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Overhead Cost Management: 5 Common Mistakes, And How to Avoid Them

Rising overhead costs have been a problem at large companies for over six years now

Collection of Various Currencies MoneyManaging general and administrative (G&A), or overhead costs, year-in and year-out is a well-known challenge for companies. Since the 2008 recession, companies have been working hard to keep overhead costs in check — and continue to do so. Today, 73% of companies feel pressure to curtail the rise in G&A costs.

But some commonly held assumptions around how best to manage G&A spend may not hold water.  Below are common mistakes finance executives make when looking to rein in overhead costs, and ways to avoid these mistakes in the future.

Five Common Mistakes

  1. Focus too much on finance spend: Finance teams frequently place too much emphasis on their own costs, even though finance only represents 14% of the average company’s G&A costs (see chart 1).

    Avoid the mistake – Focus on the big picture: While leading by example is important, finance teams should spend more time looking at what they can do for the company at large.  For example, it may be worth spending a little more in finance to analyze G&A costs in order to identify what areas need greater efficiency and what areas may need more budget.

    Average cost distribution

    Chart 1: Average cost distribution for the S&P 500 and average G&A cost distribution 2014; n=500 and n=67  Source: Compustat; CEB 2014 Overhead Cost Assessment

  2. Concentrate too much on costs at the expense of the work being funded: Traditional “cost-cutting solutions” are attractive, but cheapest doesn’t always equal best. If companies focus solely on cost, they may do so at the expense of value creation.

    Avoid the mistake – Don’t forget the “benefit” side of cost-benefit analyses: Focus on both the volume and quality of the work that various functions perform. It can be good to spend more if the value to the business is worth it.

  3. Limit shared services to the back office: Back-office processes like accounts payable and travel expenses have long benefited from shared services organizations. But other processes — like general ledger and financial reporting — are increasingly shifting to shared services, too.

    Avoid the mistake – Don’t limit the use of centralization: When managing corporate functional cost and performance, the use of shared services produces significant gains in cost and quality (see chart 2). Even some “front office” activities (those that include interactions with internal customers, such as financial analysis or HR business partnership) can benefit from a shared services approach.

    The impact of shared services

    Chart 2: The impact of shared services  Percentage of respondents; n=69  Source: CEB analysis.

    Note: Major improvement is defined as >30% impact; significant improvement is defined as 15-30% impact

  4. Rely too much on outsourcing: Outsourcing has been a common way to cut costs and/or even improve performance. But recent data show there is no relationship between outsourcing and lower costs or better performance.

    Avoid the mistake – Be selective: Do not rely on outsourcing as a sole solution to a cost or performance problem. Proceed with caution and, for example, outsource select parts of a process rather than the complete process.

  5. Using a “Do It for Me” approach for cost management, rather than a “Do It Yourself” approach: Companies often see short-term improvement when using external consultants to quickly reduce G&A costs. However, in the long-term, the costs frequently creep back in.

    Avoid the mistake – DIY: In order to manage cost and performance over time, finance leaders should focus on developing their own teams to be better at overhead cost management.

    Do it for Me vs DIY

    Chart 3: Do It for Me versus DIY Source: CEB analysis

 

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