Case Study: MD Foods - Annualised Hours 

Tough times in the UK dairy industry have seen many businesses going down the drain. But this year’s winner of the IPD People Management Award, reports Anat Arkin, kept afloat with a business and people strategy based on partnership with its unions.

More than six months before MD Foods launched Cravendale Purfiltre, managers and trade union representatives sat around a table to talk about how this finely filtered pasteurised milk was likely to affect the business and its employees.

The new product, which has a longer shelf life than ordinary pasteurised milk, would have been of great interest to competitors. In the past it would have been unthinkable to discuss it with employee representatives at such an early stage. But relationships with those representatives, along with much else at MD Foods, have changed out of all recognition in the past 18 months.

In addition to the trade union business forum, where new product launches and other strategic business issues are discussed, an annualised hours system and a self-financing package of improved employee benefits have combined to transform the organisation’s culture, halve absence rates and improve efficiency.

MD Foods, a Danish company, began production in the UK in 1990 when it bought Associated Fresh Foods. This was followed by other acquisitions, including the dairy division of Co-operative Retail Services and the former Dairy Crest site at Bamber Bridge, near Preston, Lancashire.

But this was a difficult time for the dairy industry. The abolition of the Milk Marketing Board in 1994 led to a sharp increase in the price of raw milk just when the doorstep milk delivery business was facing stiff competition from supermarket chains. Several dairy companies went to the wall.

MD Foods was going through a rough patch too, and it clearly needed a radical shake-up. A new chief executive, David Salkeld, appointed towards the end of 1995, initiated a restructuring process designed to make the business more responsive to its customers. This involved setting up strategic business units, each serving a major customer, such as Asda, or a particular segment of the market. Over three years the company also invested around £55 million in state-of-the-art processing and packaging equipment.

But restructuring and capital investment were not enough, on their own, to turn things around. The company also needed a skilled and well-motivated workforce able to react flexibly to customers’ demands and support dairy modernisation. To achieve these objectives, a new people management strategy was developed as the third and, arguably, most important element of the change programme.

Conceived and implemented with the support of consultants from the People Enhancement Partnership, it was this strategy, which came to be known as “The Dairy Industry - The Way Ahead”, that made MD Foods overall winner of the 1998 IPD People Management Award.

For the personnel function to come up with a business-related strategy was in itself something of a revolution. Until then, the role of personnel had in essence been reactive. “Some of that was because of the traditions of the dairy industry,” says HR manager Rachel Tofts, who is based at the firm’s Oakthorpe site in north London. “But it was also because we had been acquiring or disposing of sites, and HR had become so involved in doing those things that to actually stand back and look proactively at what we needed to do to benefit the company, to add value to MD Foods, was not something we had done before.”

Tofts describes the firm’s industrial relations back then as variable, ranging from good at Oakthorpe to “difficult” at Bamber Bridge. But the real problem for the personnel team was the existence of 90 different rates of pay and the absence of a formal grading structure to justify these differences. Operations managers had, over the years, used supplementary payments as a way of getting things done. They also made extensive use of overtime working.

“If a manager had a staffing problem, the simple solution would be to ask people to do overtime,” Tofts explains. “It was probably the most expensive way, but it was the done thing. It was expected.”

Low-paid workers at the company’s processing sites made a living wage only by putting in overtime, and many were working 50 to 70 hours over a six-day week. As a result, absence rates were high and productivity low. The annual-hours project team leader, Henning Berg (a Dane with a dairy industry background), describes the “overtime drift” he noticed when he began looking into the feasibility of introducing an annualised hours system.

“In the first few days of the week the machines worked very well,” he says. “But when it came to the end of the week they slowed down, because people had to build up their wages. It was obvious that we couldn’t increase efficiency unless we did something about the basic low pay.”

The personnel team concluded that the company needed a new “greenfield” HR framework. In a planning document submitted to the board, it explained: “This will ensure that people management and trade union relationships are moved into a ‘single company’, modern, forward-looking culture that complements and enables the other elements of the business strategy to be delivered.”

The main vehicle for putting this new framework into effect and for helping employees and managers to break out of their high overtime/low productivity mindset was to be an annualised hours system. This would allow MD Foods to develop a single, company-wide agreement, abolish all overtime and supplementary payments - and, in so doing, anticipate the European working time directive by capping the working week at 48 hours.

But instead of clawing back the expected savings, MD Foods decided to use them to fund an improved pay and benefits package. Although this package was on the table from the beginning, the unions were suspicious of the management’s motives. Negotiations were long and difficult.

“To me it was a bit of a shock to see the negotiations over here,” Berg says. “It was like the situation I remember in Denmark 30 years ago. The unions did not trust us at all. It took a long time to convince them that we really wanted them to work together with us.”

Officials from the T&G and the GMB, which represents most employees, agreed that the complexity and diversity of existing terms and conditions were not in the interests of either the firm or the workforce. But they were concerned that MD Foods was trying to use annualised hours simply to cut costs.

T&G national officer Ron Webb argues that if employers want to do away with premium payments, it is in their own interests to build a premium payments element into the basic hourly rate.

“If employers want to use annualised hours to take costs out of the system, then my view is that the scheme will fail,” he says. “But if they want to increase productivity and flexibility on the back of an annualised hours scheme and build the money on an average basis back into the scheme, then it’s more likely to succeed.”

It took 12 months of talks, but the management team led by former personnel director Colin Hall, who has since retired, eventually gained the trust of the union negotiators. They were won over not only by the offer of higher basic pay for their members, but also by the company’s willingness to improve the overall benefits package in return for harmonisation of terms and conditions and increased flexibility. Early in 1997, Ron Webb and GMB regional secretary David Williams recommended a three-year, 18-point agreement to their members.

Designed to replace the existing hotchpotch of locally agreed terms and conditions, this company-wide agreement was described by Webb as “the most progressive” he had ever negotiated.

As well as introducing annual hours and setting up the trade union business forum, the deal offered employees basic pay well above the likely minimum wage, greater job security, increased holidays and a new pension plan based on one-sixtieth of final salary for every year of service. In an even more radical break with dairy industry traditions, it introduced a job grading structure that recognised and encouraged skills development. The agreement also extended staff status to all employees, who would be paid monthly, and replaced three sick-pay schemes with different levels of benefit with a single scheme offering improved benefits.

The company produced a video to explain the proposed changes, and sent a copy to each employee’s home, timed to arrive on Saturday when it could be watched by the whole family. Mass meetings were also held on each site on every shift, and employees were seen individually and given statements about their new annual-hours roster and salary.

In the short term, this communication exercise failed. When the agreement was put to the vote, it was rejected - on some sites by as many as 70 per cent of employees. One senior shop steward, who argued in favour of the deal, was even voted out of office. But the management team was not unduly fazed. Responses from individuals at the meetings had prepared them for this reaction.

Some employees were clearly worried about losing their overtime and supplementary payments. Others, according to Tofts, could not adjust to the idea of suddenly having extra free time.

“We were saying that this would give people more leisure time and one man turned around to me and said: ‘What do I want to spend more time with my wife for?’ He was deadly serious.”

They were also evincing a normal reaction to major change: “We had anticipated that it might be rejected, because that’s the way it is with ambitious HR initiatives,” says Bob Hall of the People Enhancement Partnership, one of the architects of the pay and conditions package.

But Colin Hall’s successor, the present HR director Paul Simpson, believes that most of the initial opposition to the agreement came out of confusion about the annualised hours system. As the system became more widely understood - by line managers, as well as their teams - opposition crumbled. A small concession over holiday pay also helped. On a second ballot the vote in favour was around 72 per cent.

The agreement came into force on 1 July 1997. “We are still having teething problems and there are still misunderstandings,” Simpson says. “But it’s now much better understood, and my guess is that if we were to ballot today, we’d get a 95 per cent vote - you never get 100 per cent in favour of change.”

Most problems that crop up have concerned interpretations of the annualised hours scheme, especially the use of “bank” hours. Under the rules of the scheme employees’ “normal working hours” are made up of rostered hours plus “bank” hours, which can be used to cover for sick colleagues or other reasonable business purposes (see panel, page 35).

At first, managers had their work cut out allaying fears that they would, for example, bring people in during bank hours to wash company cars. But these and similar misunderstandings have now been largely ironed out, according to Simpson, and the benefits of the whole strategy clearly outweigh any initial implementation difficulties.

On some production lines efficiency has improved by as much as 10 per cent, partly because of investment in new equipment. But the annualised hours system has undoubtedly allowed the company to manage variations in demand for labour far more efficiently than it could in the past. The industrial relations climate has also improved.

Perhaps the clearest sign that the new strategy has succeeded in changing people’s behaviour comes from the company’s attendance figures. Before the agreement, absence rates had varied considerably from site to site, but were on average 9 to 10 per cent. They are now down to about 3.5 to 5 per cent.

It is, of course, impossible to say whether the measurable improvements so far achieved by the new strategy will last. But the omens are good.

“In other companies, annual hours have not been so successful,” Hall says. “The difference here - and we are still in the process of getting the system to succeed - is that we took this leap of faith together with the unions. People saw the benefits of the 18-point agreement, which probably didn’t accompany annual hours in any other company.” 

Award background : MD Foods

Ownership MD Foods is part of the Danish MD Foods Group, a co-operative owned by around 9,000 dairy farmers.

Number of employees In this country there are 2,400 employees, of whom 1,500 are covered by the current agreement with the T&G and the GMB unions.

History The company began production in the UK in 1990.

Locations The company produces milk and other dairy products at Newcastle-upon-Tyne, Leeds, Bamber Bridge, Settle, Oakthorpe and Hatfield Peverel. A seventh site, in Blackburn, produces fruit drinks.

Judging panel’s comment The judges were impressed by the way in which MD Foods – when it reorganised into strategic business units and invested £55 million in state-of-the-art equipment – also took radical steps to change the company’s rather traditional approach to industrial relations and to win the support and involvement of employees.

A trade union business forum has been set up within the company, which regularly discusses new product launches and other business issues. The judges felt that this was another sign that the culture of MD Foods has been transformed in a very positive way.

A year’s time

Under the annualised hours scheme, employees get a fixed salary for the hours they have contracted to work over a year. This allows employers to cope with variations in demand for labour without paying extra for premium-time working.

At MD Foods, contracted annual hours, minus a holiday entitlement of 26 days and eight public holidays, equal “normal working hours”. Staff are rostered for most of these hours, while the remaining time is put in a “bank”.

It has never been the company’s intention to use up all the banked hours, although staff are paid for them. “The banked hours are there to be used up to a certain degree, but if you use all of them, the managers have no flexibility,” explains Henning Berg, the annual-hours project team leader.

But the HR team is looking at ways of making better use of banked hours that are not needed for production – for example, for staff training and development.

The whey ahead

At Christmas and in the soft fruit season, when demand for cream hits a peak, Julian Ward used to work up to 90 hours a week packing cream into tubs at the MD Foods site in Leeds. “It wasn’t so much the money as the work that had to be done, though obviously the money came into it,” he says.

But a system that relied on people doing voluntary overtime was divisive.

“There’s more co-operation within the department now,” Ward says. “It was quite fractured before, - there were those who did and those who didn’t do overtime.”

Today the work is shared more fairly and the work groups are responsible for drawing up their own rosters. In the cream room, they decided to work 60 hours a week for two weeks and then have a third week off. They also make their own arrangements when it comes to dealing with short-term illness.

“Before, you’d take the day off, but now we all have each others’ phone numbers and if I’m ill, and I know someone else has a day off, I’ll call him and we’ll swap days,” says Ward.  “As long as the shift gets covered, you don’t get any hassle.”