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How to Get a Handle on G&A Costs

The nature of G&A work has changed a lot in the past decade; the way it's funded needs to change too

http://www.dreamstime.com/royalty-free-stock-images-model-businessman-studying-graph-image4858029Just past the midpoint of the year, commentators agree that the world economy is set fairly fair for the coming 12 months or so.

The dreaded Grexit will still worry everyone for months to come, and the recent Chinese stock sell-off has spooked a few but, broadly, and especially in the US, Japan, and some parts of the EU, conditions look promising.

This provides senior managers with the twin concerns of wanting to chase and capitalize on any growth opportunities – whether in adjacent sectors, new regions or new demographic slices of existing markets – and wanting to keep a lid on costs, both because the economy isn’t strong enough to make it worth chasing growth or market position at any cost, and because any reversal in customers’ willingness to buy will put a lot of pressure on already tight margins.

Speak to any CFO and you’ll hear that in particular they are having to answer a lot of questions about why the costs to fund general and administrative (G&A) functions have been so high for so many years, and why they show no signs of dropping.

The Changing Nature of G&A Work

One of the reasons that they remain so stubbornly “high” since the 2008 recession is that the nature of G&A work – on the whole that done by people in functional and support roles, HR, finance, marketing, procurement, IT and so on – has changed to match the way workplaces have changed so much in the past decade or so.

In particular, line managers now must make important business decisions more quickly than before, and involve more people in doing so. This means that the functional support needed by decision-makers in the line is more specific to the project they are working on and consequently less transactional and more “judgment-based” than rules-based.

So judgment-based work is more complex and unsystematic in nature, cannot readily be automated or outsourced, and is naturally more costly to perform; things like integrating legacy IT systems or providing non-standard financial reports. Rules-based work is, as the name suggests, routine and follows a well-defined process (e.g., accounts payable, payroll, budgeting, etc.).

Judgment-based work now represents more than 50% of a company’s G&A spend, and for the median-sized large company (with revenues of $8 billion), the costs of judgment-based work grew to $228 million or 2.86% of sales in 2013.

Why G&A Costs Are So Misunderstood

In fact, only 16% of management teams have a good understanding of what type of activities are funded by their G&A spending. Most companies today fall short in assessing their cost structure in three ways:

  1. Treating line items as the unit of analysis: Line items in departmental budgets cloud the different activities and business objectives across which G&A spending is distributed. The type of G&A work being done (i.e., routine and repeatable versus ad hoc and knowledge intensive) should be the basis for cost assessment.

  2. Focusing on efficiency, not value: Many knowledge-intensive activities — meant to add value rather than to keep a company’s lights on — are better evaluated through an ROI lens rather than an efficiency lens.

  3. Using unreliable peer benchmarks: Industry and revenue peer benchmarks fail to control for the largest underlying drivers of spending: organizational and geographic complexity.

Conventional performance metrics, which focus on cycle times, work volumes, and cost, lead companies to treat G&A functions like factories that are managed purely for efficiency. But this new kind of judgment-based work means G&A teams should be evaluated by their impact on important business goals.

Leading companies have upgraded their dashboards to include metrics that measure how they create value for the company.

The Value of a G&A Service Catalog

To fully understand how much value it receives from each G&A activity, finance teams should create a service catalog that documents each activity, what it costs, and the value it provides to the company. A service catalog uncovers opportunities to cut costs or to invest more to support growth.

Ultimately, cataloging G&A work based on value and cost enables companies to assess their cost structure and create a plan to reduce G&A costs while still promoting growth.

 

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One Response

  • Jim Smith says:

    SG&A isn’t a CFO’s job any more than COGS or capital spending. Not meaning to be disrespectful, but the CFO doesn’t make those decisions in most large companies. They may offer an opinion, but ultimately the business unit together with the CEO will make the final decision. Sending finance on the reducing AG&A mission is a fruitless effort.

    We typically follow unsuccessful cost reduction efforts lead internally or by consultants/ No matter what the result, we offer an incremental 10 to 15% SG&A reduction with no consulting. We script a five minute video from the CEO to the employees, shut down the politics, culture and silos and let the employees have at it. The results are remarkable. For one client the ten week project netted a $300 million SG&A reduction, a $200 million capital reduction and a $45 million inventory reduction, all from employee input without interference from politics, culture or silos. Finance could never accomplish something like this, there just isn’t enough staff nor enough political clout among peers.

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