Often-Overlooked Ways to Reduce Corporate Costs
- Published: Thursday, April 20, 2023 07:21
By Sean Hickey, Senior Consultant
Many corporate leaders are always looking to improve costs while improving organizational effectiveness. Many times they attempt to achieve this by reactively cutting headcount across the board by X%, with top-down mandated layoffs. In the process they usually harm organizational effectiveness, decrease service levels and increase finance process risk.
The good news is there are better ways to reduce corporate costs. Here are some ideas that, as a CFO partnering with your CIO, you should consider spearheading…
Increase the average management span of control
Take a close look at the ratio of managers to individual contributors in each department. Many companies have on average one manager for every five employees. This is an expensive and needlessly narrow management span of control that is not cost competitive.
A more effective and cost competitive span of control is one manager for every 15 to 20 individual contributors. Moving to this ratio will reduce the levels of management within your company, increase morale by reducing micromanagement and eliminate time wasted on non-value-added activities such as status reports or unnecessary meetings.
Yes, your staff is likely to be in disbelief when you propose this, because they will recognize the threat that they may lose their jobs or have to take on increased workloads. The reality is some managers will be let go. Others will move into individual contributor roles, which will afford the opportunity to cancel open hiring requisitions or the need to get new hiring requisitions approved. At the same time, most of your frontline individual contributors will be energized, because they will be freed up to deliver to the performance objectives in their job descriptions.
I have gone through this process many times. Each time I have cut at least 20% out of the cost structure just by addressing this aspect of organizational alignment and structure. Twenty percent. This isn’t just low-hanging fruit. It’s fruit that’s lying on the ground waiting to be picked up.
These cost reductions can either be taken to the bottom line or used to invest in improved process and IT capabilities, especially to create employee self-service capabilities. For example, employees are best served by being entirely self-sufficient to get things done, such as recording their time for payroll, requesting reimbursement for travel expenses or updating their W-2 forms.
Make any needed layoffs surgical, not across-the-board
A big problem with the “we’re laying off X% of employees in every department” approach is that it focuses on headcount instead of organizational effectiveness. With the across-the-board approach you end up eliminating people who are actually doing the work. Once they’re gone, the work does not get done, and the risks increase, especially if those people are managing processes that require manual controls or spreadsheets.
A better way to reduce immediate costs without increasing long-term costs in the process is to take a surgical approach to layoffs. Yes, this involves some tough decisions about who really provides value and who does not…but making tough decisions is part of a leader’s job.
Ensure your own functions are cost competitive
When organizations rely on layoffs to achieve cost savings, many corporate leaders will not take the initiative to make cuts in other areas before the layoffs, for fear of having to double cut. In fact, many leaders will continue to hire and unnecessarily spend to budget based on the logic that the coming top-down cuts and layoffs will be applied to historic expense run rates.
This is where benchmarking comes in. You should use third party benchmarking data for your industry to external benchmark your operational and IT costs. Start with your own finance and IT operations to understand how your organization stacks up against industry average and world class results. Common benchmarking categories for finance include accounting transaction processing and financial planning reporting and analysis. For IT, it is the cost of maintaining the current business IT application environment.
Benchmarking, which is an assessment of your current state, is usually an eye-opener. If your costs are higher than that of other companies in your industry, it provides objective insight for identifying immediate opportunities for cost reductions. If your costs are much lower than average, benchmarking can show you where your organization may be under-invested, especially if you have an ineffective IT application environment. After you have implemented this approach with the finance and IT functions, replicate it with all of the other corporate functions, too.
Need help identifying ways to reduce corporate costs…and then putting these tactics in place? Give us a call. This is another way in which CIO Professional Services’ assessment-based methodology can help you.
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About Sean Hickey
Sean Hickey is a business process improvement leader and business application implementation expert with 25+ years of industry and consulting experience developing and implementing transformative business strategies. Clients appreciate his ability to develop the “big picture” strategy and then drive it down to executable tactics for realizing both immediate and sustainable results.
About CIO Professional Services
Based in the San Francisco Bay area, CIO Professional Services LLC is a top-rated Information Technology (IT) consulting firm focused on integrating Business and Information Technology. Our consultants are all hands-on executives who are veteran CIOs and Partners of Big 4 consulting firms. Companies come to us seeking assistance with their information technology strategy as well as for interim or fractional CIO / CTOs, and negotiation and program management/project rescue assistance.