How can costs be cut while optimizing the added value of business and administrative functions (SG&A – Sales, General and Administration) through an optimal organization and allocation of resources?
SG&A reduction is often the primary lever for competitiveness plans, because it concerns indirect costs, which are perceived as less important for operations.
The advantages of a SG&A optimization plan are:
- Foreseeable, especially when it relates to structure, because the actions that need to be carried out are within the organization
- Accessible, whether it affects procurement optimization or organizational optimization
- High, because each gain is entirely translated into net income
Problems frequently encountered during SG&A optimization projects include:
- A plan that is restricted to the automatic application of benchmarks: external benchmarking provides perspective, but must be complemented by prior analysis of the opportunities for the functions concerned, the context (in particular the sector of activity), and the optimization levers
- A plan aimed solely at cutting costs without an assessment of the added value expected from the functions (for example, a reduction in procurement staff when the business wishes to launch a procurement rationalization plan)
- An exclusive focus on short-term efforts at the expense of sustainable gains
- Insufficient attention paid to change management, at the risk of the project stalling
Assessing and defining the organization’s vision represents an essential stage in a SG&A reduction plan. It leads to an examination of the opportunities and the value of sales and administrative functions compared to operational expectations. At this stage, the scope of the competitiveness program and the type of projects to be carried out are defined.
It is important to distinguish between variable costs and fixed costs to define the right target sizing for SG&A functions and identify optimization levers. For example, sizing the operational management control or the sales force has a strong relationship with the evolution of revenues. In contrast, sizing the back office is based on an analysis of costs before and after optimization.
After the assessment, and following the identification of optimization levers, the development of a transformation plan begins by determining the company’s level of ambition in terms of results and deadlines, and depends on:
- Urgency of the need for transformation, particularly in relation to the organization’s economic situation and competitive pressures
- Capacity and will to act quickly
- Gap between the current situation and the target
The transformation plan includes actions whose effects take place in different time-frames:
- Short term actions: for example, procurement optimization, which is often prioritized because it has the two-fold advantage of being relatively painless and having a significant impact in terms of net income:
- Provides a significant leverage on operating margins: a 5% reduction in costs can represent an improvement in margins equivalent to a 20% to 30% increase in turnover
- Very little in-house impact
- Medium term actions: for example, adaptation of the span of control or delayering (organizational simplification), whose social impacts are minimal and which are well received, particularly by labor
- Long term actions: for example, major organizational transformation such as the introduction of Shared Services, whose impact is important on both the social and organizational levels
It is good practice to generate gains through short-term actions in order to fund more structural actions that generate lasting gains.
At the execution stage, we identify five key factors of success:
- Giving meaning to the project
- Valorizing and validating a savings plan
- Commitment from all the decision-makers to achieve the objectives
- Anticipating constraints, particularly on the social level
- Introducing a system for monitoring savings and performance (FTE, costs, and outputs)
Argon Consulting’s support includes:
- An SG&A diagnostic test (benchmarking) and an insight into concrete optimizing levers as well as what they provide in terms of gains and accessibility. Projecting a vision of optimized structures and support functions
- Designing and managing the SG&A transformation plan in order to turn the levers into optimization projects and control their implementation
- Launching a “Lean Office” project, which involves rolling out a Lean approach for corporate and support functions in key processes
- Managing the SG&A by setting up a monitoring mechanism for SG&A performance, including the evolution of FTE (Full-time Equivalent), costs and key performance ratios