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"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.

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 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.

At the risk of sounding unfair to those with skin in the game, there is an inherent perceived disproportionate balance of risk and reward, in which the employee feels 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.

But 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.”


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