Consulting Playbook: A Smarter Growth Approach in Reducing SG&A Costs
The Consulting Playbook, Edition #12
A leader in the Commodities Market, despite experiencing double digit growth needed an expert’s advice as their SG&A expenses grew at a proportionate rate as well. This fact was alarming as their major competitors successfully reduced their SG&A expenses.
The organization decided to engage a consulting firm to help analyze the reasons for the SG&A increase, and make the shift in breaking the cycle, improve SG&A efficiency and control, by finding the main drivers behind the higher SG&A costs.
Top Down and Bottom Up Approach Successfully Applied
The Strategic Approach of the Consultant centered on establishing a competition benchmark, setting up a clear cost baseline and proposing sizing down levers. The top-down method was combined with bottom-up approach to fully identify internal gaps, set new goals, and explore new savings opportunities. Also, business performance specific levers were identified, with the ultimate goal to reduce costs, and a new plan was designed for implementation with a full sizing model.
The levers analyzed consisted in a combination of the following: adjusting service levels and implementing demand management, centralizing indirect purchasing, reviewing the make or buy for SG&A scope, consolidating for scale and implementing shared service centers, offshoring some activities, renegotiating contracts, optimizing the organizational structure, rationalizing the footprint as well as some working capital measures.
The major impact on the organization produced the following results:
The organization significantly improved its understanding of SG&A cost evolutions and put in place the necessary actions to progressively reduce the costs escalation, place costs under control and ultimately achieve a cost of reduction of approximately 20% on run rate vs their strategic plan. In addition, the findings pointed out a bigger issue – a clear sign of growth crisis.
Part of the SG&A costs savings were allocated to growth initiatives resulting in an EBITDA growth at twice the market rate.
How Management Mistakes Can Hurt SG&A Costs Savings?
All businesses are concerned with strategy and the best approach to reducing SG&A costs while boosting profitability. We would like to take a brief look at the mistakes many businesses make, and common things they overlook.
There are several factors that can influence costs, such as political events, economic uncertainty, company’s financial situation, and many more. Management should be looking at short-term and long-term measures to achieve desired results.
Mistake #1 – Unjustified Large Cuts or Increases in Costs
This approach is a bit tricky and often overlooked. In a period of recession for example, companies will cut cost to preserve profit margin, however in recovery they will not make the necessary adjustments to boost growth. It’s important for executives to be very selective which expenses to cut without hurting sales volumes. Being strategic about across-the-board cost cuts, and identifying costs that don’t promote growth, must be a top priority.
Mistake #2 – Broad Cost Cut Mandate
Applying a broad cost mandate can lead to disappointing results. What often happens is that if all costs are treated equal without differentiating their effect on growth, costs like procurement can be affected. The smarter approach would be to manage SF&A specifically in relation to their importance to top-line and bottom-line. Flexibility and better understanding of types of costs, will be very beneficial.
Mistake #3 – Benchmarking Approach
The Benchmarking approach has its benefits; however, it also has some minuses too. While it provides a solid basis to align by, it doesn’t determine accurately enough which costs to regulate for a long-term growth. Also, when benchmarking compare performance by company size and industry, it misses to identify the difference in strategy and the specific factors that affect growth and cost structure.
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About The Consulting Playbook
The Consulting Playbook is a collection of posts designed to offer insights into how businesses and their executives can utilize consulting as a strategic lever to boost performance. Each Consulting Playbook post is broken down into a few elements: Case Study, Additional Information regarding the technical application, and Additional Links related to the topic.