Capitalize on unused SSG&A levers
As companies struggle with a series of crises (e.g. COVID-19, war in Ukraine) and disruptive changes (e.g. transition to e-mobility, energy transition, sharp rise in interest rates), they are facing cost inflation (in terms of materials, logistics, energy, wages), price pressure, rising financing costs and an expected economic downturn.
As they are unable to pass on all cost increases to customers, many companies are faced with falling margins and profits.
To counteract these disruptive forces, many companies have addressed direct costs through cost reduction programs.
However, in order to defend and improve profit margins in the long term, additional cost structures need to be critically examined.
Structural, selling, general and administrative (SSG&A) costs often offer potential savings of up to 35%, but often remain untapped.
Optimizing SSG&A functions such as purchasing, finance, human resources and marketing is a major challenge for many companies, and it often takes longer to realize cost reductions in these areas than in other cost categories.
This article provides a brief overview of the most important levers for reducing costs in the areas of SSG&A, typical implementation challenges and how these can be overcome.
To unleash your cost improvement potential, we recommendan SSG&A optimization strategy based on three pillars:
STOP: Termination of all activities with little or no added value.
SIMPLIFY: Simplification of structures and processes.
PERFORM: Advancing digitalization and automation and scrutinizing indirect material expenditure.
These are the 3 most important levers for reducing SSG&A costs:
STOP:
Eliminate all “non-value and low value-added” activities
Companies often accumulate unnecessary processes and reports over time.
However, instead of eliminating outdated procedures and documentation, new ones are often added.
As a result, companies are burdened with many redundant reports and processes that are no longer needed.
Assessing the nature, frequency and detail of outputs from SSG&A functions, including processes, reporting/documentation and service level agreements, can help identify areas for improvement and stop ‘non-value adding’ activities.
In addition, focusing corporate governance structures, decision-making processes and participant/recipient groups on core aspects can lead to further streamlining of operations.
SIMPLIFY:
Lean organization, targeted outsourcing and efficient processes
As a result of economic growth in recent years, many companies have prioritized expansion over the development of efficient structures, which has often led to complex, inefficient and costly organizations.
Problem areas include redundancies, low spans of control, inconsistent levels of hierarchy and insufficient standardization and automation of processes.
Streamlining the organization, e.g. by harmonizing spans of control, reducing management levels, bundling, shared services, relocation and off-/nearshoring, offers considerable potential.
Shifting transactional activities of support functions to shared service centers and outsourcing non-core processes to specialized partners (e.g. payroll, travel expense accounting, resource planning) can offer additional opportunities for improvement.
Furthermore, simplifying complex processes using lean best practices and modern reference models can increase efficiency.
Common areas for simplification include eliminating redundant process steps, reducing feedback loops, eliminating the request or generation of unnecessary data and avoiding common errors.
PERFORM:
Digitization, automation and reduction of indirect expenses
Another important lever for reducing SSG&A costs is the automation of recurring processes/reports and increasing the level of digitalization.
IT solutions for improving and eliminating unnecessary process steps include the use of artificial intelligence (AI) in service processes and robotic process automation (RPA), for example in purchase-to-pay (P2P) processes or the automation of repetitive activities according to a defined standard.
In addition, self-service functions can be offered to reduce workload and costs (e.g. HR master data, social benefits).
Reviewing and streamlining the cross-departmental IT architecture (e.g. eliminating software duplication, implementing a comprehensive software application instead of many individual software solutions) not only reduces IT costs, but also complexity.
Building on the three pillars STOP, SIMPLIFY and PERFORM , the optimization of SSG&A generally leads to cost savings of up to 35% across various functions, both in terms of personnel and material costs.
Mastering the challenges of SSG&A optimization
The successful transformation of SSG&A functions is often hindered by their indirect nature, the long lead time for implementing improvements and numerous obstacles such as measurability, complexity, unclear priorities, resistance from employees and works councils, and historically entrenched structures.
In order to overcome these challenges and successfully exploit the opportunities of SSG&A, several important success factors must be taken into account:
- Holistic management buy-in and top-down objectives, supported by a “burning platform” message
- Cross-functional approaches at the working level that promote the exchange of best practices across departments, regions or business units
- Open and fundamental questioning of existing structures by those involved
- Building employee confidence in the measures through training, pooling and incentive programs.
A seamless concept helps to transfer existing structures (e.g. employment guarantees, pay scale classifications) into a future target state
Summarized
As companies are confronted with a multitude of disruptive developments, defending margins and reassessing cost structures is becoming imperative.
The redesign of SSG&A functions is an important lever for optimizing the overall cost structure of a company.
The challenge is to address the root causes, (1) eliminate non-value-adding processes (“STOP”), (2) simplify structures and processes (“SIMPLIFY”) and (3) drive digitalization and automation as well as the reduction of indirect costs (“PERFORM”).
If you have further questions about cost reduction in the SSG&A functions, please feel free to contact Futurus Management Partners, Dr. Gros.
By proactively evaluating and implementing these strategies, your organization can more effectively navigate disruptive times and maintain a competitive advantage in an ever-changing business landscape.
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