A.T. Kearney G&A Transformation Perspective

As demand and consumer spending tighten in today’s harsh economic times, the challenge for companies is to ensure continued profitability. During the boom times of the past several years, general and administrative support costs rose at many organizations, often at a faster rate than revenues. The recession has amplified the problem, forcing companies to rethink all dimensions of G&A with an eye toward improving efficiency and quality.

Typical responses to G&A often focus on cost—those draconian efforts to cut costs in the short-term that have a significant impact on people and the organization. However, leading companies do not only think about cost cutting but also about improving their competitive advantage. They set their sights on building an agile, flexible delivery model that not only meets current needs but also looks ahead far enough to accommodate future growth. Companies with agile infrastructures are able to fuel organic growth better, increase merger synergies, reduce costs and improve profits.

Before embarking on a broad transformation of your G&A organization, recognizing several characteristics of G&A costs will help improve the approach and identify the value creation levers that can be deployed. The characteristics include:

• General and administrative functions are not necessarily included in broader strategic discussions, thus, there is limited appreciation of the true value that optimizing these functions can deliver
• Costs are mostly people-related and fixed in the short term
• Inefficiencies are often manifestations of deeper structural and process complexities
• Underinvestment in technology results in a lack of automation

The following are guiding principles in transforming G&A.

Align G&A to Overall Strategic Direction and Business Model

G&A costs and complexity are often caused by an excessively complicated business operating model. While organizations can find significant benefits within their existing business models, escalating cost problems often highlight the need for reducing complexity to support the organization’s goals and enable commercial success.

Where and how money is invested in G&A must be tied directly to the organization’s goals and achieve the appropriate balance between cost and performance. Indeed, executives at leading companies drill down to the processes within each function. They screen and prioritize the key processes and place educated bets on where they think infrastructure investments would pay off. This has long been a practice in IT organizations, but now the idea is taking off across all G&A areas.

However, not all G&A functions need to mirror the overall business operating model. While strong alignment is critical in some areas, alternative structures may be appropriate in others. There are several basic G&A business models: central, regional or global shared-services. Choosing the right model depends on the industry and the company’s long-term business vision.

For example, a centralized business model might help a retailer improve efficiencies, but it may not fit with the company culture or allow for the flexibility necessary to respond quickly to market needs. A company that wants to cross-sell product lines within similar markets could decide to consolidate support functions in a global shared-services organization to enable closer cooperation. Similarly, consolidating credit-and-collections into regional shared service centers allows larger multinational companies to take advantage of their size and integrate their global operations. Indeed, when businesses, brands and products are global, the operating model should facilitate global interactions not only in areas such as marketing and product development but also in crucial back-office functions.

“Flex” Your Cost Structure

Delivery models for support functions have evolved over the years. Most corporations now acknowledge the value of partnerships in increasing both efficiency and effectiveness. The ability to generate scale efficiencies while gaining access to incremental capabilities is an attractive combination that has contributed to the growth of outsourcing and offshoring. What began with call centers has matured to include many more services.

Whether performing core consumer and market research in India, recruiting new employees in the Philippines, or outsourcing financial reporting and tax preparation to Eastern Europe, more companies are using their extended enterprises to improve their core businesses and cost competitiveness. As such, they are accelerating savings, finetuning cost structures through sophisticated contractual agreements, and driving longer-term process improvements through outsourcing and offshoring relationships. In short, the global delivery model is here to stay.

Adopt a Lean Manufacturing Mindset

When organizations cut resources (people), they rarely cut the amount of work. Achieving and sustaining worldclass service and cost-efficiency hinge on making long-term improvements to the underlying processes. There are a number of common issues that crop up. For example, companies tend to adopt an incremental approach, applying quick fixes to problems without addressing the root cause. There is often a lack of end-to-end ownership of processes. We often find process issues that surface at the end of the value chain but are a result of actions that take place at the beginning. In addition, organizations seldom have either the data or metrics to measure and benchmark performance accurately.

Driving process improvements requires the following:

• Start with the customer. Applying a “customer value” lens to redesigning standard processes will help identify and eliminate activities that do not add value.
• Breakdown process value chains. Identify waste, duplicate and non value-added activities. Any activity that does not improve quality, add customer value or improve workflow is wasteful and must be eliminated.
• Map the value chain. A value-chain map will help identify the many variants of the process that contribute to inefficiencies.
• Establish ownership for processes and develop a continuous improvement mindset. Aligning resources with end-to-end processes will refocus resources on value-added activities and away from waste. Process owners can then continually pursue sources of value and eliminate waste.

Invest in the Right Technology

Organizations often adopt an all-or-nothing approach to technology. “We need an ERP solution” or “we need a common platform” are common refrains. But executing them is easier said than done. As a result, processes tend to remain manual, which causes inefficiencies.

In many cases, though, a lot can be accomplished with little investment, by leveraging existing technology or simple solutions. Deploying tools that target the most problematic areas can lead to significant improvements that do not require massive investments and have short payback horizons. Good examples include an automated workflow solution as an overlay to disparate accounts payable systems, or intercompany matching solutions. Reviewing processes across business units and organizational silos helps identify off-the-shelf tools that, with limited tailoring, can speed things up and improve quality at minimal cost.

The Starting Point

A broad transformation of G&A functions can seem daunting, but several global companies have applied the principles outlined here to achieve significant and sustainable benefits. These organizations are more efficient, more effective at deploying resources, more profitable, better positioned to deal with business cycles and more valuable to shareholders.

As the current economic crisis affects all industries, companies that adjust appropriately and set up their support infrastructures for competitive advantage will be in a better position to emerge as leaders. The journey of a thousand miles always begins with the first step. A clear roadmap rallies the organization, builds the case for change, aligns different groups of stakeholders and sets the stage for transformation.

The inserts in this folder are perspectives on various functional areas. Each perspective is designed to serve as a starting point for identifying issues and potential solutions and, ultimately, to help you tailor an approach that is right for your organization.

Contact

Arjun Sethi, New York
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Kenneth Lee, Cambridge
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Beth Bovis, Chicago
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Shiv Iyer, Chicago
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