• Budgeting
  • CFO.com | US

Just Cutting Costs Won’t Cut It

Finance and other support functions won’t succeed unless they're actively identifying customer needs and shaping demand.

Support functions keep trimming costs, but their internal customers aren’t cheering.

HericM_print_color

Michael Heric

Over the past two years, companies cut an average 18 percent of their general and administrative costs, according to a recent Bain & Company survey of support function heads and executives who run business units in roughly 770 U.S. companies. Yet these results did not translate into higher satisfaction for many operating executives.  Some 60 percent of the executives survey surveyed still rate their support functions as high cost, ineffective or both.

Meanwhile, the leaders of those support functions often fret that continued cost cutting hurts service quality and leads to lower satisfaction. But the data show otherwise. For example, we analyzed data provided by SAP about finance departments at 4,000 companies worldwide. The top performers in service quality consistently performed better on efficiency metrics, whether based on revenue or headcount.

For CFOs, the challenge is two-fold. First, it’s getting harder to make cost savings stick. In the Bain survey, while 78 percent of executives were confident in their ability to achieve their cost savings goals, only 58 percent successfully delivered on their targets, and only one in four sustained their savings after two years.

Second, support functions have to adapt to the changing expectations of their internal customers. Business leaders want finance, human resources, marketing and so on to evolve from operating resources and cost centers into full-fledged partners in executing strategies.

To create lasting improvements in efficiency and effectiveness, high-performing companies focus on getting four things right:

Cichocki_print_color

Paul Cichocki

1. The appropriate role for support functions, so that each one can anticipate and adapt to evolving trends in external market conditions, business strategy and culture. Finance, for example, no longer simply compiles reports on past performance. Now it plays a prominent role in helping business leaders make better business decisions

2. The service portfolio and service levels, determining which activities should be best in class and which can be simply good enough to meet business needs and manage demand.

When Kraft Foods reviewed its marketing budget, it found that spending on shopper insights often exceeded what the business units required. Not all businesses needed the same level of customized research, and instead could often work with lower-cost standard or syndicated research. Making that change reduced costs by nearly 20 percent while aligning marketing more closely with the priorities of the business units.

3. The service-delivery model, fundamentally changing how work is done in order to simplify and eliminate low-value activities. A zero-based budgeting approach examines which activities are truly necessary and how they should be performed, as well as which could be eliminated.

Kraft had gone through several rounds of cost cutting, but none of them had fully dealt with the root causes of cost and complexity. The typical business unit had responsibility for profits but had direct control of less than one-third of its overhead costs.

In 2011, Kraft decided to examine costs over the entire cycle of a process, regardless of which budget line item it appeared in. With costs revealed, senior management gained consensus to establish a rule that if a business unit bore more than 70 percent of the cost of a shared service, that unit had complete authority over the cost and nature of the service. This simple ground rule changed the game, creating a greater sense of accountability and a customer-supplier mentality.

4. The right people in the right jobs with the right processes, systems and incentives.  A plan for changes and a new organization chart may look great on paper, but the plan will fail to deliver the expected results without the right elements in place to make changes stick.

A global beverage company dealt with this issue as it became more centralized around business units. Finance’s costs were 50 percent higher than industry benchmarks, and service quality ranked below average. The new organization separated decision support from transactional work, but many people weren’t prepared to take on these dedicated roles. So the beverage company had to retrain some of them, moved others into different positions and recruited new people with the right skills.

Finance and other support functions won’t succeed as order takers responding to any and all requests. Rather, they will thrive as order makers, actively identifying customer needs and shaping demand. It’s one thing to have a seat at the table but quite another to be perceived as a full business partner.

The authors are partners in Bain & Company’s Global Performance Improvement practice. Michael Heric is based in New York and Paul Cichocki is based in Boston.

3 thoughts on “Just Cutting Costs Won’t Cut It

  1. “Business leaders want finance, human resources, marketing and so on to evolve from operating resources and cost centers into full-fledged partners in executing strategies.”

    According to Harvard Business School Professor Robert S. Kaplan and his Palladium Group colleague David P. Norton, there are ten (10) process steps to strategy execution:

    Step 1: Visualize the strategy.
    Step 2: Communicate strategy.
    Step 3: Identify strategic projects.
    Step 4: Align projects with strategy.
    Step 5: Align individual roles and provide incentives.
    Step 6: Manage projects.
    Step 7: Make decisions aligned with strategy.
    Step 8: Measure the strategy.
    Step 9: Report progress.
    Step 10: Reward performance.

    An essential role of leadership is to acquire data on how well individual roles align with corporate goals and strategy, and design incentives that encourage and reward performance, while enforcing compliance will applicable laws, rules and regulations.

    ” The right people in the right jobs with the right processes, systems and incentives. A plan for changes and a new organization chart may look great on paper, but the plan will fail to deliver the expected results without the right elements in place to make changes stick.”

    Most companies have ended up with multiple sources of policy, training, surveys, assessments and issue reporting hotlines, including:
    1) Enterprise data analytics (ERP, ERM, CRM, etc.)
    2) Effective policy management (utilizing an online policy library)
    3) Ongoing culture assessment surveys
    4) Performance Scorecards (hard & soft metrics)
    5) Event management and reporting
    6) Annual certifications to the Code of Conduct

    With better tools and data, leadership can better understand their workforce to align their corporate culture and subcultures at every level of the organization (finance, human resources, marketing) with corporate goals and strategy to cut costs, drive innovation and improve performance.

  2. Many CPO in mature organisations are looking for new ways to create value to their companies. Traditional procurement “savings” are difficult to be acknowledged by others than Porcurement and are becoming sacarce.
    May the focus of mature Procurement move towards the concept of Business Partner, focuing more on lower value chain cost, higher output and lower risk?

  3. Two things, perhaps, are needed to help Finance and other support functions fulfill their role in a cost-effective manner: incentives and opportunities. People often gravitate to these roles because they enjoy providing the environment in which others can shine; thus they may need to be coaxed into thinking about how they can more directly contribute to the organization’s success. As well, if their efforts to, say, re-examine processes are met with “that is what we have always done”, how many times will they try?

Discuss

Your email address will not be published. Required fields are marked *