When a recession of almost historic proportions hit many industries following the financial crisis over 12 years ago, most companies were utterly unprepared. The same happened again to many companies last year. While the beginning of the COVID-19 crisis was marked by pure economic survival instinct, companies are now faced with the challenge of finding the right strategic position to emerge from the crisis. What is important in that context?
“Overhead is always followed by yet more overhead”
All too often, it is ongoing optimization of the cost position of all things that is neglected when times are good. This is especially true for the administration and the central functions in a company: the overhead departments. In recent years, due to good sales and profit situations, the size of overhead departments was often left to grow uncontrollably as personnel positions were approved generously. Not least since the beginning of the overhead analysis, however, have we come to understand: “Overhead is always followed by yet more overhead”. This turning of a blind eye has often resulted in a proliferation of sprawling overhead cost areas with a tendency towards bureaucratization.
Changing up the question
The central and all-important question should always be “What is the customer willing to pay for?”. Today, however, this is unfortunately all too often replaced by “How can we maintain power and influence in the company?”. In the event of falling sales, this approach results directly in the problem of enormous fixed costs, which many companies across the board react to with large-scale bushwhack downsizing. In such cases, the workforce is cut back largely independent of strategic considerations. A panic reaction of this kind is never a very effective measure. How can the problem be better solved?
Optimization of overhead costs should be based on the following guiding questions: Is the service provided necessary as it is and in its current extent? Or is the performance of the service expendable – either as a whole or in part? If the service is absolutely necessary, can it be provided more efficiently or supplied more cost-effectively from external sources?
Such an analytical process requires methodological support. Many companies, especially those operating internationally with a largely region-focused management, often lack any transparency about their administrative capacities. Who can answer the question of how many full-time equivalents are poured into personnel development in any company, for example? The only solution to this predicament is transparency since this is the only way to reveal and clearly identify starting points for optimization. How can transparency be increased in a first step?
Phase 1: Taking stock
We have been using a web-based tool for resizing administrative capacities for many years. It aims to record all full-time equivalents and their allocation to sub-processes. Allocation of FTE is based on an industry-specific standard process model. The standard process model can be iteratively adapted and coordinated to meet the specific needs of a company. Furthermore, the use of a standardized process model offers the possibility of cross-company benchmark comparisons. The capacities are shared with the managers and then checked for plausibility.
Phase 2: Creating transparency
The plausibility of the results is checked in 3 to 5 hour “deep-dive workshops”. In-depth process analyses are carried out, problems are brainstormed and initial approaches for improvement are identified. The result is thus increased transparency and clear insight into the distribution of indirect FTE. The achievement of a high degree of transparency of this kind forms the basis for procedural and structural improvements. In a company with 1,500 employees, implementation took around four weeks from adapting the process model to recording FTE and presenting the results. As a result, we were able to identify a surplus full-time equivalent of around 130.
Phase 3: Centralizing
After creating transparency and recording FTE, improvement measures are developed. Structural approaches have proven their worth, for example the bundling of functions at one location – including specific engineering activities or lead buyer functions for selected material groups. The process-related further development through suitable IT support often helps with the implementation of improvement measures: It can, for example, make sense to centralize travel expense accounting for a company at a low-cost location. Here, factor cost differences due to lower personnel costs are used most effectively and in addition, the efficiency of the process is increased through suitable IT support.
Phase 4: Outsourcing
The value analysis of the services provided is at the core of all considerations. The question of the indispensability of a service can be answered with an investigation into whether it can also be obtained from external sources. A good example for this are IT support services. Building on our experience from many years of project work, we have developed the integrated project approach “Lean Admin”. This approach combines transparency, conception and implementation into a self-contained project module. Due to the procedural approach in this, it is usually possible to largely objectify an otherwise rather emotional issue. In particular, in-depth transparency with the help of tool-based FTE assessment also facilitates and objectifies the discussion and negotiation with the social partners.
As a rule, crises are also opportunities. In economic history, external shocks of similar magnitude to the COVID-19 pandemic have always been efficiency drivers and innovation accelerators. Against this background, work on improving the cost position in good time is absolutely essential. This is how companies emerge from a crisis with momentum.
What other questions do you have about overhead costs? Contact us. Our independent operations experts increase the competitiveness of medium-sized industrial, trading and service companies.
