By FocusCore Group with Diana Leng
Chief Financial Officer & Member of Board KS Drilling Pte Ltd
Ms Leng oversees group finance & treasury, mergers & acquisitions and corporate finance related activities. A CFO with international perspective and experience in the development and implementation of business strategies, corporate planning, banking and finance.
Previous appointments include; Director of Treasury of KS Energy Ltd and various banking positions within the ING Group. Ms Leng is an alumnus of Maastricht University School of Business and Economics and holds a Master of Science in International Business.
We were delighted to have the opportunity to discuss current topics with her. As you will see, there is no lack of detail with clear advice that is worthy of note and doubtless a further boost for those in her organisation.
Q 1: What cost reduction strategies would you employ during a turbulent economy?
I do not think there are cost reduction strategies as such, unless you are trying to drive margins. These apply at all times not just during a turbulent economy. They apply in any economic state. However, it is true that you gain a sharper focus during a difficult economic period; things are more black and white. You go for the low hanging fruit, spend only on the need to have, in order to sustain the weather. Clearly projects that are not immediately essential to the business should be deferred, although usually that comes with a cost as well, in the long run. I prefer to think of it as financial discipline as opposed to just cost reduction. You study costs as a method to drive your margins, not as a strategy to see you through a turbulent economy. What is far more important during turbulent times is how well you manage cash.
Having cash or being able to retain cash is not the same as successfully managing cost. People sometimes confuse having cost control or cost reduction as equating to having cash; this is not a given, hence cash management is in my experience at least as important as cost control. You ability to truly understand and control cash flow can be vital to survival and defining to succeed. This includes having an all inclusive mentality to collections from everyone in your own value chain. It also starts early by not neglecting client credit checks and weighing this against commercial arguments. Getting paid and getting paid on time is essential but often cash leaks away in inefficient corporate structures or through complex partnerships. Your ability to understand the source and to follow the cash can make a very big difference during difficult times.
Also, business owners and leaders sometimes inadvertently get lulled into the feeling of a no-cost capital cost environment for capital because they deploy very little debt and forget about the tangible cost of equity. It is critical for profitability to keep a close eye on this and have simple and clear triggers to monitor all-in returns to the business. In our business we own capital equipment, thus the capital deployed, debt and equity is huge; and there is a very direct and visible link between performance and financial viability. The theories are textbook and classic but the reality requires a hands-on and a multi disciplinary approach to financial management. For example, the interplay between your commercial contracts and the terms of your debt come into sharp focus, especially when times are tougher. When you appreciate this interplay, you will be able to formulate and execute a strategy for riding even a turbulent economy.
2: In Singapore is cost reduction a commonly used way to sustain profitability?
I cannot confirm whether companies in Singapore use cost reduction as a strategy to sustain profitability. From my perspective this is not the key element. The focus should not be uniquely on cost reduction, but on ensuring you have the correct revenue versus your cost base.
Some companies view and choose headcount reduction as a quick method to reduce costs. But reducing headcount does not necessarily equate to reducing costs and certainly in the long run this may cost more. This is true especially for smaller and medium sized companies, where headcount reductions and savings on personnel costs may have a short term positive impact, but a negative impact on effectiveness. There is a resultant loss of company experience in the company and added costs that I shall mention in a moment.
We find in the long term and during times of rebuild, that aggressive cost reduction on the personnel side can have very negative impacts. The cost of finding and training people is quite high and the cost or impact on the social fabric is high. Of course you have to ensure that you are operating at a lean level in the first place versus profitability. I am pleasantly encouraged to see in our group that everybody is strongly motivated to search for ways to cut costs, working as a team. I am not saying we have not made cuts, we have, but these have been related to direct expenses where there is no contract. As regards pure corporate overheads, we try to manage these so they remain at a sustainable level.
In our sector we are naturally hedged, by that I mean we earn in the same currency as we spend. Most of our expenditure is in US Dollars, so cutting costs by taking exposures is luckily not a factor. I believe you must set your KPIs and monitor your investment targets. Be firm with these targets. Certain projects may have been approved under certain circumstances. Indeed these may not be loss making but if they are not as profitable as they should be, they will come back to haunt you when markets are bad. Review them. You may not be making the margins required. So you have to manage with discipline and consistency.
Across a broader spectrum of comparisons, there are variances in Singapore and elsewhere. I have worked in Europe as well as Singapore. In Europe, there is I believe more evidence in the national economic culture, the impact of the welfare state can be felt. There is less of a safety net for people in Singapore, so we do see more job hopping here and people leave for a small change in salary and this is frustrating as one tries to invest in, and train staff for, their long term career. We believe in more than just paying well. We look at the entire package and its sustainability, providing elements to people that cannot just be translated into the level of salaries. It is hard to scale back on this and you don’t want to do this, if you can help it. It is also important to be informed on the priorities as perceived by people. So my preferred management style is to have an open door policy. On these matters it is important to adopt procedures that maintain open channels of communication.
3: What about the cost of re-build after the economy picks up?
This comes back to what you have done in the downturn. There is always the cost of rebuild, due to cut backs, temporary suspension of investments etc., but if you have done things correctly I think your rebuild cost should lead from your efforts during the lean period. I compare this to going on a diet – hopefully you have hit your target and you are working from a clean slate and the correct starting point. But it is important to stay on the healthy track! People may think they have been lean and can go to a feast or on a shopping spree but it is important to stay on the target you have so painstakingly achieved. Do you defer projects as a part of cost cutting? Well yes, or at least slow them down. But when the market picks up and this does not happen gradually, it happens fast, you can find yourself understaffed, under invested. This is when mistakes can be made or growth opportunities are missed, which in itself again increases the cost of the rebuild.
You cannot control the storm outside but you can manage the way you sail through the storm. So you focus as much as you can on the stuff you do control and you should gain more return from your efforts.
4: Do you reconsider the company structure during the rebuild?
No. During a turbulent time you may consider a review, especially if entering into new projects. You face the rebuild with a fresher mind on how you do things but do not change the frame. I am not convinced you should change it. Retaining people is important, when sections go through downturns. Most industries go through cyclical patterns and it is important to keep the team together and instil confidence so that people retain their focus with confidence and work towards the corporate aims.
5: Can consultants and recruiters really help with this process?
By process I presume you mean the rebuild. There are many types of consultants so perhaps we should narrow this scope. I think sometimes a message coming from outside can be easier to hear that one coming from the inside and in that sense consultants can be very useful. But consultants are also expensive so this does not always tie in well with the cost strategies we were discussing a few moments ago. When using consultants, perception management is key.
Looking at recruiters in this, they are certainly useful as they represent a very important part of your stakeholders, namely manpower. They are useful because they give you a view on what the candidate pool is thinking. I speak to many recruitment agents to learn what people are thinking. They are also a vital sounding board for benchmarking exercises and allow our decision making panel to come to a balanced approach when reviewing salaries in different conditions of the market.
We also deal with asset brokers, also consultants. These are the market makers between the buyer and the seller or a client and an owner, a shipyard and a builder. They mediate, advise and have the ability to make transactions happen that may not appear evident. Crucial in a rebuild, as often the market is often small but yet not so transparent. They are also a good indicator as to how the market is doing. This is all vital intelligence for us to review and digest.
I have been blessed with extremely good people and mentors throughout my career. Someone once told me, that the key to success is to be genuinely open to the people you meet. Networks in a qualitative manner not just the quantitative sense matter. Listen rather than speak and this is not perhaps an easy task to everyone. Invest time in people without expecting an immediate or clear return from this investment, place your focus on hearing what other people are thinking as this is when you will start to learn.