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The pressure on corporate management to reduce overhead costs has intensified over the past two years, a new study by management consulting firm Booz Allen Hamilton found.
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| Consulting-Times E-zine
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Chief Financial Officers are centralizing staff services and taking other steps to manage costs, while improving responsiveness to the business units they serve. A significant number of CFOs are also turning to outsourcing, particularly for IT and HR operations, to manage the relentless cost pressures they face.
Booz Allen surveyed 156 Chief Financial Officers from around the world to understand current trends and best practices in the management of General & Administrative (G&A;) functions, also known as “overhead.” The report defined these functions as Human Resources, Finance and Accounting, Information Technology, Purchasing and Procurement, Facilities Management and Risk Management. North America and Europe each accounted for one-third of the respondents, with the remainder from the Asia-Pacific region and Latin America. Of the companies represented, nearly half (47%) have annual revenues between $1 billion to $4.9 billion.
The study found an intense and sustained focus on reducing costs while improving business performance. Only 3% of the CFOs surveyed feel that they have reduced overhead costs as much as possible. In fact, 85% said that cost reduction is still the highest priority challenge they confront. Nearly 60% are focused on opportunities to reduce the costs of providing overhead services, by reducing non-essential spending, by restructuring costs and by standardizing the levels of service they provide. Forty-five percent of CFOs are also working with business units – the “customers” for overhead services – to find ways to manage and reduce their demands for these services.
“Despite the fiscal discipline most companies imposed during the recession, overhead costs are still a target for even greater savings,” said Booz Allen Vice President Vinay Couto. “The quick fixes have been used up, and companies need to find innovative ways to control costs.”
The most common method CFOs are using to lower overhead costs is reducing non-essential spending (71%). Other frequently-used approaches include standardizing service offerings (55%), reducing headcount (48%), streamlining the delivery process (45%), reprioritizing requests and deferring some (37%), and physically consolidating the facilities used to provide overhead services (33%).
Mastering IT complexity has become a critical success factor in managing overhead costs. Nearly 90% of the companies who describe themselves as behind the competition in providing overhead services cite “managing a patchwork of different systems” as their main IT challenge, versus 43% of self-described G&A; leaders.
The study also found that overhead service providers and the business units that use them are frequently in conflict, leading to frustration and inefficiency. Even though two-thirds (67%) of CFOs assign high importance to this involvement, only 36% of all companies effectively have G&A; functions that offer services that business units desire and can afford. Four of the top five reasons cited why cost reduction measures meet with resistance from business units were “lack of communication” (38%), “services not tailored to business needs” (36%), “didn't involve the business unit in decision” (33%), and “overhead work offloaded to business units” (31%).
The promise – and limitations – of outsourcing
Companies are increasingly turning to outsourcing to control overhead costs – but with eyes wide open. Although 70% of CFOs report that they are outsourcing one or more processes, outsourcing to either a domestic or offshore service provider does not top most CFOs' cost reduction agenda. Less than a quarter of responding companies strongly emphasize outsourcing, and only 5% give it a very strong emphasis.
The overhead functions most often outsourced are IT (84%), HR (58%), Facilities (51%) and Finance (36%). With the exception of IT, however, functions are almost never outsourced in their entirety. For example, while 54% of companies outsource some of their HR functions, only 4% outsource most of their HR functions.
Interestingly, outsourcing is more prevalent in Europe (71%) and Asia/Pacific (78%) than in North America (61%). Small companies are slightly more likely to outsource; 72% of companies studied with revenues of less than $1 billion use outsourcing, compared to 67% of companies with revenues greater than $10 billion.
Most CFOs (67%) are “satisfied” that their outsourcing efforts have met initial expectations, citing better service levels (36%), access to best practices and process improvements (35%) and lower costs (33%). However, only 4% of respondents report being “very satisfied.”
Offshoring – sending business processes to countries with lower service costs – has been met with more skepticism. Of the companies that have resisted offshoring, only a small number have been influenced by political sensitivities (8%) or bad press (6%). The most common concerns about offshoring are the risks to service quality (37%), doubts that claimed savings will materialize (31%), and concerns about disruptions to operations (23%). More than half (53%) of CFOs consider these hurdles to be highly significant. When asked what functions they would likely or very likely offshore, IT heads the list (43%), followed by finance (22%) and purchasing (19%).
“Companies appear to be adopting a more measured approach to offshoring. They view it as one arrow in their quiver, rather than a silver bullet,” said Couto. “CFOs understand that worldwide sourcing of white collar jobs from distant locations is a vastly complex undertaking and that there are significant performance risks that need to be managed from the get-go.”
Other solutions
A shared service model is seen as a way to increase efficiency. Nearly four of five companies surveyed (78%) have implemented some form of shared services, by consolidating the delivery of support services. Of the companies that have tried the shared services approach, over two-thirds (68%) are satisfied or very satisfied with initial results.
In addition, CEO participation helps companies achieve long-term G&A; improvements, the study found. The involvement and support of the CEO contributes more to sustaining efficiency improvements (65%) than any other factor. Other methods to sustain improvements include providing incentives to meet objectives (43%) and strict zero-base budgeting (27%).
“Senior executives need to look beyond immediate obstacles and define the role that internal services can play in business unit performance,” said Booz Allen Senior Vice President Gary Neilson. “The role of the CFO is clearly changing from the historic role of business analyst to the new role of business partner and catalyst for change.”
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