Cost Sustainability: Impact of Head Count on Cost Reduction for SMEs
Louise Wood is the Managing Director at Prodrill Energy Resource Solutions and has over 25 years’ experience in recruitment within the oil & gas and finance industries. Recognized as the Aberdeen Director of the Year by the Institute of Directors (IoD) Scotland in 2013, she continues her professional involvement with IoD and the Institute for Recruitment Professionals. She brings a wealth of knowledge, passion, and commitment to grow Prodrill’s commercial business and maintain financial and legal integrity. In this post, Louise shares her thoughts on the impact of cost reduction on the industry and how human capital supply chain is a solution in attaining cost sustainability.
We are Subject Matter Experts
SME has two commonly used acronyms. SME can mean ‘small-to-medium sized enterprises’ which are businesses with typically 250 employees or less. SME can also mean ‘Subject Matter Expert.’ This is a person (or even a business) who is an authority on a particular area or topic. Prodrill sees itself as a subject matter expert (SME) business in oil & gas recruitment and consultancy. In this article, SME will mean Subject Matter Expert.
A common challenge for SMEs is engaging with decision-makers within client companies. This could make it more difficult to effectively manage cost pressures during an industry downturn.
Pressures on Costs, Profits & Human Capital
Over the last three years, most companies have had to reduce costs in their business. Quick cost reduction measures have lead to significant reduction in profits. Louise explains,
“Proper analysis needs to be done because when companies focus on reducing costs by reducing layers of protocol, people, and processes, the risks increase.”
Cost sustainability has come from driving the cost of producing a barrel of oil in the North Sea to $18 without corporate overhead. However, with corporate overhead, it increases to about $35-36/barrel. It is common that companies then focus on reducing corporate and commercial overhead. Having witnessed several companies restructuring in recent years, Louise observes that there is often increased pressure on those working in non-technical roles.
For example, a role that was standalone in the past is now being combined with another role to reduce head count. Within these combined roles, employees still only have the skills for one specific area and lack skills in the other area. Louise notes,
“Companies are now looking for candidates in the recruitment market to be more multi-functional and multi-knowledgeable in areas that the industry hasn’t yet had time to create.”
People must carry the weight of that extra responsibility and there is a risk that the knowledge and expertise is simply not there.
A Strategy to Engage SMEs
As Managing Director of an SME recruitment business, Louise advocates better engagement direct with SMEs as a solution for driving cost sustainability. Oil companies are beginning to recognise the need to measure engagement with SMEs as part of their supply chain strategy. This solution could support many SMEs that still see their profits being challenged. There are several industry initiatives to help businesses like these have their voice heard. However, it is a slow process that will take time to get traction and implementation.
SME’s continue to play a vital part to play in the industry, dictating profit margins is not a way of engaging. Louise believes this approach only measures costs not value; she adds,
“You need to truly engage with suppliers to measure value”
Strategies around volume recruitment, payroll and costs can be used but it’s more important to ensure that people are working in jobs with the right expertise to manage expectations of employees and contractors.
Specialist recruitment businesses have a strong part to play in human capital supply chain, creating value through relationships and their market knowledge, as well as keeping candidates engaged and informed about opportunities across the sector. Louise explains,
“Our role within recruitment has changed dramatically over the past 2-3 years; expectations of candidates and clients have increased considerably. Clients now expect candidates to be more versatile than ever. With the added pressures of the Oil& Gas downturn, we are starting to see candidates leave the sector and they are unlikely to return. This potential skills shortage could pay a significant part in increasing costs again over the next decade.”
The Value of the Human Capital Supply Chain
Human Capital Supply Chain refers to an integrated approach to business planning, workforce planning and staffing, and recruiting processes and technology with the aim to increase corporate productivity and profitability.
Louise explains that in recent times, measuring value has been around productivity of people. Many companies count the number of employees or contractors on a job, multiplying the day rates and time spent on that project. Competency and performance are often not the focus when companies are looking for ways to reduce costs. For instance, they are not measuring how specific skilled individuals in roles can create greater value. Value is an emerging area that is different for each company.
If SMEs continue to drive costs down to the point where it’s not viable for them to stay as subject matter experts, then these businesses could be losing entrepreneurial flare, determination that is critical to industry’s longevity. Louise emphasises,
“Every business is here to make profit and create value for its shareholders”
Any business that is heavily constrained could risk losing its entrepreneurial spirit. If the industry falls back into these habits, costs will rise again.
A Bright Future for SMEs
Louise explains that we are in a very cyclical industry. While we are now in a downturn cycle, we are starting to see drilling campaigns increase and projects being re-initiated. The industry is looking to maximise North Sea recovery and output. Therefore, there is still a need for SME businesses that don’t carry large overheads and are often more versatile than larger corporate counterparts.
To improve cost sustainability, Louise advises SME businesses to use technology and enhance employee’s skills. Technology is going to play a part for any SME, whether creating technology or using it. Technology and people development will help SMEs to have broader business knowledge, across every role. Attitudes and behaviours are the key to change across all levels of personnel. Everyone plays a part in cost sustainability.
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