We have implemented a salary cut across the board for most employees in the company. This leads to many questions, which we attempt to answer here.

When is this salary cut effective from?

This is from December. In other words, all of us are earning less from 1 Dec 2008.

Why is this information being shared so late, in March?

Things have been getting tighter for quite some time. If you remember, there were no increments in October 2008. We began to suspect in around December that sharp cost-cutting would be needed. We did not announce a salary cut at that time because we decided to

• try to push our project pipeline,
• try to push our new order pipeline,
• cut costs on other fronts

This process was started in January 2009. If these had yielded big enough results, we could have avoided the salary cut. We have been monitoring all three fronts since then, and we have finally concluded that a salary cut is unavoidable. Therefore we are announcing it now. It will be effective from 1 Dec 2008.

In a company like ours, it's almost impossible to cut costs effectively without reducing salary. About 70% of our total expense every month is just the salary bill. Everything else accounts for the balance 30%.

How much is the cut?

It is 10% for most of us.

Is it applicable to everyone?

No. We are not cutting salaries of peons and non-officer grade employees. They need the money more badly than most of us. Some have a non-earning wife and two minor school-going children, all living on that one salary.

We are also not cutting salaries of officers who have joined very recently (in the last few months) and whose current salaries are already quite low. One or two other officers whose salaries are currently quite low (less than Rs.15,000) have also been exempted from the salary cut.

Will we get this cut portion of our salary back later?

No. This is a salary cut, not a salary deferment. In a "deferment", the company declares that the salary payable remains unchanged, but only part of the salary is paid now, the balance later. In a "cut", the actual salary payable is reduced. So, your new salary from 1 Dec 2008 is the reduced figure.

When I joined, I was offered a certain salary. I was not consulted before my salary was cut. I do not accept this reduced salary.

If you feel this way, we can sympathize with you. We would like you to accept the reduced salary in the interests of the company. A salary figure only works when it is a mutually acceptable figure. Both employer and employee must agree on the salary.

However, if you right now feel that you do not wish to accept the reduced salary figure, we will have to do the following:

1. We will give you the balance salary from 1 Dec 2008 onwards, so that your salary is not cut at all.
2. We will not be able to continue working with you on your old salary figure, since we have decided to apply a salary cut for you. Therefore we will ask you to tender your resignation, with your normal notice period.
3. Till your last working day, we will give you your older, uncut salary.

As we said earlier, a salary figure must be mutually acceptable to employer and employee. If you want the older, unrevised salary, then we will not be able to continue working with you beyond your notice period. But till that time, we will respect your decision and give you your earlier salary, without cuts.

If you feel that exiting from Merce Technologies is better than continuing with a slightly reduced salary, please immediately let us know in writing. You have till 31 March 2009 to inform us about your decision, and after your tendering your resignation, you must continue for the duration of your notice period. Failing this, we will not reverse your salary cut which started on 1 Dec 2008, even if you choose to resign after that.

Will anyone's salary be cut more than 10%?

Yes, a very small number of people will get a larger cut. They are being informed individually about it in their emails. These are situations where:

• These officers have been with us for at least a few months and we have been able to assess their performance
• These officers are currently getting a salary much higher than their peers, who are delivering equal or better performance
• Their performance is not excellent

These cases are cases of a rationalisation process. We have always done rationalisation in the past, where we have sometimes increased salary sharply for some excellent engineers who started with very low salaries, and reduced salary in other cases where the performance was not up to the mark.

This rationalisation is independent of the overall salary cut, but is being done at the same time.

Are the management members also taking a salary cut?

Yes. All the top members of the company are taking 10% cuts.

Is the company doing badly? Will we close down now?

Strangely enough, by most yardsticks the company is doing better than ever. Our turnover in 2008-2009 will be about 50% higher than for 2007-2008. We continue to recruit -- we selected one young lady from Pune for AE position just last week. Our total business volume is growing. We are expecting to add new customers. Our attempt to reach a wider market through sales and marketing is beginning to bear fruit, and we today have more prospective customers than we ever had in our company's history.

Then why the hell are you cutting salaries? Is this a sick joke?

The question is very valid, and we have asked this question ourselves. It seems totally crazy, but it isn't.

There are four reasons why we are under tremendous cash flow pressure:

• Projects are not closing on time. Our engineers are not working hard enough, or are working in wasteful ways in some cases. In other cases, clients are creating obstacles to delay project closure. Therefore, some payments which were expected before December are not received even today, and so on. We are trying hard to tighten project closure on all fronts, and are rejecting applications for long leave of engrs, etc. This is critical to the company's health.

• The economy both in India and elsewhere is in trouble, therefore our customers are releasing payments late. For instance, an invoice we submitted to Jesons in December was paid up in February -- they say they have tremendous cash flow pressures. Earlier, our waiting periods for Jesons-like companies used to be less than 10 days.

• We (and many other companies) are getting sucked dry due to a change in tax laws. Our company is receiving less money for the same work because TDS rates have been increased from 5% to 10% in this year. This means our customers are deducting 10% before paying us, where previously they used to deduct 5%. The Income Tax Department owes Merce Technologies tens of lakhs of rupees, which it will release over the next few years, when their fancy takes them. Result: We are borrowing money from banks to pay our bills, because our money is sitting either with the IT Dept or with our customers.

• We are growing our business. We are faced with better growth opportunities now than we ever did. Unfortunately, growth means that we have to spend now in order to earn later.

But we are healthy, because we are getting business, executing successfully, and getting new orders.

What's this growth story you are talking about?

It may sound strange that a company which has severe cash flow pressures is faced with growth prospects. But this is indeed a fact. Two strategic relationships have worked out well, and are beginning to show results. They are Nortel and IBM.

Nortel is giving us business, and there are indications that our Nortel engg team may exceed the NSDL engagement size. But working with Nortel is very challenging. They pay our bills 70 days after we submit them; no other customer does this, and Nortel does this with all their suppliers. Secondly, there is a long lead time before an engr becomes billable on the Nortel account. All this adds to almost 5 months of lead time between an engr joining our Nortel team and we getting a cheque from that work. We are currently going through that 5-month lead time, and our cash flow is stressed. It is likely that we will have healthy and steady cash flow every month from Nortel from, say, May 2009 onwards.

IBM is turning out to be a powerful partner for us in our Merce product sales. We are approaching the market in joint marketing seminars and roadshows which they are organising. Shraddha and I are speaking at these seminars. There was one event in Delhi in December, and three in this quarter (Coimbatore, Pune and Chandigarh). In the April-June quarter, there are eight events scheduled. Each event gives us some new leads -- we have at least 10 new leads due to the Delhi roadshow alone, today. But to service these leads, we are recruiting Sales Specialists, and spending on their salaries, travel, and other expenses. The money will come in a few months.

We are also working on two very large leads for the Merce product suite. Each of these leads can give us more revenue than we have got from all our Merce projects this year put together. Once again, these leads will give us revenue maybe 3-6 months from now, but we have to spend money on servicing them, and invest in pre-sales activities, today. So we have severe cash flow pressures today.

There are other growth opportunities too. Existing customers are asking us to take up more business, giving us new projects.

Incidentally, throughout the history of companies, growth has always led to cash flow pressure. At the other extreme of the size scale, Tata Steel is under tremendous cash flow pressure because they chose to grow by acquiring Corus. The choice is clear: remain a corner-store kirana shop forever, and have healthy cash flow and no future. Or grow, and struggle. We choose the latter --- this company deserves it.

Why must we grow now, why not wait?

Our growth strategies are based on working with partners. In this game, we have to grow when our partners grow, or else we lose the game altogether.

Nortel needs a huge boost in their IVR team size --- they're under pressure to grow their team. If we get in now, we become a preferred partner and can probably get steady revenue for two years or more. If we are not available now, we may find it very difficult to make an entry later.

Similarly, IBM has -- for reasons too complex to explain here -- begun to work aggressively with ISV partners like us to enter the market for mid-sized customers in a big way. That's exactly our market for Merce. They tried working with us, and they have got excellent results. If we back out now, they will go to market with other ISV partners.

No one waits for Merce to wake up, get its act together and come back into the game. We have to take the tide as it comes.

Are you just exploiting employees by cutting salaries, or are you cutting costs elsewhere too?

We are cutting costs on many fronts.

• We are letting go of the sixth-floor office. This will save us almost Rs.50,000 per month. We may take a small office later, which will cost us less than half the current sixth-floor.
• We are re-negotiating our seventh-floor office rent.
• We are doggedly deferring purchases of many items, even essentials. Prajakta has been asking us for approving purchase of chairs, but we want to wait before we give a go-ahead.
• We work without air-conditioning on the sixth floor. It's so uncomfortable here that most engineers will not be able to work in this floor for even a single day. But we have suffered this till now.
• We reviewed all expenditure and cut costs wherever there was any scope for cutting.
• We switched our office Internet connection's rate plan to a flat rate of Rs.3,000 per month. Earlier, we have paid upto Rs.12,000 in a single month on that connection because of a different rate plan.
• We have decided to shift our office telephone system to a new technology, offered by Tata Telecom, to get better service as well as cut costs. This will help all of us reduce our mobile phone usage when we are in office, and also reduce our total landline bill.
• To reduce expenses on account of engrs at Nortel Gurgaon, we have rented an apartment for them, so that the total expense for their stay can be reduced. This has entailed large security deposits, which have again added to our overall cash flow problems temporarily.
• We are halving the commission percentage we give to our Biz-Dev people. Where we used to pay 10% commission earlier, we are now paying 5%, and so on.

These were just cost cutting measures. In addition, we have taken other measures to improve cash flow by tightening management of projects, tightening follow-up for payments, and reviewing the tax structure to improve cash flow. For the first time in the history of the company we have also taken loans in the company's name in order to battle the cash flow problem.

Are we a profitable company?

Yes. We don't make large profits, but we are profitable.

Will the company sack people now?

I do not know whether you know this, but we have always sacked people for performance reasons. I can remember at least five cases of officers who have been asked to leave in the last six months due to performance problems. That will continue. This is a part of the tight management of our productivity. We always give sufficient notice to such officers to allow them to make a smooth transition to a new position elsewhere, and we always give them good recommendation and support for this movement.

We are not sacking people due to cash flow pressures. The biggest proof of this is in the fact that we continue to recruit, and our team sizes in various engagements continues to grow. This means we're able to increase our billings.

But we will continue to ask people to leave due to performance reasons.

Is it possible that there is going to be more salary cuts?

It is possible. But at this point, it seems highly unlikely.

Is this cash flow pressure expected to ease in a finite duration?

Yes. We expect the picture will ease in six to eight months.

Has the salary payment delay been due to this issue?

In the general sense, yes. The salary payment delay has been due to the erratic and delayed nature of inflow of cheques.

But even if that was not the case, we would have had to implement a salary cut, due to other reasons, and we would have then paid salaries on time, but with the cut. So the two factors are actually not closely linked.

In some sense, the salary payment delay is a very short-term problem, and we expect that this will ease in a few months. The overall cash flow problem will take longer to ease. Till that overall picture eases, we will not have any salary increments.

This is all a really bad period, isn't it? We're getting totally rogered, and we're all going to die, aren't we?

Things are not as bad as you may feel.

Things have been much, much worse in the earlier IT industry crash which happened after the dot-com bust in 2001-2003. At that time, software engineers posted in the US used to take their families, drive down to the airport, leave their cars parked in the parking lots, and take flights back to India, because they lost their visas and didn't have time to sell their cars. We have seen literally dozens of Indian software companies folding up. One of our engineers who had left us to join Satyam Software for a 100% salary jump lost her job overnight. Their entire Bombay office was closed down overnight. She remained jobless for eight or nine months after that. One company we knew in Faridabad, with about 250 employees closed down a few months after receiving sizable VC funding.

Our company had to undertake salary cuts of 70% (i.e. people were getting 30% of their original salaries). My salary was down to Rs.10,000 a month; I had taken a salary cut of about 90%. All our engineers hated working for our company, and would bitch about the company in groups. But they stayed with the company, and continued to work for more than a year on those low salaries, because there were no jobs elsewhere. They all left one by one, over a period of 18 months. Our company shrank to just one engineer in 2003. We began growing again in 2003.

Most of you are too young to know about that period. The current downturn has hit the world economy much more than the 2001-2003 downturn. However, the Indian economy is not hit as much as the rest of the world. The export-centric Indian IT industry is badly hit. Specifically, Merce Technologies is not badly hit, because we have learned our lessons from the earlier experiences and we work with domestic clients. This time, we are also managing the challenge much more proactively. We are tightening much earlier, and we are also seeing much more business opportunities than we saw at that time. We are better prepared to pick up opportunities and encash them. We therefore believe that this current downturn is just a blip, lasting an absolute max of 9-12 months.

Salary cuts are now a common feature in most companies, though you will not hear about them directly. Most companies have a "fixed component" of their salaries, and a "variable component" or "bonus". In normal years, everyone used to get a pretty decent-sized bonus. (IBM officers have up to 45% of their total package as their "variable" component, and they all get most of this amount every year.) All these companies are cutting out the bonus now. That's a salary cut, but they don't call it that. Many companies are forcing people to take their accummulated leave, which means it is not encashable, and therefore it's a small cut in income. Many companies in the manufacturing sector have begun to impose one-day-a-week of unpaid leave for everyone -- staff, workers, clerks, and officers. One of our clients earns income of Rs.8 crores a month. In Nov 2008, the company's income had dropped to Rs.2.5 crores. And of course, many companies are shutting down entire divisions and letting go of their workforce.

We are far, far more healthy than many of these companies. And due to our tight management, we hope things will not get worse.

Will I be asked to leave for poor performance?

If you have doubts, ask us. If we have identified you as one of the weak performers, we will tell you directly if you ask us. We are always honest with employees.

What will change now, other than salary cuts?

We will all have to work harder. Not all of us are. I have sat in our seventh-floor office at 11AM on a working day and found just empty seats on more than one occasion. One day I walked in and saw just empty chairs at 11AM. Other than new AEs, one Support Engineer, and one senior AE, I did not see any other engineer in the entire seventh-floor office. This will have to change.

Leave will be harder to come by. Long leave will be strongly discouraged.

You will be asked to escalate problems earlier and more rapidly. Do not allow things to drag on --- delays will affect project closure.

Other than this, probably nothing will change.

NOTE

This entire document is Merce internal confidential information. No one other than employees of Merce Technologies must see any part of this document. Do not show it to anyone on-screen, let alone forward it by email outside the company. Do not discuss its contents even in conversation to anyone outside the company.

This confidentiality rule applies to all internal documents, including all pages of our Intranet, but in this case, we feel the need to emphasize it because of its sensitive nature.