Intense pressures from a wide range of sources, including competition from low-cost players and rising prices of raw materials, have forced corporate leaders across many industries to give closer scrutiny to the cost side of their income statement. Capital markets and shareholders have demanded that companies respond to these pressures by managing costs more efficiently and effectively.
A critical but often undervalued area for cost improvement is nonpersonnel costs within selling, general, and administrative (SG&A) expenses. These include costs for facilities, information systems, outsourced labor, transportation, travel, and utilities, among many other areas that are regarded as routine overhead. Depending on the industry and the extent of outsourcing by the company, nonpersonnel costs can account for 40 to 50 percent of SG&A expenses. Because these costs have traditionally received less attention than personnel costs, the savings potential is usually significant. However, reducing nonpersonnel costs and making the changes stick are not simple tasks. Executives must decide where to target their efforts and determine how to reduce costs, while still meeting the needs of internal and external stakeholders.
BCG has developed a comprehensive approach to help companies identify and quantify opportunities to reduce nonpersonnel costs, select targets and improvement measures, and sustain improvements. The approach focuses on the “drivers”—such as head count or utilization—that determine the levels of nonpersonnel costs. This approach helps reduce costs without sacrificing efficiency or effectiveness, while also promoting wide acceptance of the reductions throughout the organization.