Forgotten value: Streamlining business support functions
While managers rightly concentrate on squeezing variable costs out of their organizations, one McKinsey team believes that a proportionate effort should be applied to the fixed-cost areas represented by business support functions (BSFs). Today, in part because of their rigorous efforts to drive down production and material costs, companies need to optimize their growing overhead costs—but most lack knowledge and experience regarding how to do it in an integrated, pragmatic, and sustainable fashion. Based upon McKinsey's extensive experience in this area, the team has developed an approach that includes a preparation phase and four progressive steps. During the "pre-phase," managers set the overall project direction, develop cost baselines used later for comparison, and assemble their teams. Steps 1 and 2, covered here in greater detail, assess the overall BSF opportunity and develop ideas for reducing costs and measuring progress. The final two steps of the process focus on implementation progress and impact monitoring.
Step 1: Assess the opportunity.
McKinsey has established three approaches that provide increasingly granular assessments of a company's BSF performance. The first involves a quick scan that benchmarks performance at the functional level and is capable of delivering high-level performance indicators. In the second, managers make a deep dive into one specific function (e.g., the team splits human resources (HR) into subfunctions such as recruiting, training, labor relations, and personnel administration). Finally, McKinsey can do an intensive assessment across all general and administrative (G&A) functions (e.g., finance, HR, IT, marketing, quality, and real estate). This detailed benchmarking exercise is focused at the subfunctional level by analyzing complexity and cost drivers per subfunction. The team can then employ a mix of internally and externally available benchmarks to improve the accuracy of the assessments. In cases where internal data scarcity limits performance-assessment clarity, the team can pursue a "triangulation." This approach relies upon the combination of three elements: specific key performance indicator (KPI) benchmarks, an improvement lever review, and existing peer benchmarking.
Step 2: Generate and measure improvement approaches.
Once the size of the BSF improvement opportunity has been established, teams focus on developing the improvement measures and approaches they will use to capture the identified value, as well as on the metrics to measure progress. McKinsey has developed a comprehensive framework featuring six efficiency and effectiveness levers. Effectiveness, for example, focuses primarily on redirecting resources toward activities and outputs that produce the greatest marginal value-to-cost ratios. To improve efficiency, managers can employ five different levers: a lean-process transformation, management de-layering and span-of-control optimization, shared-services consolidation, offshoring, and outsourcing.
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