium and 15% of that of the spouse
and children); subsidized lunches; paid vacation time; salary supplements in case of illness
(the company supplemented the social security benefit up to 100% of the salary); leave for
personal reasons; training (the company ran a permanent training program); advances of up
to three months’ pay; the option to work remotely; medical service; and cultural and sports
activities (the soccer and basketball teams were subsidized, as was the astronomy group).

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 Telefónica I+D DP-110-E

The Career Plan

The career plan of each company employee is based on the results of the job evaluation.

In general, all company employees have a particular job and know their position in the career
plan (i.e., the level assigned to their job) and the jobs they must secure in order to move up a
level. The career plan is established and formally laid down in a document called the “job
profile,” which is given to the employee.

Thus, the career plan encourages a progression to higher-level jobs in two phases. The first
phase includes the first levels as defined by the job evaluation, which are jobs with no
management responsibilities. This phase is therefore generic and, logically, is structured
according to areas of activity. The second phase is structured in terms of project management,
structural management (division and area), and experts. If the job evaluation is reviewed and
there are changes, the job is reclassified.

Each boss personally informs subordinates of their job grade, once this has been classified, and
identifies the higher-level jobs available.

Specific promotions. These are promotions that occur as an exception in the course of the year
whenever a vacancy occurs, a new job is created, or the content of a job changes significantly.
A specific promotion involves a change of level and a change in the job profile.

Reclassifying a job consists of changing the job description when the range of functions it
involves is expanded, which can happen at any time of the year if necessary.

Annual promotions. These occur as a result of the review of the job classification, which is
carried out annually for nonmanagement jobs. For management jobs, promotions are generally
specific, as they are prompted by new projects or organizational changes.

Annual promotions procedure. Each boss gives his or her senior manager a list of all the jobs
due for review. The senior manager of each activity sends the human resources department a
list of the jobs that are up for review. The human resources department notifies the area heads
about which jobs to promote.

Conclusions From the Interviews

Felipe Pérez decided to add to the survey data by conducting a significant number of personal
interviews, which would be open to all issues relating to the atmosphere at work, without
revealing a desire for information on any specific issue that might put people on the defensive
or create false expectations.

The interviewees were people from different areas, with different experience and at different
hierarchical levels. Generally, the interviews took place in an atmosphere of trust and openness,
which was a great help to understanding the real situation.

The following is a list of the more general conclusions reached by Pérez.

First of all, employees were almost unanimous about the good atmosphere at work and the
good relationships they had, both with one another and with their immediate bosses. They also

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 DP-110-E Telefónica I+D
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appreciated the independence they had at work, which as engineers and technicians they found
very attractive. They also felt safe working in a company that belonged to the Telefónica group.

As far as the issues being examined were concerned, the opinions were as follows:
 Employees did not seem to be particularly concerned about the level of their salaries
compared to those at other companies because they thought their salaries were in line
with the market average. They had the feeling that, in general, the payment policy was
fair – that is, if they compared their work in Telefónica I+D with the job opportunities
available in other companies, they felt that they were reasonably well paid. Although
one or two felt that they were earning less, this was offset by the security of working for
a sound industrial group and by the characteristics of the job and the possibilities it
offered, which were difficult to find in other companies.
 They did not seem to know much about the payment system or the career plan, or even
to want to know much. The employees did not understand it and found it a bit artificial
and subjective. While some said that job descriptions and grade assignments were a
“farce” that did not accurately reflect the real situation at work, other people were so far
removed from the system that they could not even remember their own grade. “In a work
group it is almost impossible to define and delimit jobs.”
 During the early years, employees’ motivation was centered on learning and developing
technical expertise. As time went on, the processes became more bureaucratic, which
made it difficult for them to continue learning and taking on technical challenges at the
same rate.
 Opinions differed on the fairness of how the payment policy was applied to the
interviewee in question compared to others inside the company. Some employees felt
that inequity in pay was introduced at the outset, when pay levels were established
through individual negotiations, and that it still existed. The job evaluation had built on
these differences and, although they had been evened out at the lower levels, in general,
the differences persisted because there were no maxima.
 People at the middle and lower levels had no clear idea of the company’s strategy, which
caused a certain amount of anxiety and made it difficult for them to plan their future.
They also felt that management was too far removed from the project teams.
 Employees felt that in most cases it was very difficult to set realistic short-term objectives
for each job and, in practice, this meant their bosses were taking into account many
subjective factors in performance evaluations. Also, people did not regard the annual
salary increase as a financial incentive, although they were worried if they did not receive
it as this implied a negative evaluation of their performance and professional worth.
 They felt that it was increasingly difficult to move up in the company because the bosses
were young and the average level of competence was high. Employees also did not
know the reasons for promotions or their timing, which created a certain amount of
confusion and disillusionment. They said that they did not know the reasons for changes
of level – the system seemed arbitrary (based entirely on the opinion of the boss), and
the salary increase that came with a change of level was very small and was not a real
incentive.

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 Telefónica I+D DP-110-E

 People thought that it would be good if there were greater internal mobility between
different technical areas, although this would have to be handled with care. However,
they understood that project leaders and area heads opposed the idea.
* * *
By 4 p.m., the traffic situation had improved and, as agreed, Pérez went to Galán’s office with
the results of the interviews and all the material on the career plan and the payment policy.
After a half-hour meeting, they decided to hire the services of a consulting company to confirm
the results of the survey and to propose a new payment policy and career plan.

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Exhibit 1

Grade Project management Functional Structural management

18 R&D project head A R&D expert A Area head
17 R&D project head B R&D expert B Area head
16 R&D project head C R&D expert C Division head
15 R&D project head D R&D expert D Division head
14 R&D project head E R&D expert E Division head
13 R&D project head F R&D expert F Division head

Grade R&D engineering Basic techniques Secretarial Administration

12 Specialist R&D engineer A Technical coordinator A Admin. technician A
11 Specialist R&D engineer B Technical coordinator B Admin. technician B
10 R&D engineer A Technical specialist A Secretary A Admin. technician C
9 R&D engineer B Technical specialist B Secretary B Admin. technician D
8 R&D engineer C Technical specialist C Secretary C Admin. technician E
7 R&D engineer D Technical operator A Secretary D Administrative official A
6 Technical operator B Secretary E Administrative official B
5 Technical operator C Administrative assistant A Administrative assistant A
4 Administrative assistant B Administrative assistant B

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