Managing change: What lies behind G&A spend transformation

SG&A priorities are changing as long-term value-creation work, such as improving customer experience and creating new business-information products services, takes on greater importance.

The COVID-19 pandemic isn’t yet in the rearview mirror, but around the world, organizations are adjusting to the next normal. Headlines tell us hybrid working is becoming the norm, supply-chain challenges and inflation are affecting all areas of the value chain, and labor shortages are limiting production.

In our survey of C-suite leaders conducted in August 2020, organizations reported increasing their cost-reduction targets, modifying their operating models on the fly, and redefining functional priorities. A little over a year later, we checked in to see how things have changed: whether the rapid shift to remote working has stuck, whether companies are setting—and achieving—cost-reduction targets at the same rate, and in a climate of labor and skills shortages, the level of prioritization being given to capability building.

Sidebar

To find out what lies behind the highlights making the news, we revisited our 2020 survey and talked to 350-plus senior executives on their current priorities and future plans for transforming sales, general, and administrative (SG&A) activities, including spending, working models, the use of shared-service centers, and digital priorities. Representing a wide range of industries and geographies, they report that like so many other functions, digital transformation has led the march into the next normal, with progress that would normally have taken several years achieved in a matter of months.

Digital solutions in the spotlight

A common theme runs throughout the responses to this survey: a push toward investing in digital and analytics solutions to drive improvements and efficiencies is at the forefront of transformation. From capability building to collaboration platforms to analytics-guided decision making, organizations are emphasizing digital actions to enable SG&A transformation and drive productivity. Accordingly, skill building has become an even higher priority: the 2021 results show a 16-percentage-point increase in focus on “capability development,” and an 11-point increase for “building digital capabilities” (Exhibit 1).

Over the upcoming year, organizations plan to redirect focus toward digital capabilities and capability development.
We strive to provide individuals with disabilities equal access to our website. If you would like information about this content we will be happy to work with you. Please email us at: McKinsey_Website_Accessibility@mckinsey.com

Slowdown in transformation impact

In previous surveys, we saw big ambitions on spending targets and yet a lack of confidence in being able to meet them. Now we see that half of executives are 12 months or more behind in meeting their cost targets. As a result, SG&A cost-reduction targets are declining, from an average of 16 percent in the third quarter of 2020 to 12 percent one year later. In addition to the lag in value capture, we believe there are other reasons behind the decline, including an improved revenue outlook: in 2021, 89 percent of respondents report a positive revenue outlook, up from 40 percent in 2020.

SG&A cost-reduction targets are declining, from an average of 16 percent in the third quarter of 2020 to 12 percent one year later.

In addition, respondents report an expected increase in indirect spend—especially in categories like IT and telecoms, slated to rise an average of 5 percent, and employee services and benefits, with an average anticipated rise of 6 percent over what organizations were spending in 2019. While these developments are likely to impede the achievement of aggressive cost targets, now may be the time to consider whether targeted reductions might be possible in at least some areas within these categories.

The future workplace and the case for change

The reasons for the increases are easy to see. Digital solutions have played a critical role in enabling remote working ever since workplaces were forced to shutter and send their employees home. While there may have been initial challenges as employees adjusted to new ways of working, actions taken to improve employee well-being have increased the productivity of employees working from home: the proportion of respondents who say working from home (WFH) has increased productivity compared with prepandemic levels rose by 29 percentage points.

To better understand what really matters in making WFH work better, we asked respondents about a range of possible employer actions. Companies reporting decreased productivity due to WFH said they had deployed some of the same tactics as their more successful peers, including new team norms (such as regular breaks and clearer definition of expected working hours) and better communication about employee-assistance programs. However, the success stories made even bigger commitments. The biggest differentiator turned out to be the introduction of “circuit breaker” holidays to boost morale and mental health: only 18 percent of WFH laggards had tried them, whereas 54 percent of companies with constant or improved productivity had implemented the concept—whether just a couple of days or a weeklong shutdown in the case of some high-profile companies (Exhibit 2). But if these perks are viewed—by either employers or employees—as just a quick fix, their effects may not endure for the long term, with record numbers of employees considering quitting their roles.

Productivity is up for remote workers thanks to improved workforce well-being.
We strive to provide individuals with disabilities equal access to our website. If you would like information about this content we will be happy to work with you. Please email us at: McKinsey_Website_Accessibility@mckinsey.com

Where to work—balancing hybrid models

Despite the uplift in productivity among remote workers—and indications that many companies are considering making the shift to remote working permanent—challenges for remote and hybrid working models remain. These include the impact of remote working on innovation and collaboration, digital fatigue, and helping the workforce maintain a healthy work–life balance. Interventions to sustain remote work are under way, with 60 percent of respondents saying that their organizations are switching up performance-management processes and parameters to better match new ways of working, and 53 percent are realigning capabilities, such as through digital upskilling. Almost 60 percent of respondents are adding digital tools and infrastructure to improve hybrid working—more evidence that digital is a key enabler of SG&A transformations. Additionally, 51 percent of respondents are looking at workplace factors, such as reconfiguring their office spaces.

Given the productivity boost, and organizations starting to understand which measures best enable remote working, it is no surprise that organizations are actively looking to optimize their real-estate footprints—and are aspiring to an average of 20 percent savings through real-estate portfolio optimization. Indeed, most organizations have already started taking actions to modify their locations. About three in five executives are optimizing their real-estate strategy for flexible working models, employee engagement, and environmental, social, and governance (ESG) impact. They’re using a range of measures to do so, including letting leases expire, renegotiating lease terms, or implementing flexible desk arrangements (Exhibit 3).

Organizations that are aiming high have already started taking steps to  optimize their real-estate footprints.
We strive to provide individuals with disabilities equal access to our website. If you would like information about this content we will be happy to work with you. Please email us at: McKinsey_Website_Accessibility@mckinsey.com

Outsourcing: Accelerating and going global

The most striking insight from this survey is that more than 80 percent of organizations accelerated their outsourcing and use of shared-service centers (SSCs) during the pandemic. Moreover, they say that over the next one to two years, they plan to continue consolidating operations and globalizing through further expanded SSCs (Exhibit 4).

The next chapter in shared-services evolution is acceleration: geographic, operational, and digital.
We strive to provide individuals with disabilities equal access to our website. If you would like information about this content we will be happy to work with you. Please email us at: McKinsey_Website_Accessibility@mckinsey.com

The gig economy may also have a role to play here, adding capacity and flexibility when it’s needed, and giving companies a competitive edge in a challenging labor market. In parallel, SSCs are continuing to evolve—evidenced by a significant focus on developing and accelerating new SSC capabilities including process excellence, analytics, agile, and digital agendas more broadly.

Winning through digitization

Unsurprisingly, executives are unanimous (98 percent) in their belief that digital technology is important to improve the effectiveness and efficiency of G&A. As a result, 91 percent of executives surveyed are planning to maintain or increase investment in digital technology in coming years—further emphasizing the focus on digital actions to enable SG&A transformation and productivity.

However, while embarking on a digital journey seems like table stakes, leading organizations also focus on the success factors that drive effective implementation. Of those enterprises that have already digitized, only four in ten organizations actually delivered value from tech-enabled SG&A processes. The drivers of their success have been understanding sources of value, creating a robust road map, and successfully aligning business and IT. Unfortunately, six out of ten organizations have yet to capture the value available because of the lack of a robust road map aligning business and IT objectives (Exhibit 5).

Only four in ten companies deliver value from tech-enabled G&A. What makes them different?
We strive to provide individuals with disabilities equal access to our website. If you would like information about this content we will be happy to work with you. Please email us at: McKinsey_Website_Accessibility@mckinsey.com

Digital investment priorities evolve

Enabling growth is now, and appears set to remain, the number-one priority behind pursuing digital investments in G&A functions. Respondents nevertheless report shifts in prioritization, with cost-related topics such as demand management and direct spend falling in importance (with the notable exception of functional-process cost efficiency). However, new products for the business, customer experience, and process effectiveness are viewed as crucial for success (Exhibit 6).

Priorities for digital investment in G&A change over time.
We strive to provide individuals with disabilities equal access to our website. If you would like information about this content we will be happy to work with you. Please email us at: McKinsey_Website_Accessibility@mckinsey.com

Across industries and functions, the COVID-19 pandemic has accelerated the adoption of digital solutions and new ways of working. Companies’ SG&A functions are no exception, and investments to enable new solutions through capability building, or to drive the future of the office through remote and hybrid working, are increasing.

Not only do SG&A leaders recognize the need for digital adoption, but many of them have also accelerated their own programs in the past year, with particular emphasis on outsourcing and shared services. Irrespective of whether your organization is transitioning to a different working model, improving the effectiveness of an SSC, or simply transforming SG&A, digital will have a major role to play in delivering impact in the development of SG&A functions—and supporting a future that’s centered on growth.

Explore a career with us

Related Articles