Reducing Costs Effectively: How to Save Millions in Overhead

In recent months, the labor shortage in Germany has dominated headlines, but now, a flurry of layoff announcements has taken center stage. Many medium-sized enterprises are compelled by increasing profit pressures to optimize their operational processes. A frequently overlooked area is overhead. Experience shows that many mid-sized companies carry unnecessary overhead costs. Potential savings in the overhead sector typically range from 15 to 18 percent. enomyc author Jan Ulrik Holsten outlines the optimal approach to overhead cost reduction and explains why customer satisfaction must always be a priority.

When it comes to strategic developments and operational improvements, overhead processes often recede into the background for various reasons. A significant factor is the prevalent disconnect between value-adding operational processes and administrative or management processes. This is evident in numerous corporate practices. For example, in controlling, complex reports are often produced long after their initial relevance or purpose has expired—typically justified by the age-old rationale: "It's always been done this way."

Furthermore, the potential of technical innovations in the overhead area remains largely untapped. The focus for efficiency improvements via IT often lies on what are perceived as the more critical units—the operational ones. This is evident from the fact that in most companies today, employee self-services (ESS) such as time tracking, personal data maintenance, or leave requests are either non-existent or only rudimentarily implemented.

The cost-saving potentials in overhead are often not given the attention they deserve because they appear marginal compared to savings in operational business. However, this perception is misleading. As the saying goes, "Every little bit helps." For instance, changing the cleaning frequency of office spaces from daily to twice a week can accumulate substantial savings. Moreover, the overhead area in most companies is a haven for "sacred cows." Changes of any kind are unwelcome among staff and often lead to significant resistance—for example, changes in the cafeteria or the electronic time tracking system. This is true for medium-sized companies as well as large corporations.

Overhead: Often More Than Meets the Eye

enomyc has developed a straightforward yet highly effective approach to reducing overhead costs. It encompasses all central and decentralized overhead services of a company and its business divisions. Central services include all functional areas provided from the headquarters, such as Finance, HR, Facility Management, Marketing, Procurement, and IT. These areas are rightly often the focus of restructuring measures.

Less frequently considered: Overhead services are also provided at the regional and divisional levels, such as in Sales, Accounting, Logistics, or operational Purchasing. In production and sales companies, there are decentralized overhead services like Facility Management, technical services, time tracking, or security.

When examining our clients' overhead costs, we adhere to the Lean principle: What is needed, and what isn't? What service level is necessary? Which services justify the effort they require, and which do not? A guiding principle is the avoidance of waste and rework. These issues are almost certainly to occur when tasks are over-fulfilled, unnecessarily, or too extensively performed, or when unclear communication leads to queries and multiple processing.

Battling Waste and Rework: Four Steps to Success

We define cost-saving measures for each function in four steps. After all services are structured and quantified, we set ambitious savings targets (initially top-down and benchmark-driven). Based on this and our experience from over 1,400 similar projects, we develop cost-saving ideas with our clients. Then, the feasibility of these measures is assessed, again with a focus on the needs of headquarters. The final step is deciding which measures will be implemented and how.

This selection process must always be driven top-down, although input from the ground level is crucial. Our experience, particularly in restructuring contexts, shows that it's easier to set ambitious goals and link them to job security expectations during challenging economic times. A capacity self-documentation tool, such as our InFLOW, provides additional transparency on capacity hogs and performance indicators—globally and simultaneously deployable.

Best Practices Quickly Clarify Optimization Opportunities

Various factors influence decisions on the scope of specific services in the future. For instance, a service might only be required for legal reasons, even if it otherwise offers no value. If a process is to become more efficient, external or internal benchmarks can provide realistic targets.

Importantly, past oversights should not be revisited in this process; they are generally granted amnesty. However, it's time to address the so-called sacred cows. Appropriate measures often send a critical signal to staff: that management is serious about cost-cutting and willing to face resistance.

Another advantage of this method: The identified cost-saving potentials can be realized in a relatively short time, typically less than twelve months. For those aiming higher, further structural changes over a longer period can unlock additional potential savings of 10 to 18 percent.

Cost Savings in Overhead: Leaders and Influencers Play a Key Role

Cost reduction and performance improvement programs are currently a daily agenda item in almost all companies. Sharp cuts in overhead are often politically sensitive and, as such, are either not clearly communicated or inconsistently executed. As in other areas of restructuring, leadership's personal persuasive power is crucial: Leaders must enlist influencers to help overcome resistance. The numbers show: The effort is worthwhile. My most important implementation recommendation: Look forward, not back!

Do you have questions about potential overhead cost savings? Book a non-binding, complimentary initial consultation to estimate your cost-saving opportunities. Schedule your appointment with our expert Jan Ulrik Holsten now.

About the Authorr

Jan Ulrik Holsten serves as a Partner at enomyc, heading the Sales and Marketing division. He is responsible for comprehensive turnaround and value enhancement projects as a consultant and interim manager. This article highlights a central solution approach and consulting portfolio that has proven to be a valuable lever for improving profitability and enhancing competitiveness. Jan Ulrik Holsten also specializes in Corporate Profit Improvement and Working Capital Management. Learn more about Jan Ulrik Holsten here

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