The type of work funded by what’s known as general and administrative (G&A) costs has changed fundamentally in the past decade but managers’ understanding of these costs and the way they manage them has not.
Any history of management (such as the potted one in this excellent piece) will show that the majority of the work done by employees in the past century has been “rules-based.” The aim has been to complete a series of consistently similar tasks as quickly and cheaply as possible again, and again.
This is certainly true of those working in corporate functions funded by G&A budgets, and includes transactional activities like accounts payable, payroll and running the IT help desk, and calendar-centric ones like budgeting and workforce planning.
All these tasks are still required of course but, given how fundamentally the work environment has changed in the past decade, employees need to 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.
CEB data bear this out. Transactional activities now comprise only 49% of G&A costs for a typical large company, whereas 51% of overhead spend is for judgment-based work, including ad-hoc activities like analytics and non-standard reporting and initiative-based efforts like systems integration and new-product feasibility studies.
CFOs’ Light Bulb Moment
Categorizing overhead costs by type of work done is a departure from the historical norm of grouping them by discipline — IT, HR, purchasing, real estate, etc. Rules-based work is easier to automate, standardize and centralize, but judgment-based work is more knowledge-intensive and ambiguous.
The CEB research further breaks down G&A spend as follows: among the 49% that is rules-based, 25% is for transactional work and 24% for calendar-centric activities; among the 51% that is judgment-based, 29% is for ad-hoc work and 22% is related to initiatives (see chart 1).
Chart 1: How cost management differs Judgment-based work versus rules-based work Source: CEB analysis
For some companies, this shift has taken place over the past 10 years or so, but probably over the past five or six for the average company. Nevertheless, CFOs are having a light-bulb moment when CEB staff show them this breakdown. They know functions are entering the realm of more value-added work, but are surprised at how much of their non-finance G&A spend falls into the judgment-based category.
CFOs also know the heat is on to control overhead costs. Asked to rate the degree of pressure they’re under on that score, on a 1-7 scale where 7 was the greatest pressure, 73% of survey participants pinpointed it at 6 or 7. Yet, while 89% of them gave a 6 or 7 rating for the degree of rigor with which they’re managing the costs of rules-based work, only 22% said so for judgment-based work.
Generally, two types of increased complexity are to blame for this rise.
Geographic complexity: there are more ad-hoc requests for information and analysis relating to country-specific issues, still more analysis is needed as markets become more heterogeneous, and there is more variable work, driven by greater economic and market volatility.
Organizational complexity: more work to integrate acquisitions, more customized analysis to support matrixed decision making, and more collaboration to support such matrices.
The complexity also fuels the shocking lack of confidence that managers have in the level of their G&A spending. Only 23% of survey participants said they were confident their finance spending was judicious — and that was more than said so for legal (17%), HR (15%), IT (15%), procurement (9%) and marketing (8%).
It’s Not About Size, It’s About Complexity
In fact complexity is now an even bigger cause of cost increases than company size. Using regression analysis, CEB research shows that complexity is behind 58% of overhead spending, compared with 42% for revenue volume.
The other reason for finance executives’ lack of confidence about overhead spend comes back to the increase in judgment-based work. Examples abound here: finance is no longer just about transaction processing and closing the books, it’s also about analyzing data. Real estate is not just about making sure you have enough office space and cubicles, it’s also about transforming the workplace so it’s more collaborative and productive. IT isn’t just about “Does my laptop work and can I connect to the network?” It’s also about evolving business models to take advantage of new technology.
So a lot of overhead functions have transformed from back-office, standard-service outfits to look a lot more like professional services firms, because they’re doing so much more decision-support work. Confidence about overhead spend is low because the nature of the work has changed.
How to Respond to the Rise of Judgment-Based Work
To manage the efficiency of judgment-based work, companies must re-orient traditional budgeting, measurement, benchmarking, and controls to the new nature of the work.
Measurement: As above; finance teams can measure expenses using the categories the general ledger, but it’s probably more informative to also measure them based on the type of work that’s being done.
Budgeting: In the past, Finance would think about whether it had the correct level of overhead spend based on what it had historically and how it thought revenue would change: “My revenues are going to go up 10%, so my overhead spend should go up by 3%, because that’s what’s happened historically.”
Now managers should say, “Yes, we’re going to grow in revenue, but we’re also going to go into four new countries and support three new currencies and two new languages. So we actually need 5% G&A growth.”
Performance management: In the past Finance thought, for example, that HR was efficient because its costs were 3% of revenue, and the benchmark average for peer companies was 4%.
That kind of thinking is fine if managers just look at transactional and calendar-centric work. But when managers start discussing decision-support value that a function provides, it can’t just be looked at in cost-comparative tiers. There has to be some way of measuring the impact that cost has and the value it’s creating.
Control: In the past, Finance would try to control overhead expenses by relying heavily on automation, centralization and standardization. But to control the costs of judgment-based work, you have to change people’s expectations or their behavior.
Either internal customers have to get used to receiving less of the expensive judgment-based services they demand, or overhead functions have to improve their expertise to do the same amount of work in less time, or both.
For more on CEB’s work on reducing G&A costs to improve margins, register for this December 18th webinar at 11am Eastern Standard Time.
A version of this post originally appeared on CFO.com.