Eskom Case

Eskom Case

Background

Eskom, an electricity provider in South Africa, has recently undergone a series of changes in the way that the industry operates, including reconfiguring from a government department to a company. The company aims to be the lowest cost electricity producer in the world, and thus has implemented a Productivity Accounting focus (see Exhibit A). The company has come to a crossroad where it must decide if continuing this focus will further their new objectives.

Problems

At the root of many of Eskom’s dilemmas is the switch from a governmental agency to a company. Maximizing shareholder value does not always coincide with what is best for the country. Eskom has stated goals such as hiring 50% black South Africans, protecting the environment and electrification of 1.75 million homes. These goals are difficult to achieve when striving to be the lowest cost electricity producer in the world.

The focus on productivity lead management to create an annual bonus based on that year’s productivity gain. The lower levels of employees often do not know what this bonus is based upon or how they can contribute to productivity. The total productivity bonus is essentially divided evenly over every employee, rather than rewarding specific departments for their specific contributions.

Eskom is also having difficulty acquiring and attaining quality employees. The private sector pays considerably more, and thus skilled labor is difficult to find. Additionally, outsourcing has caused many experienced employees to retire early. Managers are frustrated with trying to meet productivity goals when the company cannot supply skilled and knowledgeable labor.

Outsourcing has also brought about the concern that the company is merely “window dressing” the poorly performing areas of the company. Strategic decisions were made to outsource particular functions to effectively utilize assets. To some this seems to be avoiding the issue of trying to make those areas more productive, and is skewing the actual productivity results.

Recommendations

Productivity Accounting is not a good fit for the company if they are going to be focusing on other goals such as employment equity. These goals take time to actually see a profit, and in the meantime, productivity results will be indicating that the company is not meeting goals. In fact, over the long term, the company may be making substantial progress towards those goals. Since 1993 they have included a productivity statement in their annual financial report. This productivity statement initially showed a profitable organization but it is now making them look unprofitable not only to their employees but to their shareholders as well.

However, the company may wish to reconsider some of those goals as it is becoming privatized. Many new competitors are going to be entering the market soon, and the company will not be able to stay the lowest priced producer, and continue to meet some of these other goals.

Eskom could see many positive results from staying with the productivity accounting approach. As the company is trying to lower costs, specific inputs and outputs can be measured to ensure that every input is being utilized well. If the employees are better educated about the productivity measures, each employee can be accountable for ensuring the success of the company. Productivity accounting can serve as a good basis for employee bonuses, given that the measures are appropriate. If employees are not given the inputs necessary, then it is not feasible to expect impossible outputs.

Eskom currently uses a total productivity measurement for its productivity accounting system. Using this approach makes their productivity statement look worse than the actual progress of their productivity. It shows a negative profit for 1998 and 1999. This downward trend will be reflected in the employees’ motivation at work. Their bonuses are a result of profits the company makes