Exercising for Excellence: Creating Value Through Smart and Simple Support Functions

Exercising for Excellence: Creating Value Through Smart and Simple Support Functions

          
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Exercising for Excellence: Creating Value Through Smart and Simple Support Functions

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    Support Functions Can Endanger Competitiveness

    Why has providing high-quality support services at sustainably low costs proved to be such an elusive goal for many companies? One reason is that the value that support functions create—or destroy—can be hard to identify. The benefits or waste are typically hidden in information flows and systems and dispersed over several locations. By contrast, the value that core functions produce or erase can readily be observed. Efficient manufacturing operations, for example, can quickly be identified, as can underutilized equipment and overflowing warehouses.

    At the same time, keeping costs under control is hard, because inefficiencies are notoriously difficult to measure and often reflect long-standing cultural habits within a company. Furthermore, individual employees may not have an incentive to eliminate these inefficiencies and may even benefit from their existence. Some employees may create processes, workflows, or reports to add to their own responsibilities and build up their department’s staff, even if the business value created does not exceed the additional cost. To make matters worse, some companies have taken a “more is better” attitude when it comes to adding product variants and new systems and processes, whether to satisfy customers or internal clients. Unfortunately, it is usually easier to add these customized products and services than to manage the resulting increase in costs.

    Although the causes of waste or inefficiencies in support functions are hard to identify and control, the symptoms are well known: Byzantine processes, multiple IT systems, unread reports, marathon meetings, and seemingly endless red tape. Instead of enhancing competitiveness, support functions often burden organizations with unnecessarily high costs and low productivity, while an unyielding bureaucracy causes employees to become increasingly disengaged and frustrated.

    Companies recognize the importance of improving the performance of their support functions. Too often, however, management focuses on superficial cost cutting rather than using a comprehensive approach that reduces unnecessary costs while adding services that are valuable to business units or operational functions.

    Cutting resources can be an effective way to mobilize support functions and force them to refocus on value-added activities. However, to reap the full benefits of painful onetime cost cutting, the organization needs to sustainably change how activities are prioritized and executed. Otherwise, the workload is likely to remain essentially the same, and companies may eliminate resources that are essential for undertaking value-adding initiatives in a fast-changing business environment. What happens next is all too common: the costs and resources of support functions creep back to their previous levels—until the next cycle of cost cutting trims them yet again.

    BCG’s research sheds light on the extent to which companies have endangered their competitiveness by failing to transform their support functions into value-adding units and achieve sustainable cost efficiency. (See “Most Fortune 500 Companies Lack Smart and Simple Support Functions.”) We found that declining business profitability is often accompanied by rising costs in support functions.

    MOST FORTUNE 500 COMPANIES LACK SMART AND SIMPLE SUPPORT FUNCTIONS

    Do leading companies position themselves to maintain a long-term competitive advantage by sustainably reducing the costs of support functions? To answer this question, we analyzed the Fortune 500 companies and categorized them on the basis of two factors. (See the exhibit below.)

    • The development of their business profitability, measured as the compound annual growth rate (CAGR) of their operating margin
    • The development of the cost of their support functions, calculated as the CAGR of their sales, general, and administrative expenditures relative to their total costs
    exhibit

    Higher business profitability combined with declining costs for support functions indicates that companies benefit from smart and simple support functions that facilitate value-adding decisions at the corporate level and in business units. Our analysis found that only 23 percent of Fortune 500 companies have achieved this favorable scenario. These companies should not rest on their laurels, however. They have an opportunity to enhance their competitive advantage by taking steps to sustain their improvements to support functions and by taking smart approaches to adapt to the ever-more complex business environment.

    The remaining companies face the types of obstacles to sustainable business success that the X4X approach can help resolve.

    For 21 percent of the companies we analyzed, higher profitability was accompanied by an increase in the relative costs of support functions. These “effective but inefficient” companies could increase their operating margin by reducing the total costs of their core business or increasing prices to push revenues higher. Even if support functions’ higher relative costs do not appear to be a drag on profit growth today, their inefficiencies could significantly undermine future business performance, as the company seeks to adapt to changing external conditions in the dynamic environment.

    Thirty-eight percent of the companies reduced the relative costs of their support functions, yet their business profitability contracted as well. This “efficient yet ineffective” performance can be attributed to superficial cost cutting that reduces or eliminates resources without regard to the value added by the related activities. Such quick one-off improvements do not translate into long-term benefits.

    Finally, 18 percent of the Fortune 500 companies were “inefficient and ineffective”: unproductive work, wasteful bureaucracy, and complicated structures, among other factors, have combined to drag down profitability. These companies need to transform their support functions so that they add value while being sustainably cost efficient.

    Our project experience provides additional insights into the detrimental consequences of failing to properly manage support functions. We have found that waiting time can consume up to 80 percent of the time required to complete support processes, which limits an organization’s agility and the quality of its outputs. For example, one company needed more than 150 days to complete the hiring process for new employees, and 65 percent of this time was spent on unnecessary activities. Long waiting times during the company’s hiring process resulted in roughly 50 percent of candidates turning down an offer.

    Companies can often accomplish a process’s objective with up to 50 percent less resources. As a case in point, the resources devoted to preparing financial reports could be significantly reduced. Many of these reports are often too long and produced too frequently. The result is that up to 60 percent are unread. Moreover, many companies do not have standardized formats for these reports, which means that multiple iterations are typically required to prepare a finished product that, more often than not, simply collects dust.

    Inefficiencies such as these can take a significant toll on employee satisfaction and engagement. In surveying employees during our projects, we have found that satisfaction and engagement are up to 50 percent lower in poorly performing support functions than in efficient ones. In some organizations, the rank-and-file employees are shut out of decision-making processes, receive little or no feedback, and do not see any impact from their efforts.