"You don't have to have every single answer. It doesn't matter how many blue trucks a company owns. More important is what can you do in the business, in the the 20% that will really drive the results and drive the outcome" - Talks at GS, Henry Kravis
Examining financial statements can be tricky and tedious.
From an accountant's point of view, the ledger has to be always complete and accurate, even if it means laying out a few hundred lines of items. From a banker's point of view, we tend to be only interested in the top 3 to 5 items that affect the top and bottom line. There is always room for uncertainty and nothing is ever absolute. Unlike accountants, we talk about numbers in ranges and what-ifs. Nothing is ever precise. Sometimes we bankers talk too much as well.
There is a lot of art in balancing uncertainty and precision when it comes financial modelling. One must be careful to avoid being caught up in too much detail such that it hinders decision-making and deviates from what we hope to achieve from building the model. This is where the 20-80 rule is useful.
This rule can apply to cost cutting initiatives too. Conventional wisdom and numerous precedents dictate that the elimination of jobs should start at the top where it takes up presumably the bulk of costs.
But removing the top brass could be potentially detrimental to an organization, especially if senior managers are instrumental in steering the business. The case here being: Better and more cost-effective to remove the head of a business unit than three or five cogs in the wheels.
On the flip side, by removing the cogs i.e. shaving away a huge number of "low-cost" people, we also run the risk of overburdening remaining managers and employees with more work, which can lead to dampened motivation and workplace fatigue.
Aside from headcount measures, firms tend to also cut back on business travel, entertainment and other petty expenses as part of cost saving initiatives. While prudence is a commendable attribute, if we put too much focus on the small items, this will ultimately hinder business development initiatives in the bigger scheme of things and sometimes limit creativity and innovation.
So to sum it all up, no easy way out. And all of the above fundamentally relates to cost savings - a convenient way to justify improving profitability to shareholders.
However, most companies tend to neglect that the short term cost savings provided by a layoff are often overshadowed by bad publicity, loss of knowledge, weakened engagement, higher voluntary turnover, and lower innovation — all of which hurt profits in the long run [link].
In times like these, it is even more important for the firm to be upfront when communicating to staff. In late 2010 with the onset of the Eurozone crisis, I remembered my entire team being rounded up in a meeting room to be given a brief "heads up" of the looming uncertainties. No promises were made. The job cuts came about 3 to 4 months later. It was a difficult time but that short briefing gave everyone sufficient time to get mentally and logistically prepared.
No one benefits from such a situation - the folks who are departing obviously lose their jobs and the ones who stay on shoulder more work and responsibility. But as much as possible, you want to avoid having huge clouds of uncertainty hanging over everyone's head.
It is of course also hard to be encouraging but still absolutely necessary for the firm and managers to communicate the facts to the team in terms of what to expect, rather than soldier on silently. Employees will be employees and 99% of them will always feel victimised in a situation like this.
There is also another good cause for initiating cost-cutting from the top - solidarity.
Collective hardship and pain are a good band aid for fostering some camaraderie during turbulent times, and this needs to be communicated well. Just take a look at Sea, JD, BABA.
Perhaps more important than solidarity is trust. The relationship between a firm and employee extends beyond just a contractual agreement but a psychological one. Most employees who have been laid off don't feel that they should be penalised for the underperformance of the company, especially if the employee isn't in a leadership or senior management role. There is a perceived disproportionate balance of risk and reward, in which the employee is involuntarily placed in a weaker bargaining position, subject to the whims of their employer i.e. the firm ultimately reserves the right to terminate them during a period of economic uncertainty.
These feelings of negativity and distrust can be contagious and can spread quickly within the rank and file.
In the strictly commercial sense, profitability and shareholder value are both important metrics to measuring corporate performance. There are no jobs without the existence of a company, no company to speak of without the investment of capital. No capital without shareholders / stakeholders.
But even as we strive to maximise profitability, it is equally important to ensure sustainability in generating profits, to go beyond the numbers and dive into corporate culture to examine the quality of earnings being generated.
By solving for profitability in the near term, are we putting the longer term strategy of the firm at risk? In the words of the founders of 3G Capital:
“Culture is not about supporting strategy, culture is the strategy.”
人才是核心资产，以人为本是所有企业不可忽略的重要价值观
People are at the heart of all businesses.
"In the end, I am a teacher; that is really how I see myself." – Jorge Paulo Lemann
When we think about teaching, instructional delivery is almost always the first thing that comes to mind - The typical classroom or lecture hall setting whereby a professor or a lecturer pulls up a set of powerpoint slides and speaks to the class.
Giving a two-day lecture on financial modelling has always been an enjoyable session for me - the interaction, debates and sharing of anecdotes. One of the biggest highlights personally is to see someone complete his/her financial model (plugging the ending cash from the cash flow statement into the balance sheet) for the very first time.
Doing up a financial model might be considered rudimentary for some of you seasoned bankers out there but it is a big thing for someone who is either not trained in corporate finance or struggling to put together an investment thesis at the workplace.
But my teaching engagements go beyond the classroom. At the work place, I am also the go-to person when it comes to troubleshooting excel files and powerpoint, explaining a financial model to an analyst or investor, or when someone needs a slightly older person to be present in the room or to do the presentation in English, etc. Aside from that, I've also been a listening ear to many of our colleagues at the office, from the senior and mid-level folks all the way to the rank and file. I've even been called to help in a situation whereby someone had called our front desk complaining about an imposter who offered him a job at our company.
In August, we closed a landmark financing transaction with a highly reputable investment firm.
The process was lengthy - mostly because we had very sucky lawyers - but also because it involved a deal structure that no one else had done before. Parts of the term sheet were tricky and the closing was even more convoluted.
One treasury analyst (协办) in my team had the 'privilege' of assisting me on the deal. Joke was that I had brought her aboard a pirate ship (带上贼船), unleashing an incredible amount of documentation in the process, spanning at least seven inter-connected agreements. The deal was eventually closed and some weeks later, she resigned for better opportunities and left this note:
Over that same period (with a separate team), I was also running multiple conversations on getting our first-ever "ESG financing" framework accredited by a international ratings agency.
Although we had paid a fee for doing so, the negotiation process was tough. The ratings team sitting in Europe didn't have a clue on the overly long payment cycles experienced by public hospitals in China, and how supply chain financing for pharmaceutical companies delivering medical consumables actually resolves this critical financing bottleneck.
When we finally obtained the official second party opinion (SPO), I counted over 100 threads in the email exchange. It was not only the first time we had ever published a social and sustainability-linked financing framework and received a vote of confidence by an internationally reputed ESG ratings agency, but more importantly, this was one of the key CPs to drawing down on a RMB 500 million syndicated loan facility.
In situations like these, I find my teaching methods taking on a more practical element. I am no longer working within the 'harmless' confines of the classroom where I can freely talk about structuring, negotiation and valuation.
My actions have tangible repercussions on the outcome of the deal, and at every step, people are watching.
Middle-to-senior management roles (much like my typical classroom lectures on financial modelling) are often like stage performances: As long as you don't screw up big time, you can always afford a few slip ups, which is perfectly normal, but the show has to go on.
Look, most of the time, you work for money and are subject to the obnoxious KPIs placed on you because of your position.
But once in awhile, your job gives you a unique opportunity to make a difference. That difference is sometimes not measured in the millions of dollars you bring in for the firm or the big bucks you bring home at the end of the year, but the impact that you make on the people around you. That difference could range from anything as simple as fixing the alignment on a powerpoint slide, fixing a financial model, helping someone negotiate through a transaction bottleneck or simply changing the mindset and perspective of a particular person.
It is often said that we can't let our jobs define us. But how we do our jobs, and behave with our colleagues and clients ultimately determines the kind of person we are.
[Adapted from something I saw off the Internet recently.]