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  Trends and Challenges for Work in the 21st Century
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Rebuilding the Social Contract at Work:
Lessons from Leading Cases

Thomas A. Kochan
Institute for Work and Employment Research
Sloan School of Management, MIT

Task Force Working Paper #WP09

May 1, 1999

Draft in Circulation

Xerox

T he Xerox Corporation employs approximately 150,000 workers globally and 90,000 in the United States. Within the United States, approximately 4,000 manufacturing employees are unionized, with the vast majority located in Xerox’s main manufacturing center in Webster, New York, a suburb of Rochester. This case will focus on the partnership that Xerox has with its union—the Union of Needletrades, Industrial, and Textile Employees (UNITE). We focus on this partnership because it is perhaps one of the most longstanding and successful labor-management partnerships in the country, as well as one that many researchers have been following since it was initiated.

The Xerox-UNITE(3) partnership began in 1980, when the company and union negotiated an agreement that provided for experimentation with employee involvement. At roughly the same time, Xerox implemented a major top-down Leadership through Quality initiative. Over the years, the bottom-up and top-down efforts were effectively integrated and continue to provide a shop-floor training and participative work system at Xerox. From a narrow employee participation process, the labor-management partnership expanded to support development of work teams, special study teams to address outsourcing decisions, self-directed work groups, and joint approaches to new facilities.

Five successor collective bargaining agreements have been negotiated since 1980, the most recent for a long-term contract lasting from 1994 to 2001. That agreement proved to be controversial both within the company and the union. It provided for a set of new, lower-wage classifications for several entry-level positions and the flexibility to hire more temporary workers, but in return for the continuation of guaranteed employment security for incumbent workers through 2001. Amidst these negotiations were rumors that some management officials were exploring the option of moving much or all of the company’s manufacturing operations from Rochester to North Carolina and other operations to Mexico. The company’s decision to negotiate a long-term agreement signaled the defeat of the North Carolina option and a commitment to maintain operations in Rochester, at least for the duration of the contract.

In addition to the shopfloor partnership, Xerox executives meet twice a year to share information with top union leaders over the current and future state of the business.

Key Events: 1980-Present

The Xerox-UNITE partnership has been described and summarized in various places and is well-known to those in the field of employment relations. Therefore, I will only summarize the pivotal events and developments in the relationship since its formation in 1980. A full case study (used for teaching purposes) is available for those interested in exploring the partnership in greater detail.(4)

1980-82: Employee Involvement Program

In 1980, the company and union included a clause in their collective bargaining agreement calling for an employee involvement (EI) program. The agreement included a provision indicating that nothing done in EI would in any way change other management rights or union-negotiated work rules. Thus, at the partnership’s outset, EI was viewed as a limited quality circle program. The initial program was well-received by the rank and file and by plant managers.

1982: Wiring Harness/Outsourcing Issue

The first crisis in the program came in 1982—when, as Xerox’s market share hit the bottom of a decade-long decline and the push to reduce manufacturing costs was acute, the union was informed the company planned to outsource its wiring harness operations. The company estimated that an annual cost savings of $3 million would result from outsourcing this work. After some discussion, a joint committee was established to examine whether production changes could allow this work to be done competitively in-house. The result has now become a classic example of how EI can—if allowed to do so with mutual consent of the union, company, and workforce—take on broader and bigger issues. The committee recommended changes that would reduce manufacturing costs by more than the $3 million benchmark. However, the changes involved a number of contractual rules and managerial prerogatives. The company and union agreed to these changes, modified their labor agreement to accommodate them through a series of side letters and language changes approved in the subsequent contract negotiations, and most importantly agreed to institutionalize this approach for handling future outsourcing decisions.

1983: Negotiations

The second crisis came in 1983, when the parties renegotiated their labor agreement amidst the success of EI and the wiring harness outsourcing decision, as well as layoffs of both the blue and white collar workforces that had occurred in the previous year. Surveys and company data both clearly indicate that, if job security was not addressed in these negotiations, the EI process would have collapsed. With the support of CEO David Kearns (who visited the bargaining table to convey his personal support for the EI process) an employment guarantee was included in the agreement, in return for both some work rule changes and a commitment to grow the EI process.

1983-1994: Moving Beyond QWL to Team-Based Work Systems

Over the decade spanning 1983 to 1994, Xerox witnessed the following events: (1) experimentation with various types of team-based work systems—for example, some self-directed work groups and use of ad-hoc teams to solve particular problems.; (2) a broad-based training of the management and production workforce in Leadership through Quality (LTQ) techniques and tools; (3) the gradual recapturing of Xerox’s market share; (4) the winning of the Baldrige Award for the company’s quality programs; (5) the re-negotiation of two collective bargaining agreements that reinforced commitment to the labor-management partnership and continued the employment security guarantees; and (6) leadership transitions—Xerox’s CEO, the company’s director of industrial relations, and the local union’s key leaders all changed at least once. The partnership endured these changes and, in fact, became well-known as a national model of union-management relations.

1994: Negotiations

In 1994, the company and union agreed to renegotiate their labor agreement in mid-term, in response to a series of crises that threatened continuation of the partnership and indeed the bargaining relationship itself. Xerox was continuing to rationalize its manufacturing operations, bargaining unit employment was declining through attrition due to the continued guarantee of employment security for incumbent workers, the layoff of 10,000 white-collar workers was announced, and rumors of possibly moving manufacturing operations to North Carolina and/or Mexico were being spread. These negotiations were perhaps more intense for their intra-organizational bargaining than for the negotiations across the table. Inside the company, the director of industrial relations had to confront the proposed relocation of manufacturing operations; within the union, the threat to job security and company demands to lower entry-level wage rates, allow greater use of temporary workers, and make additional changes in work rules were controversial. In the end, CEO Paul Allaire accepted his industrial relations director’s recommendation to commit to a long-term (seven-year) agreement that continued the employment security guarantee for incumbent workers and therefore the commitment to maintain manufacturing operations in Rochester in return for the new, lower wage structure and flexibility in staffing.

1998: Profit Sharing, Stock Purchase Plan, and Bonuses

In the four years following the 1994 agreement, Xerox’s stock price, profits, and global businesses performed extremely well. In recognition of these improvements and the lack of wage increases, Xerox offered and union leadership and rank and file workers accepted a new profit-sharing and stock-incentive purchase plan, along with a one-time 3 percent wage increase.

Future Challenges

Despite the long-term success of the partnership, its future is uncertain. In 2001, the contract containing the employment security provisions expires. Pressures on Xerox to balance employment opportunities on a global basis in order to penetrate markets are intense. Outsourcing opportunities for lower-skilled manufacturing work are available to Xerox, as they are to other large manufacturing companies (see the Lucent case). Leadership transitions are occurring within the company—a new CEO will be in place by 2001, and the director of industrial relations (IR) who carried the partnership through its difficult days in the early 1990s and in the 1994 negotiations has left the company. In fact, a succession of several IR directors has moved in and out of this position since his departure. How these forces play out in the future of the partnership is therefore quite uncertain.

Xerox and UNITE have sustained a successful partnership for two decades, and more importantly through the transitions of two CEOs, two union leaders, and a number of changes in the leadership of the company’s industrial relations function. Another CEO transition is looming, and the parties face significant challenges ahead as the current labor agreement expires soon, when some within Xerox already favor outsourcing more of its manufacturing work to lower-cost alternatives and the business is shifting to digital-based technologies and products. Yet, the resolve to continue the partnership and address these issues remains strong among leadership at the company and the union. A veteran manager—who, based on his long tenure in that position at Xerox, has the trust and respect of the union—has been put in charge of industrial relations. The heir apparent to CEO Paul Allaire has already begun meeting with union leaders and assures them of his intention to carry on the partnership’s principles. Thus, while the issues facing the parties will be difficult, they are taking steps now to carry the partnership forward into its next phase.

Summary and Implications

The Xerox-UNITE partnership represents the most enduring example of the strengths and potential of sustained innovation and adaptation in American labor-management relations. It also demonstrates such a partnership’s vulnerability to the pressures that companies and workers now face due to changing technologies and market uncertainties. Finally, it provides a glimpse of what it takes to respond to these challenges. These strengths, vulnerabilities, and responses of the partnership are summarized below.

The strengths and achievements of the Xerox partnership are the following:

  1. It is grounded in a proven, shop-floor employee involvement and teamwork process that has demonstrated its ability to improve quality and productivity. As far back as the mid-1980s, as Xerox struggled to transform its organization to focus on quality, the bottom-up change process, combined with the top-down Leadership through Quality initiative, convinced company executives of the programs’ value to the company. Both quantitative and case study research validated the contributions of these processes as well.(5)
  2. It tackled the tough issues of job security in ways that were viable for the firm and responsive to the deeply felt concerns of employees. These issues were first joined in the 1983 negotiations and then extended and modified in each successive round of bargaining through the 1994-2001 agreement.
  3. It integrated the collective bargaining process into the change effort—using bargaining to join tough issues but also conducting negotiations in a fashion that reinforced the values and substantive objectives of the shop-floor participation and the organizational transformation process. This effort also began during the 1983 negotiations and carried forward to the 1994 seven-year agreement.
  4. The parties adjusted the terms of their agreement to accommodate the gradual broadening of the employee participation process and changing competitive conditions and firm performance—again starting as far back as 1982 with the wiring harness experiment and continuing through the decision in 1998 to pay employees a lump-sum increase, as well as introduce a new stock option and enhanced profit sharing plan.
  5. The process has been supported and reinforced with strong commitment by leadership—both of CEOs and union officials. Most important, high-level of commitment has been passed down through three successive CEOs (Peter McCullough, David Kearns, and Paul Allaire), three sets of union leaders at the local level (Les Calder, Tony Costanza, and Gary Bonadonna), and three at the national level (Jack Sheinkman, Arthur Loewy, and Bruce Raynor).
  6. This top-level commitment is maintained by biannually scheduled “summit” meetings to share information on developments in the company, in the union, and in their relationship. These meetings serve to both build and reinforce trust. As one of the union leaders who participates in these sessions put it: ”We are on the same page; we can count on them to do what they say.”
  7. Of equal importance, strong professional leadership in Xerox’s IR department perpetuated the commitment—again, dating back to the beginning of the effort, when Director of Industrial Relations Bill Asher held “Friday-afternoon seminars” with David Kearns to acculturate former IBM CEO Kearns in the labor-management culture of Xerox. Joe Laymon continued this leadership and commitment in the late1980s through the mid-1990s. The direct access these directors have had to the CEO has been critical to winning various internal management conflicts over competing priorities such as the wiring harness outsourcing issue in 1982 and the proposal to move manufacturing operations to North Carolina in 1994. The 1999 decision to promote a veteran industrial relations professional, who has worked with the union for over 20 years, to the position of corporate director of industrial relations represents a strong signal of the company’s intention to continue the partnership.
  8. The partnership was responsive to the economic and strategic needs of the company to improve quality and reduce manufacturing costs by improving productivity and flexibility in its operations. The ability to move non-productive work out of the operation and bring new work in has been critical. As a result, employment and bargaining unit membership has remained relatively constant. In 1980, it was approximately 4,000 and, in 1998, it was approximately 3,800.

There are several challenges that must be addressed if the partnership is to continue. Listed below are a number of vulnerable areas with which labor and management must contend:

  1. The manufacturing challenges facing Xerox are much greater today. Changing technologies—the movement to digital-based machines—requires different skills of the workforce and less labor to produce. Therefore, the skill mix of the workforce must adapt. This is a significant challenge, but not the company’s primary one, however. That challenge lies in the pressures to outsource more of its manufacturing operations to lower-cost vendors and/or to relocate more of its production in lower-cost countries. Whether or not the pace of productivity improvement, quality, and flexibility is enough to overcome the gaps that were closed in the 1980s through the EI and LTQ process is an open question.
  2. The manufacturing workforce is likely to shrink in size, regardless of whether work is outsourced or performed within Xerox. The fact that job growth at Xerox lies outside of the bargaining unit has been, through joint agreement, kept off the table and off limits for the union. How the service technicians and sales representatives and the supervisory and middle managers at Xerox will fare as the same pressures of technological change and uncertainty in the marketplace play out is a predominant question for the company and its employees. And, the lines dividing these groups and those in the bargaining unit are becoming increasingly blurred. Yet these groups have no voice in the partnership and they were not protected by the employment security agreements negotiated for bargaining unit employees.
  3. The employment security agreement expires in 2001. Given the points raised above, and the continued interest of the workforce and the union in employment security, this major issue will only be resolved if the parties begin exploring options well in advance of the contract deadline. Job security solutions in the past were agreed to after the other key strategic and directional issues were resolved—at that stage, the company and the union could make commitments that were enforceable based on the other elements they had agreed to do and achieve.
  4. Company and union leaders understand these challenges and state their determination to both address them and continue the partnership into the next century. Heir-apparent CEO Richard Thoman is meeting with union leaders both in the semi-annual “summit” sessions and in other settings, including a visit to the union’s headquarters where in the presence of both union leaders and his top management staff, he has expressed support for and interest in continuing the partnership. After several false starts at replacing the corporate director of industrial relations, who had been instrumental in nurturing the partnership through some difficult times in the early 1990s, a veteran professional who supports the partnership’s principles was promoted to fill this position. The company’s top human resource position was also filled recently by another individual who had worked effectively with union leaders in her prior position. Top executives have continued to demonstrate their commitment to the partnership by overruling and reversing outsourcing decisions made unilaterally by business unit executives that were found to be inconsistent with overall company policy. The option of opening talks over the next contract well before the 2001 deadline is being considered.
  5. Finally, despite pressures to outsource from within the company, Xerox’s top leaders may prevail. The fact that some managers within the company are opposed to continuing the partnership and favor moving or outsourcing production to take advantage of lower-cost alternatives is openly acknowledged by top executives. They view these opinions as a natural feature of the different responsibilities and priorities leaders in different functions and at different levels of responsibility have in a complex organization. But, in the end, top company executives take responsibility for setting the principles that will guide labor-management relations and resolving these different points of view.

More than anything else, this case demonstrates the importance of strong support from top leaders and careful leadership succession processes for sustaining labor-management partnerships over time. But, it also demonstrates that this view will not be shared uniformly throughout management’s ranks and that the conflicting views need to be acknowledged and dealt with directly.

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