G&A Cost Reduction
Developing a Scalable Cost Structure
General and Administrative (G&A) costs typically account for 20 to 35 percent of a company’s revenue. Yet many businesses treat G&A functions as back-office activities that create little or no value, instead of exploiting their potential for competitive advantage. Efficient and effective G&A spending in areas such as Finance, HR, IT, Legal and Procurement can boost a company’s bottom line and provide a sustainable advantage in the marketplace. Top performers routinely achieve G&A costs that are on average three percentage points lower (in terms of G&A as a percent of revenue) than bottom performers do. For large, global companies this differential translates into average annual savings of more than $500 million. Also, improved G&A capabilities can help the rest of the business operate more effectively and give the company a competitive edge.
A strategic approach to G&A cost reduction requires a multi-functional perspective and services that cut across business disciplines. Our cost management professionals work closely with other specialists in Human Capital, Information Technology, Financial Advisory, Risk and Tax to tackle challenges from every perspective. Learn more about the offering.
Riding out the storm – How to make enterprise cost management sustainable
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- Omar Aguilar, principal, Deloitte Consulting LLP
- Corporate and Business Unit Strategy
- Enterprise Cost Management
- Finance Transformation
- HR Transformation
- Integration and Divestiture Planning and Execution
- IT Strategy and Effectiveness
- Outsourcing Advisory Services
- Service Delivery Transformation
- Shared Services
Learn more about the offering
Using G&A for competitive advantage
Sustainable G&A cost reduction requires a comprehensive and systematic approach that centers around a structural philosophy for defining how G&A is delivered. It addresses key levers, including business processes, systems, organization structure, people, governance and skill sets.
Many companies make the mistake of focusing their cost reduction efforts too narrowly. They rely on continuous improvement programs that only generate small process improvements. Or they limit their attention to a single G&A function. Although it’s possible to generate significant savings from continuous improvement, or by focusing on a single function, companies that take a broader approach have many more improvement levers to work with. The result is higher savings and broader benefits and impact.
One of the key improvement levers is to change or adjust the service delivery model for G&A functions. This involves defining how and where G&A activities will be performed based on their value and relationship to the business. Many activities can be centralized to improve efficiency and economies of scale. However, some G&A activities cannot be removed from the regions or business units due to local requirements or strategic needs. To reduce costs without undermining effectiveness, it’s important to understand the trade-offs.
To be sustainable, the redefined service delivery model for G&A functions must align with the company’s business model. Often, it involves creating, defining or strengthening alternative approaches to service delivery, including shared services, centers of expertise, call centers and outsourcing.
How we can help
A strategic approach to G&A cost reduction requires a multi-functional perspective and services that cut across business disciplines. Our cost management professionals work closely with other specialists in Human Capital, Information Technology, Financial Advisory, Risk and Tax to tackle challenges from every perspective.
We help clients drive efficiency and effectiveness through redesign and restructuring of one or more G&A functions, such as Finance, HR, IT, Procurement, Legal and Facilities/Real Estate. We also help improve indirect sourcing and spend management, which can deliver significant savings not tied to headcount and allow the cost reduction effort to become self-funding more quickly. Our service offerings include:
- Functional cost reduction and performance improvement
- Strategic G&A transformation
- Reduction of G&A costs and indirect spend
- Global G&A service delivery strategy and restructuring
- Definition of global, regional and local G&A requirements
Our experienced teams have completed more than 300 G&A cost reduction projects and are known for developing executable strategies and delivering tangible results. We are confident in our savings estimates and are willing to share financial risks with clients through value-based billing options.
Leading companies are taking advantage of today’s challenging business environment to restructure their G&A activities, reduce external spend and create or regain a competitive advantage. Specific benefits include:
- A G&A service delivery model that aligns with the company’s business model to deliver sustainable performance and results
- Immediate and significant savings that provide a competitive cost advantage with little or no downside for the business
- Structural improvements that are locked in and sustainable
- A scalable G&A cost structure that can readily adapt to changing market conditions, including divestitures and future growth
Four ways to create more value now
Adjust or confirm the company’s business model. The value of moving to a different business model often hinges on whether the company is in a high- or low-growth market, or whether the services and products provided by its operating units are similar or overlapping. For companies in low-growth markets, or with similar offerings across operating units, a more integrated, synergy-friendly model can improve cost efficiency and overall performance with little negative impact on the business. This is the path many Fortune 500 companies are taking, particularly for their G&A functions.
Align governance with the company’s business model. Determine how operational and functional decisions will be made and executed to effectively manage G&A functions and other key parts of the company. This requires clear organizational roles, responsibilities, functional ownership and communication. The impact of better aligning governance for G&A functions typically results in more effective functional performance that also translates into achieving more efficient and effective policies around many topics and issues, including demand management and functional service levels.
Rethink the service delivery model for G&A functions. Define how services will be delivered to improve scalability and efficiency. This provides a framework for segmenting G&A activities based on the value generated for the business and the strategic need for local resources. The right functional service model varies for different companies and even for different functions within the same company, due to variations in functional maturity and best practices.
Include improvements to indirect spend. To maximize savings and build momentum, an improvement program should include indirect spend, which encompasses all external spend not directly related to company operations. Improvements in this area can significantly reduce costs for sourcing and demand management – reductions not tied to headcount. Even more important, they can generate accelerated savings that help make the overall improvement program self-funding.
G&A Cost Reduction in action
- The finance function of a global pharmaceutical company needed to reduce its costs while maintaining effectiveness and keeping risk in check. We are helping to design, develop and implement a transformation program that is expected to reduce Finance’s annual operating costs by 30 – 35 percent.
- A $2 billion furniture company was struggling with profitability and cost control. The business had grown and evolved through a series of acquisitions and divestitures, which created significant redundancy and inefficiency across business units. We helped integrate the company’s business model and centralize common activities, saving more than $50 million annually.
- A global consumer products company redefined its G&A service delivery strategy and established a more scalable G&A platform to support its aggressive growth goals in emerging markets. Major initiatives included opening or redefining G&A hubs in North America, Europe, Latin America and Asia. Annual savings exceeded $75 million.
As used in this document, “Deloitte” means Deloitte Consulting LLP, a subsidiary of Deloitte LLP. Please see www.deloitte.com/us/about for a detailed description of the legal structure of Deloitte LLP and its subsidiaries. Certain services may not be available to attest clients under the rules and regulations of public accounting.