Think Cutting G&A Costs in the Next Recession Will Be Easy? Think Again


2019/06/13 10:52
贝恩咨询公司(Bain & Company)的一项最新调查显示,在负责总务及管理(G&A)职能的高管中,超过一半的人预计今年或明年会出现低迷。

A low-grade fever simmers in the hallways of many companies: More than half of executives who lead general and administrative (G&A) functions expect a downturn this year or next, a new Bain & Company survey shows. The good news is that most believe the next downturn will be shallower and shorter than the last one, and will require a lower level of savings from them—about half the level of 2008. The bad news is that two-thirds said it will be as hard or harder to find these more modest savings than the last time around (see Figure 1).

贝恩咨询公司(Bain & Company)的一项最新调查显示,超过半数负责总务及管理(G&A)职能的高管预计,今年或明年将出现低迷。好消息是,大多数人相信下一次经济衰退将比上一次更浅、更短,并且需要削减更低的开支水平——大约是2008年水平的一半。坏消息是,三分之二的人表示,与上次相比,要完成更适度的开支削减将会更加困难(见图1)。

What explains this contradiction? To better understand the challenge, Bain conducted research on how US companies’ G&A spending has changed over the past economic cycle, and what concerns support-function leaders. We surveyed 650 executives and professionals across human resources (HR), information technology (IT), finance, legal, and real estate and facilities management departments about their recession experience, challenges faced today and expectations for the future. And we analyzed the G&A spending patterns of over 450 US-based companies with more than $100 million in annual revenue from 2003 to 2017.


In past recessions, many companies turned to G&A for fast, easy cuts, because they viewed support functions as less critical than customer-facing or operational activities. However, our analysis found that the track record of most companies in managing G&A spending over the entire economic cycle has been mediocre at best. While half of companies in a given year improved their G&A efficiency (G&A as a percentage of revenue) from the prior year, the gains were transitory: Only 6% of companies achieved efficiency gains for four straight years during the period (see Figure 2).


Despite large investments in technology, on average, G&A efficiency has actually deteriorated by 20 basis points, from 6.9% in 2003 to 7.1% in 2017 (see Figure 3). Beneath the average, of course, there are winners spending far less and losers that have increased G&A spending relative to revenue.


Stalled efficiency raises concerns. Support-function leaders relied on labor cuts, without changing the underlying work, to find 50% of the savings made in 2008 and 2009. They learned the hard way that overly deep cuts take years to recover from, because of reduced service levels and lost institutional knowledge. Asking staff to do more with less cannot be sustained for long, as people will have no leeway to innovate or execute new initiatives.


Hiring freezes aren’t the answer


For these reasons, support-function leaders expect expedient labor-based strategies such as hiring freezes and across-the-board cuts to account for only one-quarter of savings needed for the next recession. Instead, they’ll have to rely on a mix of changes to technology investment, process redesign and eliminating low-value work.


That will be easier said than done. Almost two-thirds of companies surveyed have taken action in the past two years to reduce costs, with one-quarter making moves beyond the normal course of business. Yet the expectations of support functions have been steadily rising. For instance, they’re being asked to use new digital capabilities to speed decision making and improve business outcomes.


The stakes are high, as successful support functions help create a competitive advantage. For the average global 1000 company, we estimate that every 1% reduction in G&A spending translates to a 10% improvement in operating margin. The most efficient quartile of performers in our analysis increased EBIT 1.5 times more than bottom-quartile performers through the cycle (see Figure 4). The gap between the best and lowest performers ranges from 2.5 times to 4 times, depending on the support function, suggesting that the highest performers create significant value to reinvest in their businesses.

这么做风险很高,因为成功的支持部门有助于创造竞争优势。对于全球1000家平均水平的公司,我们估计,每减少1%的G&A支出,运营利润率就会提高10%。在我们的分析中,效率最高的四分之一表现者在整个周期中的EBIT比底部四分位数表现增加了1.5倍。(参见图4) 最佳和最差表现者之间的差距从2.5倍到4倍不等,具体取决于支持部门,这表明表现最好的人创造了重新投资其业务的重要价值。

To achieve greater efficiency, support-function leaders will need to step up their game on four fronts:


  • gaining a clear view of all their costs and what drives them;
  • 清楚地了解它们的所有成本及其驱动因素;
  • fundamentally changing how work is done;
  • 从根本上改变工作的方式;
  • reaping more value from digital investments already made; and
  • 从已经进行的数字投资中获得更多价值;和
  • creating a fail-safe plan for drastic cost reductions, agreed on by the senior team, should that become necessary.
  • 如果有必要的话,创建一个安全的计划来大幅削减成本,并得到高级团队的同意。

Let’s explore each of these.


Understand your costs in detail, including their causes


This imperative might sound obvious. However, many support functions don’t manage costs with the same rigor that sales, manufacturing and operations costs are managed. For example, only 54% of survey respondents track functional headcount in detail, and only 47% have management dashboards to measure and track efficiency and effectiveness. Worse, many companies don’t have a complete view of support-function costs. Only 18% of survey respondents said their companies track shadow costs, namely, people in distributed business units performing activities that duplicate those performed by the support functions (see Figure 5).


Full visibility requires identifying costs at every level inside and outside corporate headquarters—whether the costs are attributed directly to functions or to shadow costs. When managers know and measure all the costs for each process, they can target cost reductions surgically rather than spread cuts evenly.


A cloudy cost picture proved troublesome for an industrial company that had high G&A costs relative to competitors, driven by a large number of management layers and duplication across corporate headquarters, regions and local sites. Support functions didn’t measure or manage their costs holistically. For example, corporate HR was constantly pushing out new policies and processes for the regions and sites to follow, without realizing the cost implications to both the business and the HR departments in those places. More broadly, the multiple layers in headquarters and regional support offices led to slow, ineffective decision making. Once the company shifted to a decentralized operating model and started measuring all costs, it was able to adjust the size of each support function, reducing the corporate office by more than one-third and overall G&A costs by one-quarter.

事实证明,相对于竞争对手而言,模糊的成本状况令一家工业企业感到棘手。与竞争对手相比,该公司的G&A费用较高,这主要是由大量的管理层以及跨公司总部、地区和当地的重复操作造成的。支持职能没有全面地衡量或管理其成本。例如,公司的人力资源部门一直在各个地区和场所推行新的政策和流程,却没有意识到这些地方的业务部门和人力资源部门都受到了成本的影响。更广泛地说,总部和区域支助办事处的多层结构导致决策缓慢、无效。一旦公司转向分散式运营模式,并开始衡量所有成本,它就能够调整每个支持职能的规模,将公司办公室减少逾三分之一,G&A 成本减少四分之一。

Look for alternative ways of working


To move beyond incremental improvements, companies benefit from taking a clean-sheet approach to redesigning how work gets done. This method sets aggressive cost targets, defines what the future should look like and then works backward on how to achieve it, reinventing from the ground up rather than optimizing current ways of working. Taking a blank-sheet approach to simplify the organization and streamline work processes can unlock massive value in both efficiency and effectiveness. Defining the future state involves four dimensions:


  • clear roles aligned with customers’ priorities;
  • 明确符合客户优先级的角色;
  • a service portfolio and service levels that make the appropriate trade-offs between which activities should be best-in-class and which should be best-in-cost;
  • 服务组合和服务级别,在哪些活动应该是最好的和哪些活动应该是最好的成本之间做出适当的权衡;
  • a service-delivery model that balances efficiency with value added to the business; and
  • 服务提供模式,以平衡效率与业务增值;和
  • the right talent, processes and systems.
  • 正确的人才、流程和系统。

A clean-sheet approach proved transformative for a manufacturing company building a factory in Europe. Success hinged on redesigning how support functions carried out their work, not just on how production processes were managed. In HR, for example, the company set targets for digitalizing over 100 activities, and rebuilt them from the ground up in conjunction with the other plant processes, to ensure that support functions helped enable the broader business. The result: HR costs reduced by 10% to 30%, depending on the HR process, as well as a radically better employee experience through standardized, simplified and more digital interactions.


Get full value from existing digital technologies


Reinventing how work is done inevitably requires smart investments in digital technologies. Digital yields benefits beyond cost savings, including faster decision making and improved service, business insights and financial controls. But while almost 90% of survey respondents are investing in digital today, more than half said they aren’t getting the benefits they’d expected (see Figure 6).


An earlier Bain survey of HR executives found several issues cause the most aggravation: too many digital tools, especially unintegrated tools; interfaces that users find difficult to understand; and tools that are missing critical functionality. And in finance departments, even while many companies rush into new technologies such as robotic process automation, they aren’t wringing full potential value from current technologies. In accounts payable, for instance, 55% of finance groups Bain surveyed don’t use basic technologies such as online invoice approvals. Absent proper integration, companies that adopt more tools risk adding further complexity and unwittingly creating a new set of problems.


Top-performing support functions, by contrast, have learned how to get tangible business benefits from their digital investments. A good example is Microsoft’s finance function. In the early 2000s, Microsoft faced a proliferation of internal data, inflexible technology systems with static reporting, overly manual processes and increased regulations. Through a decade-long effort, Microsoft’s finance group patiently invested in a digital transformation through the recession and a change in corporate leadership. Digital enhanced virtually every corner of finance, from global business reviews on a KPI data lake to machine learning in accounts receivables, allowing finance professionals to spend more time on higher-value activities. In parallel, relative costs fell: From 2009 to 2018, finance headcount grew by 14% while revenue grew by 89%.


Expect the best, plan for the worst


Reducing costs by 5% to 10% might be challenging, but what if the situation calls for 30% or more in savings? Even if the next recession turns out to be mild, what happens when an entire industry faces disruption? Rather than wait and possibly get backed into a corner during crisis or disruption, it pays to plan early for restructuring functions to take out massive costs, whether through eliminated work, redesigned processes, shared services or digital tools.


Reaction time is critical during a crisis, so securing the entire senior leadership team’s buy-in beforehand allows a company to act quickly. Rather than relying on across-the-board cuts, which inevitably remove muscle from the organization, it helps to define and align on a contingency plan in advance.


Caterpillar, which provides heavy equipment and related services, put contingency planning to good use. As part of its 2005 strategic plan, the company started an initiative called trough planning. Every business unit developed a detailed plan that could be initiated quickly during an economic downturn. Once the recession started, prior planning allowed the company to take rapid, bold steps to immediately align the G&A structure with lower volumes and revenue. When revenue declined by 37% in 2009, Caterpillar had already started to execute contingency plans the year earlier, reducing selling, general and administrative costs by 17%.


While the next economic downturn might not hold the unpleasant surprises of the last ones, its scale and duration remain uncertain. Many support-function leaders will likely find the traditional approaches to managing costs through the cycle less fruitful this time around. Those leaders that make the hard investments early—eliminating low-value work, reinventing processes and making the most of digital technology—are likely to navigate the next downturn better than others. They’ll provide fuel for reinvestment to go on offense and emerge from the recession in a winning position.


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