← The HC Commodities Podcast
The HC Commodities Podcast
Planning for the Unplannable with Savvas Manousos
00:55:31
As we enter the planning season, we consider why business planning in the commodity sector is so challenging. And how uncertainty and a more volatile world has made it even more so? What can organizations do to build in resiliency and flexibility into planning and what tools are available to better manage the downsides and also capture opportunities? Our guest is Savvas Manousos. Savas has spent a long career building and running trading platforms and is now a partner at Enco Insights, a global advisory network dedicated to energy and commodities. As an Enco Insight Partner, Savas and his colleagues are supporting Corporates and Strategics around the world, build, develop and implement plans big and small to meet the challenges of the commodity sector today. Enco Insights provides senior energy & natural resources advisors for short to long -term engagements to the private equity world, the legal world and of course corporates when the stakes are high and the insight matters.
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Foreign.
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B
Welcome to the HC Commodities Podcast, a podcast dedicated to the commodities sector and the people within it. I'm your host Paul Chapman. This podcast is produced by HC Group, a global search firm dedicated to the commodities sector. Today we're talking business planning in volatile time. Why is business planning in the commodity sector challenging? And how is the uncertainty and volatile world out there making it even more so? And what can organizations do to build in resiliency and flexibility? And what tools should they use so they can manage downsides and also capture opportunities? Our guest is Savas Menusos. Savas has spent a long career building and running trading organizations and now is a partner at Enco Insights, he's global advisory network dedicated to energy and commodities. As an ENCO Insight partner, Savas and his colleagues are supporting corporates and strategics around the world build, develop and implement plans big and small to meet the challenges of the commodities sector today. And Enco Insights Self is providing experts for short or long term engagements to the private equity world, the legal world and of course corporates when the stakes are high and the insight matters. Also on the evening of September 30th we have an HC Commodities podcast live event as part of the Argus Global Markets Conference in London which is held on September 30 to October 1. Our panel is beyond Adapting Trading Strategies to a Shifting Geopolitical landscape and our panelists are Saad Rahim, Chief Economist at Trafigura, Kurt Chapman, Director at Levmet, David Fife, Chief Economist of Argus, and Nick Kumleben of Greenmantle. The Argus Global Markets Conference is an excellent event. You have to be part of that conference to attend the live podcast panel, but I encourage people to sign up and I'll put links to the event in the show. Note and many thanks to Argus for the invitation. As always, please do leave us a positive review on the platform you're listening on. And as always, I hope you enjoyed the episode. Well Savas, welcome back to the show.
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Thank you Paul.
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B
So I guess this episode is spurred by the kind of questions you're tackling right now as an Enco Insight partner. And also we're in the season or coming up to it very shortly of business planning and budgeting. And the question that we're asking ourselves today is essentially twofold. One being how, how relevant, how challenging is business planning and budgeting in the commodities sector itself, and that's today and historically, but also how relevant is it today in a world that's changing so rapidly, particularly in policies, economics, geopolitics and so forth so before we, before we even get to planning and budgeting, can you just help us understand how that they alone are not a substitute for strategy and how strategy is different from this annual planning cycle?
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A
I think what's interesting now, only because it's probably dialed up to 1112 or beyond, is if you look around, the world's running on uncertainty and many of the companies are still planning as if the future will politely follow what was written in last year's strategy statement and budget and plan. Traditional budgeting and static strategies just don't align in at the moment. Sometimes they do, but they certainly don't align at the moment with the level of geopolitical shocks, economic shocks, logistics changes, tariffs, policy swings, various disruptions that now arrive without warning. And I, I don't see many examples yet. And this is one of the things that we're working on, which is how do you help an organization move from. One of the phrases I like is replacing rituals with readiness. How do you move from this static steady state view if we do something at certain periods of the year and then it plays out in either a one year or a three year plan or strategy and how do you remove those rituals and that steady state to something which is much more agile, much more able to cope? The old style world assumes that things move in straight lines. It doesn't. The last two years we've watched shipping lanes open and close, tariffs appear overnight, change later, change again. Panama Canal has been impacted by weather, trade conflicts, global conflicts reroute trade flows. So the result is strategy whiplash. Last year's strategy and last year's budget become this year's blind spot. Static plans meet a world that's very dynamic and it ends up that C suites and businesses are forced to manage volatility only with the tools that they have, which were designed around a very stable linear world. So you know, the trick is how do you change that? How do you move from a world where you're now planning in cycles, not in seasons, where you have an option deck, not individual line items of spend you manage to portfolios rather than activities. You test strategy using things like war games or red team decks, not necessarily big slide decks, and getting comfortable that it's not about perfection. What's interesting is companies often spend huge amounts of time getting every single variable and parameter and assumption right. And before the ink has even dried on the slide, the world has changed and something has moved. And you just don't have the pace, the optionality and the decision rights to, to be able to recast that every month or every three months you're set up where the cadence of that is annual or biannual and that just doesn't work right now if you anchor performance to a once a year plan, you're effectively outsourcing that year's plan a little bit to luck. So that's why I like this concept of replacing rituals with, with readiness.
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B
It's somewhat the tyranny of the budget and I guess then we'll come on to that. Just a word on strategy and using my favorite professor, Vikas Mittal, who even did some work with us of Rice University. You know, I think he would say that, you know, if your strategy is changing every couple of years, you don't have one. And your strategy is your plan to win. And it can only really be based around a couple of key elements, right? Customer service, brand design, engineering. You know, you could argue that Porsche is strategy for the last 80 years is design and engineering and Apple's is brand and design and so forth. And there's a few in commodities, right? Whether you're lowest cost or customer service, whatever it might be just sort of talking about kind of the plan to enact that strategy, you know what is just going to the ritual format because that's probably what most of us have experienced, whether as leaders or as employees, if we're honest. Every year this sort of plan comes around and the budget gets created and that's when headcount is determined and all the rest of it. Can you just give us some sense of what that sort of ritualistic approach is? Is it ultimately ruled by the tyranny of the budget? The budget's got to be made and that kind of substitutes for a plan. And secondarily, can you just help us understand why in a commodity market, particularly a commodity trading business, I mean that's playing on hard mode. Even when you, if you had a normal world and we didn't have all of the change and non linearities we do today.
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A
So yeah, strategy typically is about taking. What do you think the key fundamental elements are that drives whatever it is my business is about? So whether I'm fmcg, whether I'm trading, whether I'm oil refining and they will typically be, you know, what's global GDP doing in terms of am I facing a headwind or a tailwind, what's demand for my product or service, where I am, what's competitive intensity, what's my margin that I can typically achieve, what are my unit costs and the variable costs doing what does my capex need to be to sustain a long term business and what does my shareholder need in terms of returns and dividends? So the challenge is how do you avoid anchoring it back to a financial outcome too early? Is one second is you don't always have the chance to reposition your assets and your portfolio. And therefore the temptation can almost be this year's strategy is a kind of build out of what went well or badly in the last strategy. And where do we cause corrects and where do we dial things up or down? And certainly by the time you get to the budgeting exercise and quite often budgets and plans equal the same thing. It's usually the starting point of what did you deliver last year? How can I give you a stretch target for what you need to deliver this year? And how do you have a debate on what costs have done? And therefore you need an additional resource allocation, whether it's CapEx or OpEx or whatever it is. So it ends up more times than not being an extrapolation of past as the direction for the future. And that's I think the biggest challenge right now is you get fixed into very few opportunities to course correct your ability to genuinely course correct at the planning. And the strategy time is quite low because it's usually a build out of what's gone before it. And therefore frankly the times when organizations make the biggest change is usually in times of crisis when they're forced to. You're not going to pay a dividend or you've got no free cash flow or you're going to run at a loss this year and then all of a sudden you can't get away with saying well it's the environment and we still believe the long term strategy is robust and so on and so forth and you have to intervene. Challenge is how do you almost bring that mindset of not creating a crisis every month or every quarter, but building the capability and resilience and curiosity within an organization to be able to know where you want to go, where you want to head to and where you want to deploy. And it's very much about those allocation of resources in a much more flexible and mobile way than they are. And I get this is very difficult for large organizations where you, where you have businesses and functions and very much kind of silo command and control because it needs to be because you're managing tens and thousands of people. The problem is it's very hard then to be as reactive as you need to be in the world we are right now. If you continue to run in those old Style ways.
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I mean one of the just sort of leaning into the commodities aspect of this is, you know, if you, if you take the AG houses and I, you know, and I think they're indicative in general of the, and today, you know, hedge fund or trading house is much. There's a different set of problems. Right. It's hard to budget if you're just purely a trading organization. Most of the trading organizations now are more like mini majors and integrated. So doesn't apply. But let's take the ag houses. Over the last 15 years, one of the challenges with the commodity markets is you kind of get this. It's cyclical. You'll have, you know, four years of completely lean results to losses and you'll have, you know, one or two years of picking up or slowing down and four years of great results. And those time frames can be different. But one of the challenges is for leadership is in those four to six lean years there's a lot of talk and rhetoric, especially public companies, where it's more felt about having to plan. You know, commodity markets have changed. There's no longer the opportunity. So we need to lean into manufacturing, processing, adding value, getting further down the value chain. And then suddenly the commodity markets pick back up, results return. And shareholders and stakeholders are asking why are we in these low profit margin, longer term cycle R and D businesses? Let's cut it all and get back to commodity trading.
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Right.
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That's one of the challenges with commodity trading is that cyclical nature and the unpredictability of returns, they're ultimately based on mismatches in the capex cycle and exogenous events that cause volatility. I mean, I don't know if that makes sense. And how do you, I guess we're still sort of on that strategy piece. How do you face those types of challenges and not yield to immediate pressures?
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A
So one of the things to decide is over what strategic horizon are you setting your strategy for? What you quite often see with many listed companies is they almost have to reset their strategy a little bit. Every time they do a quarterly results announcement and one of the competitors did better or worse, they almost end up doing a little bit of course correction. And some of it is how do you articulate and hold the line of these are the things that are the core elements of our strategy. These are they will be subject to in year volatility. But here's why we have a right to win. Here's what our distinguishing performance factor is. So one year we may go from 5% return to 10% return on that asset. But fundamentally it's resilient through the cycle because of X. And X can either be a sustainable geographic advantage of a market that's growing or lowest cost production or a technology or, or you identify what the winning element is for you. And I'd say if you can't do that, then you should question what part does that play in your portfolio. You may choose to say, well, it's fine, it's generating cash right now, I'll keep it there. But if it doesn't have a sustainable element to it, there is the question of are you the natural owner? Do you have a right to, to win with that, or is it best owned by somebody else in their portfolio rather than yours? And that's always a good asset. Test was if we gave this to XYZ competitor down the road, would they be able to make more money from this activity than we do? And if so, why? And either that's something that you can react to and level and get ahead or else it says no, they've got a sustainable advantage here and maybe they see more value in this and you know, we should be somewhere else.
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B
Yeah. Strategy is your, your plan to win based on your competitive advantages that you have. Right. This is, this is as simple as that. That's kind of where you get a bit, I get a bit squirrely thinking about redirecting, changing strategy too often to suggest that you don't have the right one. Right. I think, you know, you've got your plan to win. It's, it's obviously shaping tactically how you're delivering on that. That kind of comes to the planning cycle which is, you know, every year, every three years, every, you know, and they're sort of overlaid like onions. And I guess you're sort of pointing to the heart of this, which is kind of like how do you make sure that you're bucketing these activities into the right sort of time frames and that everything is subservient to the overall strategy? And that ultimate strategy is being stress tested as it respects to markets, assets, people and timelines so that you're not, you know, so that you are testing whether those competitive advantages still exist.
- [16:52]
A
Yes. And on one level, the market, you know, the market will give you feedback on how well or badly you're doing against that on a quarterly basis. I think looking at the numbers over a slightly longer time period is, is more helpful just because it helps strip out some of the noise. But one of the things that people often get caught by is they run these things in 12 month cycles. So I run my strategy, it's now fixed for 12, 36, 60 months, however long it is. And I'm going to revisit it in X period of time. I think having strategic goals and compass settings and a breakdown of what it is writing down. If this was a dashboard on an airplane, where have I set each of the controls for each of the key areas and then on a rolling forecast or a rolling plan basis saying am I veering off course and do I need to course correct or is there something more fundamental that I need to intervene? But not only doing that on an annual basis. So it's not about rewriting the strategy every month, but it's about checking in on, I want 12 proof points on a rolling 12 month basis that my strategy is still robust and my assumptions that I took in and my competitive edge is still what it is. And if not, what, what do I need to do to, to augment or respond?
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B
Yeah, and, and Vikas Matal, I'm actually moderating a symposium in November for Rice University. He would say, you know, I mean so much ink has been spilt on this but the, you know, the temptation suddenly also becomes very insular. Right. You're looking at yourself by your own self designed dashboards rather than as you said, what is the market actually giving you? That is what are your customers saying about you? And so it's important to check that that lens, those check ins, those stress testing are done with your customers, not just what you think about yourself because often your incentive is to say I'm doing really well.
- [18:57]
A
Yeah, I think the dashboard and the KPIs and what you look at, you set internally because that's how you want to align people in performance contracts and objectives of, of what you want to do. But you're absolutely right. The context against which you put those set points on each dial, as it were, absolutely should be based on what will give me a sustainable competitive advantage or what will give me a better TSR than the company that I'm being compared to within the context of the resource allocation, the portfolio and everything else. But the definition of what good looks like should be set externally in terms of what those targets are.
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The energy and resources sector is experiencing unprecedented change. To help navigate this change and capture its opportunities, HC Group launched Enco Insights, a global advisory network dedicated to the sector providing senior advisors and subject matter experts to investment and infrastructure funds, law firms and corporates. Encoinsights leverages HC Group's 20 years of connections in energy and commodities to give clients the expertise they need when the stakes are high and insight matters. Learn more@encoinsights.com I want to go back.
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B
To my point though about kind of what differentiates the commodity trading sector here. And again it's a relevant conversation because pretty much every asset heavy, every strategic, every asset, you know, owning organization in this, the value chain is, is thinking about or in, or strengthening their trading capability, their commercial capabilities is just because the, you know, then this is, comes back to that point of tyranny of the budgets. Just because you have a bad year or results aren't what you expected them to be as a result purely of how the, the markets developed that year or one off losses or events or whatever it means, doesn't mean you have the wrong strategy though, right? In other words, because the markets themselves are so important in driving results and it's hard to have a con, there's no control group that you can compare yourself to necessarily and you can't really calculate how many losses you avoided. There is this challenge in budgeting in commodities on an annual basis where you can say oh well, we expected to make a billion, we only made 200 million, therefore the strategy is completely wrong and shareholders are disappointing in what we're doing and we should abandon our drive towards improving and sophisticating and making more resilient our commercial and trading functions.
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A
Yeah, I mean I think it's very interesting where you see corporates or industrial companies, NOCs, small and mini majors who maybe don't have the Same history of 20 years of financials to be able to point back to in terms of trading where you're exactly right, the temptation is I'm going to set you an annual plan and a budget and then I'm going to measure you every month and every quarter and I expect you to deliver 1/12 of the plan every month. And if you don't, then we need to have a conversation that's entirely wrong for commodities because the world just never plays out like that. There's either more volatility or a certain trade flow has moved or the market's gone from backwardation to contango or whatever it is. We know the fundamentals that drive the rent pool and I think the question always is, therefore, when you're looking at performance, did you receive the best return on risk and the best return on the volatility based on the conditions that you saw at the time? And you may not deliver plan, but that doesn't mean that the strategy was wrong. It means that Your plan had a set of assumptions around what the world was going to do that didn't play out like that. And I think it's critical for the leaders to be able to understand the difference between did I deliver 200 because a billion was never on the table, or did I deliver 200 because either I played, there was a particular trade that went against me, or my market call was wrong, or there was something where I had an assumption that was there or is my cost base wrong? So I think you end up using some of the levers of finance and budgeting just to stress test that none of the fundamental tools in your toolkit were incorrect. And actually the 200 million was as good as you were going to get in that environment. And then it's a different call on do I think over the medium term my assessment of the strategy and why I'm in that market is still robust. And this was, I should expect the volatility of that particular desk to go between 200 to 2 billion, potentially one year on the next with the same people and the same activity, but where fundamentals drive something differently. And if you're in any of the bigger cross commodity houses, you've usually got a big enough portfolio that some of these things offset each other because rent typically moves from one part of the economic or geographic value chain to another. So as long as you have good representation of all parts, where a lot of people get it wrong is they effectively end up driving forwards by looking in the rear view mirror. And if something underperformed, the temptation is to salami, slice it from your portfolio and invest, reinvest those assets into, into something else, which almost always over time goes against you because you end up just, you know, putting another facet and chopping a little bit more off the diamond. And you end up with, if you've continued to follow that strategy, you end up with something that's very, very small but perfectly formed rather than something that maybe a bit rougher, but in materiality terms and portfolio terms it is actually much more consistent.
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B
Well, and this brings us nicely on to kind of, you know, all that we've discussed is kind of true in general. In fact, it's almost industry agnostic, right? With the exception of sort of the overlay of trying to pass what is a good performance relative peers with the same setup, you know, that control group versus what's a good performance versus budget, when budget ultimately is just a reflection of how last year looked or whatever it might be, is how do you actually now, as we go into the Planning stage, think about building in a very volatile world, all of which we've covered, everyone knows those narratives. But shocks, exogenous shocks coming from things that professionals may not have seen in their entire career. Right. I mean, there's a potential that we have stagflation next year that hasn't happened since the 70s. Right. There's economic crisis potentially around the horizon, there's interest rates going up. You know, at the same time, you know, whatever all of that it might be is this need to build in resiliency and flexibility into your planning and your strategy more broadly to adapt to this. So I kind of want to talk about. And one of those is, as you say, having that small but perfectly formed diamond doesn't create the diversity that you need to adapt in, in volatile times. But can we just focus, I guess how do you think sort of philosophically about resiliency and flexibility? And how do you. And can you start helping us understand about how you're challenging planning sessions, strategy sessions with that in mind?
- [26:37]
A
Yeah. So I think, you know, as you say, you know, the world's moving too fast and too unevenly, that the annual planning process makes sense. You know, we touched on all of the things that are going on. So it's literally shifting the mindset away from static forecasts, assuming a stable environment isn't where we are stability still. And it is a mindset change. A lot of organizations, particularly once you write a plan, it's a series of static numbers. They're typically not ranges. It's a number and you either hit or miss your number by X percent. And the problem is that that locks you into a stability being the default, which it isn't. Conflict, climate, volatility, they're always going to be there as permanent features, not anomalies. And therefore I think you have to challenge and you have to question the old ways of planning in a non vuca world. So CFOs, for example, their disciplines typically have always been on I need a fixed annual budget. And therefore my discipline now has now shifted. And what you need is dynamic control, faster cadences, rolling forecasts that are shifting to take into account what's going on right here, right now, rather than something that you revisit in 12 months time. And you need to have many, many more options which you deploy along the year. So you go into the year or you're planning and your execution cycle less with a defined set of commitments, but more options that are either tied to strategic opportunities and to be able to react to what's going on. So let's give a specific example to bring it to life. So I would argue that in a world where tariffs, let's move away from commodities, in a world where tariff levels are going to determine a lot of whether your product does or doesn't make sense to the consumer. You know, spending the marketing budget, because it was already in your plan, probably isn't going to generate the return you want. And so how quickly can you say well actually what the skill that I need is, I need better business development people, I need better procurement and logistics and supply chain management. I need people who are all over all of the, all of the tax rules and regimes. And actually I'm going to take, you know, 30, 50%, whatever percentage of what was the marketing budget and I'm going to redeploy those resources to get after what I need to be focused on right now. So you know, I think if you say okay, so how do I bring that to life? So one you could consider we're looking at with some people is you form a cross functional resilience cell if you want to lock in the resilience phraseology. And that for example in a commodity perspective would include trading, logistics, treasury, legal operations, market analysis. And you set up a weekly, monthly, whatever the right cadence is, decision forum with resource allocation rights and authority to be able to trigger and fast track options within obviously set parameters. But you're changing it to a world where rather than being a bottom up feed which then gets stretched, synthesized, crystallized into a corporate number that then trickles back down to a bottom down strategy of ultimately business plans and then individual objectives, you're devolving those resources down to the, to the front line with the appropriate cross functional checks and balances and perspectives to be, to be able to execute that. So that would be one second would be you know, run war games once per quarter on a live issue that you see going on, you know, stars.
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B
Red teams.
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A
Yeah, red teams.
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B
Can you explain that a bit? Because I know that word from other.
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A
Contexts, but yeah, yeah. So you know, the idea is putting people into different, exploring the idea of agent based behavior. What are my competitors doing? You get someone to kind of play the part of a government or you're two or three key competitors, you play in what's going on in each market and you role model. And the idea is you're not going to, you know, this isn't about so spreadsheeting exercise and forecasting exercise. It's about unlocking the intrinsic expertise that already exists within the organization. It's just not codified in a hard way. And you pull those people together and you set them a challenge. So you say, you know, I pick a particular area of geography, let's play forward. The strategies that you see the top three, top four companies having. Look at their asset base, look at what they do, look at where they're advantage or they're disadvantaged and tell me who you think is going to win and why and what is it they do and therefore what is it that we need to do to either exit we set ourselves up for success or respond. And then you can, from a commodity perspective you can make that much more specific in terms of okay, what are the key contracts that we need to have, what are the potential hedges that we would, that we want to put in place for a longer term perspective, what's our rules on inventory management, what's the key assets that we're going to take, and so on and so forth. So that would be the second one. So set up cross functional resilience teams that come together with weekly or at most monthly decision making rights to execute options, run war games or whatever cadence you want to stress test and check how you think the game can be, can be played out and is going to win. And the third one is to replace the annual static budget process with a, with a rolling forecast which is very much based on having three or four or five times as many options than you can fund. But you keep them in the hopper and you have that option set that then you choose to execute as you get into whatever period of time you're going into and you see which ones work or not work. What you often see now is companies who, they already went through that filtering exercise before they set their annual plan and they don't revisit it until 12 months forward. And if some of those things didn't work out, they don't immediately have something off the shelf ready to replace it. And I think that's the agility, the cadence, those option pools and being able to react much more quickly and also devolving some of those decision rights lower down from a hierarchical perspective in the organization to where people have the real time feedback. It doesn't need to wait till the end of the month till you do your performance report. These guys know what's going on in the here and now and are close enough to hear it happen and you give them the space to execute.
- [34:09]
B
And this is part of I guess Shameless Plug, but this is sort of part of the Enco Insights offering, you know, building that global advisory network there Is this argument that actually given this volatility, given the changeability, given the non linearity there is of course one, I think a revaluing of expertise and tenure. Right. You know, the having seen these things before, that kind of the wisdom, let's say. But secondly, this need, I think dropping that advisory board is. Advisory boards are almost no longer just for the C suite or for shareholders is, you know, their tool is dropping that down a level so that actually you are able to have these, these as you say that the plan and strategy doesn't go into the top draw or bottom drawer. It's actually reviewed every month and you've got some external voices there challenging some of the internal narratives, but also layering on perspective. And that's where actually you can get you come to sort of a live budget, live planning and actually some of this gets put into, into practice and obviously that's part of what you've been doing. Well, before I ask my actual question, I guess do you want to comment on that?
- [35:18]
A
Yeah, I mean, I think so. If I look to me personally, the I think the most valuable thing with the clients have been working with is I come very much from a thought partnership perspective where what I'm there to do is to help the leadership of that organization convene, coalesce and bring to play the bigger brain within their organization. I'm not bringing the answers from outside. I'm not bringing a slide deck of here's what's been done in XYZ that I think may work here. I come with the perspective and the experience and expertise of knowing what it takes to connect trainers, refiners, logistics, finance, risk, legal in one conversation and to facilitate that paradigm and to kind of hold that dialogue to allow those organizations and those people to come together in a way that quite. You'd be surprised, they rarely do.
- [36:21]
B
Well, there aren't those board meetings. Right. I guess in some sense that kind of holistic oversight and opportunity to challenge, discuss at a broader level. Again, they are kind of somewhat exclusive to board discussions. Right. Or at least effective ones. It seems to me that, you know, there is that there's that real opportunity to cascade those down a couple levels.
- [36:44]
A
And I think it's also about changing the dynamic of. Quite often the dynamic that exists between board and the executives is one of functional assurance or challenge or making sure that you've executed fiduciary duty and you've explored a lot of the things that can go wrong as well as right. But it can almost sometimes feel as more of a check And a balance. I think what we've seen that's been successful is we're allowing the team the space to come together to create a solution that no external report would ever give them. You know, it's theirs, it fits their company's DNA, it fits their paradigm, their market situation. It's typically breakthrough because people will bring different perspectives and they know they're all there to co create and build rather than necessarily challenge or block. And going back the link back to why I like the word resilience is resilience isn't something that you buy. If I want to go to the gym and I want to become resilient, I can't buy that. I have to build it by what I do. You can compress that learning curve within organizations by bringing advisors, coaches, insight partners, thought partners who've lived it and can share some of their perspectives. But are there very much to coach and support? The teams grow and accelerate. What's the right answer for them in a solution that they own from the get go?
- [38:24]
D
Hello, I'm David Hunt, founder and managing director at Hyperion Search. Founded over a decade ago, Hyperion Search has helped organizations from major utilities to startups recruit their leadership teams and key individual contributors to accelerate both their growth and the energy transition. Our three main verticals are renewable power, energy storage and E mobility. The energy transition and the talent that delivers. It has been our passion since day one. To find out more, visit hyperionsearch.com or listen to my Leaders in Clean Tech podcast. Available on all platforms I guess, you.
- [38:58]
B
Know, and it's only fair to not just sort of glaze but also kind of challenge. How do you avoid. Right, so you've got those sort of. There's three options, there are others, but there's sort of these, these cross functional teams you've got. You know, I like the idea of red teaming. I think that's always really useful to, to challenge and you've got the, the multiple options approach as well. Building these kind of optionality into your budgeting process. How do you stop everything from ending up as kind of a contingent? Right. And this has a powerful impact on performance as well. But how do you keep maintain accountability and avoid everything just being contingent? Well, sorry we didn't meet our targets because X happened and therefore you should lower my budget and I should still get paid the same. Right. Or every point, you know, accountability devolves to. You're just yielding accountability to external markets and forces and it's hard to ever hold someone to account. I mean how do you avoid going too far down the road of contingency.
- [39:59]
A
I think you'll so the first part you were talking about in terms of what's quite often a conversation that certainly I've had with many traders every single year of here's why this year's plan can't be repeated next year. Here's why my bonus needs to be this. Here's why you need to give me XYZ Capex. I think you will continue to have that kind of dialogue until you change and this is much more fundamental. You change the mindset and everything else that goes with it to that of an ownership mindset. Everyone becomes a partner, everyone becomes an owner in the business. I have a system where I'm able to, you know, externally benchmark, whether that's either because of what the volatility was in the market or flow or competitive benchmarks where the transparency exists. But also I have, you know, practitioners who are leaders who, who also either are on the bench or very close to the, to the benches and the front lines to see what the market context was. So that if someone tries to, to adopt a line to kind of game something, you're able to call them on it quite quickly. But more fundamentally you're saying, I'm changing the contracting nature where you're here for the next five to ten years, not the next five to ten quarters. And I align everything else behind that. I have budgets which take into account someone who showed the right federal behavior and support, supported not doing a project on their desk because they were part of that cross functional team and they saw better opportunities somewhere else. And they say, yeah, that's, you know, if we can't fund both, that's the one that we should do. And they share in a, in a portion of that success because the overall enterprise was better. Something that, if there's a credit issue or an operational issue or something, you know, everybody owns fixing that, that problem and getting behind it. And some of it is about how do you have the functional checks that need to be there to make sure you don't do anything that goes over the line. You don't report something in the wrong way, you don't fall foul to market abuse or competition or whatever. But absent of those boundary conditions which are actually quite well defined and usually at towards the extreme, everything else that's within the operating parameter of the business is a one team approach. And I think that the thing that organizations often wrestle with is very few of them really operate to one team. You have functional targets, you have team targets. You have regional targets, you have desk targets. And the problem is as soon as you start to codify those, it immediately breaks down and it becomes a I win by the other person losing or I get the resource. So that doesn't happen. And I think, you know, it's changing that, that architecture to the way that we're all owners in the business, we all do this together and here's how we collectively stand behind what good or bad looks like. You see, I mean it's kind of, you know, you see this clearly in the sports world and it's using you know, a bit some more of the ethos and culture and ways of working that you see there.
- [43:30]
B
Yeah, well one, I guess you know, and Enco Insights has worked quite closely with our talent intelligence group in HC which provides all the data behind compensation trends and structures and so forth and makes them intelligible and fits them into a strategy. I mean one challenge of course is that you as, as these asset backed organizations as strategics build out these capabilities that you know, they're you know, going back full circle. Their strategy is ultimately based on their competitive advantages. Sat around assets and collections of, you know, teams across finance, origination, trading, all these things. Some of the talent pool you're drawing on is, comes from a world where it's just incredibly binary. Right. You know, I get my percentage of book, I know exactly what my costs are and I sit in there. I'm company agnostic but I am incentivized entirely by that action. And it can be quite challenging about those are skills that you need but how do you integrate them into a company that's thinking in five, ten years and thinking in terms of collective performance, thinking in a very different lens, but still attract those individuals. Some of that is down to it's just culture and people who want to work in that kind of organization, who want to have that kind of ownership mindset you said. But there is also that challenge of you've got the commodity trading sector that's in some ways sort of learned habits and being incentivized that way.
- [44:56]
A
I'd offer there's a slightly different perspective whether you're private versus public. I think some of the non listed larger organizations have managed to do this quite well because they lock in people either being actual partners or shareholders and they think about equity of the organization. So yeah, and I think to be honest, I mean certainly if I look back at my career, I remember, you know, one of the companies I worked with, the CEO asked to meet with the crude trader because he Wanted to know and he was curious from a genuine way what that person had done that meant he got paid twice as much as the CEO did that year.
- [45:40]
B
I know that story. Yeah.
- [45:42]
A
And it almost, you know, compensation unfortunately ends up, rather than being an outcome of the activity, the compensation drivers and calculations often end up putting boundaries or driving the activity in the first place. So rather than being an output, there ends up being a circular feedback loop where they also become a restriction on the input. And you almost kind of need to get organizations comfortable with a world a bit like, I guess you see this much more commonly in the tech industry that if a successful team grows a $10 million a year business into a billion dollar in a year business, why shouldn't they collectively take 10 or 20% of that? Yes, it's a very big number. Yes, it will show on. It's a question that you're probably going to have to explain to shareholders. But ultimately, if it's linked to sustainable long term performance delivery, then there's no reason for me why that shouldn't be there.
- [46:45]
B
Yeah. And this is the perennial challenge, right, about what is organization, what is beta, what is alpha for? Obviously, you know, if you, you in asset backed organizations where you, a lot of people have built a significant platform, a system and all that is, you know, and actually I think technology unlocks some of that challenge about figuring some of that piece out. The, the, the second challenge question I have is how do you not end up in paralysis?
- [47:09]
A
Right.
- [47:09]
B
Because the other temptation is of course is to say, well, it's incredibly volatile times, we need to build a war chest and you'll risk off effectively potentially in a time when you should be risk on. But rather than do one of these five options, we're better off doing none because we can no longer tell whether tomorrow the post shuts down or the, you know, or that trade route ends or whatever it might be. I mean, how do you also, on the other side avoid that paralysis?
- [47:38]
A
I think it's, I mean, I think if, you know, if you're in the fortunate position, you've got the wall chest and you've got limited debt, then an internal benchmark that says your return has got to beat the opportunity for that capital. So if I shoved it in a corporate bond or a government bond and I'm going to get 3.5%, 4.5%, depending where it is, that becomes the benchmark of what you should be delivering. Given you're then taking risk with that capital. That doesn't mean you drive everything to become an Annuity and dull. But similarly, what it also does is if your competitors are consistently delivering 9, 10% and you're sitting on your hands doing nothing is a 5% that's going to quickly show up in a performance gap versus the competitors. And then I think you have an expectation as a broader fund and portfolio managers, as the organization that you're putting the capital to work. And as you know my experience, as long as you have enough of those options. And in some ways, if you look at a world where you shift from annual forecasts linked to a strategy, but to rolling forecasts linked to strategic outcomes and themes, not just the number. And instead of allocating every dollar rigidly, what you do is move to a world of kind of options, budgets. So you have pre approved capital that that cross functional resilience team and the war game team know they can access and you give them the space and with an expectation that once you hit certain thresholds they will deploy that capital. They don't necessarily try to pick the ultimate bottom or top of the market because you know, you can rarely call that. Exactly. So as long as you've hit the return expectation, then you deploy that and you start to have some agility around that. So, you know, maybe lease commitments, it may be how you play your freight book, it may be certain term contracts you want, it could be certain hedges that you, that you put on around specific arbs or you know, whatever it is, but it's, it can come across as being a bit loose. Actually it's the opposite because it's removed. We said it right at the beginning. It's removed that ritual of an annual process and it's replaced it with a resilience which is I'm going to respond to what I see going on right now and I have a readiness and an agility to execute in a way that actually the agility can appear chaotic. But it's much more about responding to what's going on and taking more of the opportunities that are there. Top down strategy then just becomes something that sets very broad guidance and guide rails. But you allow the teams to have the freedom to act within bands based on what they see. And you have an expectation that they do that. And most organizations you'll know, you know, who the people are that are creative and driven and natural risk takers, not in an unbounded way, but the ones who are comfortable with deployment of risk. And it's all about how you create that team that can get after that.
- [51:13]
B
Yeah, it also sort of points to, I guess, you know, we're back in a world where, and we have been quite some time. But scale matters, right? Size has a quality all of its own. It's hard to be resilient and flexible and robust and have these options on the table without kind of that scale to take advantage of. And again, that's again, why we're seeing these large strategics getting into the space.
- [51:39]
A
Yeah. I think you either have to do it through partnerships or by ownership or by lease commitments with various exit options built in there. Each of those will come with it with a different return expectation. If you're in a partnership, you're going to expect to share some of the rent with someone. If you're in a lease commitment, you're going to have to pay someone their cost of capital before you can start to deploy it as you will, versus outright ownership, where you ultimately carry all of the economic rent, but you carry all of the exposure to the volatility as well. So it's about what's the right balance. There are going to be certain markets, certain places where you absolutely want to own something. There is going to be other places where it may be a more transient activity. And actually leasing a tank rather than buying it is the right thing to do. Or JV ing with a local partner is the right thing to do. Yeah.
- [52:35]
B
Well, lots in there and a really interesting discussion. And of course, if you have interest in following up with Sav or his colleagues over at Enco Insights, dig in further, then I'll put links in the show notes. I mean, I think now, as we're seeing already from demand and your busyness, Sav and teammates busyness, we're definitely in the season, but also in a new world as well.
- [53:02]
A
Yeah, absolutely. I think we're. And that's the joy and why I get the enjoyment. There's a lot of stuff that we haven't seen before and there's a lot of experience and foundation that I'm fortunate enough to benefit from and colleagues similarly from the careers we've had where, you know, the right questions to ask and the right questions to have teams ask of themselves. And I think the biggest piece, and I think why it resonates with a lot of companies is our ethos is about building that resilience within. It's about acknowledging that organizations know the answers to whatever hard question you've got. And it's how you facilitate the dialogue to allow that to come out and how you support them in executing it. So it's their solution, not your, you know, it's not SAV or Enco or whoever else. It's, it's that team that owns it. And you know, we're very fortunate that the Enco Insight partner is a very small team. Each of us get our enjoyment from looking back quietly and seeing what the client and the team have been able to do and how, you know, hopefully we've left them in a much stronger and that team in a much stronger position at the end than they were at the start. And that in an ideal world they don't need us, they don't need to call us back to come and fix that problem because they've already got all the tools internally that they built well.
- [54:34]
B
And also we're going to face a leadership gap coming up right as we've got there's a paucity in the middle of sort of mid level experienced commodity professionals because they just weren't hired in the 2010s so organizations are in and senior leadership is starting to retire and they're going to have to rely on these external advisors but who are as you say, and this is the thesis of Enco really who are focused on enabling those organizations to come to their own solutions and own them as opposed to kind of Your here's the PowerPoint. But anyway, well Sav, it's always a massive enjoyment having you on. Really look forward to our next discussion and thanks for your time.
- [55:11]
A
Thank you. Great to talk.
- [55:14]
B
Thank you for listening. To find out more about HC Group, our global offices and our expertise in search within the commodities sector, please visit www.hcgroup.com.