RAJWANT ENGINEERING: SURVIVAL OR ETHICAL VALUES?

On October 16, 2014, H. S. Sokhi was wondering what he should do next. Sokhi was the owner of
Rajwant Engineering Pvt. Ltd. (REPL), a small-scale engineering and manufacturing company based in
Jamshedpur, India. He had just had his first meeting with R. K. Gupta, the new procurement manager at
ClientCo,1 REPL’s most important client. Sokhi recalled the event:

The meeting had been a complete disaster. I had hoped to secure an order that would have got REPL
about ₹5 million in additional revenues.2 Gupta asked for a bribe in return for giving me a contract. I
flatly refused and stormed out of the meeting. On returning, in a fit of anger, I drafted a letter addressed
to ClientCo, seeking a termination of our current contracts with them and effectively ending our long
standing relationship [see Exhibit 1].

Sokhi was about to send the letter when he was interrupted by a personal call from home. After the call,
all he could do was sit and stare at the letter. For a man who had always prided himself on his
decisiveness, his inability to decide what to do next was extremely frustrating. Sokhi realized that given
his company’s financial status, a continued relationship with ClientCo was essential, but compromising
on his ethical values was not something he wished to do. If he lost this account, there was a real danger
of REPL going bankrupt. He had a week to get back to Gupta, or else he would likely lose the contract.

BACKGROUND

REPL was a small engineering and manufacturing company based in Jamshedpur, an industrial town in
the state of Jharkhand, in eastern India. Sokhi had started REPL over three decades earlier, soon after
completing his education. He grew up in a family environment where honesty and integrity were highly
valued. Consequently, Sokhi developed REPL into a highly ethical, values-driven organization right from
the start. Over the last thirty years, REPL had successfully executed a variety of engineering projects for
large and prestigious clients across different industries (see Exhibits 2 and 3). Sokhi related his
achievements:

I was very proud that despite my humble beginnings, REPL could count many leading companies as its
satisfied clients. Over the years, we had executed high quality work for clients such as ClientCo, The
Tinplate Company, Voltas Ltd., Bharat Aluminum Company Ltd., and Usha Martin Industries, to name a
few.

REPL’s Internal Environment

Unlike many competing small businesses in the region, Sokhi had ensured that his employees received
fair rewards and experienced a good work environment, as he explained:

I tried to ensure that REPL’s organizational environment was conducive to both personal and career
growth. I ensured the well-being of our employees and their dependents. Employees appreciated our
caring culture. We valued integrity in all our dealings—internal and external. My endeavour was to make
REPL a great place to work.

Sokhi had created a culture where the employees of REPL felt like family. The company was sensitive to
the needs of all its stakeholders. Sokhi spoke about his employees:
I had recruited people who were likely to remain with REPL for life. Our policies and practices aimed to
give every employee a sense of ownership. I was committed to share the wealth created by REPL with all
stakeholders in a fair and transparent manner. When deciding [on] promotions, my main criterion was
whether the abilities of the candidate matched the requirements of the job, and that they adhered to
REPL’s values. All in all, the organizational culture of REPL was socially sensitive, and ensured equal
opportunities to all its employees.

REPL’s Clients

Over the years, REPL had accomplished many milestones (see Exhibit 2). Sokhi explained how REPL
retained clients:

Our clients were extremely demanding, and had a large number of service providers [like us] queuing up
to seek work. Clients appreciated REPL, as we had a reputation for delivering high quality [and] efficient
and on-time execution of projects. This, in turn, enabled our clients to adhere to their tight project
execution schedules. We assured customer value by ensuring lower cost of ownership and quality
services. Thus, we were able to maintain long-term relationships with customers.

Although REPL was profitable, finding scalability of revenues was an issue. Sokhi explained his company's
struggle:

I sometimes felt that I had made a mistake by starting in a city like Jamshedpur. While we had decent
profit margins, we found it difficult to scale up. After all, we were dependent upon two [or] three key
clients. First, our clients’ businesses were cyclical, and consequently we would also get affected when
their business was in a trough. Second, competition was increasing and we had to fight harder for new
orders.

Evolving Business Climate

When he first started his venture, Sokhi had found the business environment to be quite stable and
predictable. In the initial years, he foresaw many growth opportunities. REPL had always worked closely
with its key clients. In many ways, the key clients had defined the processes and outcomes of REPL’s
business. They had their own set of expectations in terms of quality, cost, and other measures, and REPL
had been measuring up to them. However, over the years, a few things had changed. Sokhi explained the
changes he saw:

In the last two to three years, I found that both my clients as well as my competitors were changing. The
way business was getting done was undergoing changes that I did not like. I was beginning to sense a
large gap between the kind of behaviour clients were now demanding and what I could [deliver].

One of the reasons for these changes was that the industry that REPL was in had witnessed an influx of
many new players over the last few years. These new competitors were offering very low prices in order
to gain market share. Many of the new players who were manipulating price, were compromising on the
quality of deliverables. Sokhi explained how the business climate had evolved in recent years:

I had always done business with honesty and maintained transparency in all my dealings. I always
highlighted this as REPL’s unique selling proposition. Our clients were large and prestigious. Their vision
and values statements highlighted ethical business practices. However, on the ground, there were
discrepancies. In the last couple of years, things were not going smoothly for REPL. I felt that my honest
approach was hindering REPL’s prospects. Sometimes, clients’ procurement managers asked me to
manipulate my bid. At other times, they asked me to withdraw my bid so that they could give the order
to a competitor. Occasionally, a manager would hint that it was difficult to award the contract to REPL
unless “his needs were taken care of.”

I still believed that these problems were mainly at the lower levels of the bureaucratic setups in these
large clients. These companies had become victims of their bureaucratic setups. Managers at lower
levels were taking undue advantage of their positions, and gaining personal profits.

RECENT ISSUE WITH CLIENTCO

REPL had been a supplier to ClientCo for the last two decades. ClientCo gave REPL large volumes of work
and accounted for nearly 35 per cent of REPL’s revenues. Given the dominant size of ClientCo in the local
market, it was a marquee name for REPL to have on its clients list. REPL understood the client’s
requirements well, and had always managed to deliver high quality services at a reasonably competitive
price. REPL was listed as an A-rated contractor with ClientCo. This meant that REPL was given preference
over new suppliers, and was subject to less operational scrutiny by the client. Sokhi had maintained
excellent relationships with various managers at ClientCo over the years. Recently, Gupta had been
appointed new procurement manager for ClientCo. Sokhi recalled his recent meeting with Gupta:

The meeting was nothing short of a disaster. First, Gupta made me wait for nearly an hour, despite
having given me an appointment. Then, he called me in and straight off stated that the prices quoted by
REPL were way too high and that I would have to give discounts. I tried to explain that our prices were
based on our high quality standards. I also highlighted our excellent delivery track record. However,
Gupta would have none of it.

Finally, after a bit of beating around the bush, he hinted that I had not done anything to make him feel
welcome in his new job. He said that it would be difficult for him to give me the contract unless I kept
him happy. To me this was a quite a new experience. Nobody at ClientCo had ever asked me for a bribe
this bluntly before. I was angry, and only with great effort, managed to hold my nerve. I walked away
from the meeting without making any commitment.

As soon as I was out of the meeting room, I called up the chief procurement officer of ClientCo, whom I
knew personally. However, to my surprise, he did not seem to believe what I was saying, and joked that I
needed to grow up and manage these small problems on my own.

OTHER ISSUES AT REPL

Given increased market competition and the cyclical downturn in its clients’ industries, REPL was going
through a slump itself. There were very few new projects on offer, and those being bid for were getting
postponed by the clients at the last moment. Also, pricing had become extremely competitive, with
many competitors resorting to unfair and unethical practices. Sales figures for the financial year
(FY)2013/14 were not very encouraging (see Exhibit 4), and the first few months of the current financial
year had been no better (see Exhibit 5).

Given the difficult business conditions, REPL had built up significant levels of outstanding loans, statutory
dues, and other payables. It did not have adequate funds to make provision for these outstanding
payments. To expand its operations, REPL had taken long-term, fixed-interest loans in the past, and was
saddled with a high interest burden, which it was currently unable to service using its business accruals.
REPL was hemorrhaging cash flow and had built up minimal amounts of revenue over the last three
months. The company was rapidly depleting its reserves and borrowing from whomever was willing to
lend it money to meet its immediate financial requirements. What made matters worse was that a very
large portion of its accounts receivables was disputed by REPL’s clients, citing superficial reasons, and
given their own difficulties, many clients were delaying payments. Meanwhile, REPL’s dues to various
creditors were mounting (see Exhibit 6). Sokhi explained his difficulties:

REPL was going through its worst crisis ever. We had very few projects to execute, although I was putting
in all my efforts to bag some projects for the purpose of REPL’s survival. I also realized that what REPL
really needed was holistic changes to its business model that would help it in [the] long run.

We were dependent on two [or] three key clients [the largest relationship being the one with ClientCo]
and that was risky for us. In addition, we believed in working in a certain way and our clients had started
demanding that we [compromise] our core values. That was extremely difficult for us to do.

Over the years, REPL had expanded rapidly during profitable times without giving much thought to
internal systems, processes, and information technology (IT). Thus, the quality of REPL’s IT systems
ranged from obsolete to non-existent. Most processes had never been formalized or documented; for all
others, workers and supervisors did not follow the documented procedures. REPL had no enterprise
resource planning (ERP) system in place, nor an external facing website. For most processes, REPL was
limited to traditional, inefficient, and costly manual methods.

Because its business expansion had been rapid, REPL’s recruitment had been rather haphazard. As a
result, REPL now had an incompetent and irresponsible supervisory cadre who could not achieve targets
and resisted new initiatives. REPL’s employees were mainly individuals with secondary-school education,
who were responsible for securing orders, managing projects, ensuring job execution, billing, and
correspondence. REPL’s employees also lacked technical knowledge due to REPL’s very low investment in
formal training programs.

Most employees did not speak English and lacked computer skills. Supervisors and their subordinates
were often involved in relationship clashes and acrimonious exchanges were common among
employees on the shop floor. Supervisors did not accept responsibility or accountability of processes,
and a general lack of discipline was evident in the workplace. The employees strongly resisted the
suggestion that employee salaries should be linked to performance. Sokhi had planned many such
operational improvement initiatives in the past; however, they were always postponed in favour of more
important and urgent day-to-day business. Sokhi pondered about the state of his workplace:

I knew that a lot of things were not ideal at REPL. I knew that it was I who had to drive various change
initiatives if things had to improve. For instance, I knew that REPL required a website and we needed to
automate many of our business processes. Implementation of an ERP software was becoming
important. There was an urgent need to control overheads.

I was planning to introduce a variable-pay system and a performance management system. There would
have been some reluctance and resistance, but I was confident that these could be overcome. However,
the problem was that all these initiatives were likely to eat into my limited time bandwidth. These days, I
seemed to be always stuck in too many urgent crises that took away my attention from long-term
initiatives. Also, I was unsure whether to start any improvement initiatives when the business was going
through a crisis.

CONCLUSION

Given the context of his company’s situation, Sokhi realized that he had difficult choices to make. If he
compromised and agreed to Gupta’s request, he would be setting a precedent, and this would mean that
REPL would always be under pressure to yield to unethical demands. Breaking the relationship with
ClientCo at a time when the business environment was weak would have considerable negative
consequences for REPL’s future. ClientCo would possibly be in a position to sue REPL for breach of
contract. The loss of existing ClientCo business would require REPL to cut costs in all ways possible,
including layoffs and retrenchment. Sokhi explained his view:

I had treated my employees like family members, and these decisions were certainly not going to be
easy for me. If I broke this client relationship, irrespective of whether the breakup happened on a
cordial note or not, REPL was going to face serious consequences.

If Sokhi decided to continue the contractual relationship with ClientCo, he needed to find a creative way
to do so without compromising the core values of his business ethics, integrity, and honesty that he held
in such high esteem. He was not sure if he had the option of formally escalating the issue with ClientCo
to higher authorities in the client’s management team. In any case, all the options that Sokhi was
considering required efforts in terms of handling legal matters, making ethical adjustments, dealing with
the press and media, and having numerous meetings with both his staff and the client’s officials.

Gupta had given Sokhi no more than a week for a response before he would award the contract to “the
most suitable” bidder. Sokhi realized that he had been absent-mindedly staring at the letter to ClientCo
for nearly 15 minutes. He now had to make a decision.