Daily Archives: August 8, 2006

It Pays to be World Class (in Cost Reduction)

The Hackett Group recently held their 2006 Best Practices conference where participants were able to hear speakers from a number of leading global companies, including Alcoa, Citigroup, Constellation Energy, HP, Greif, Nissan and U. S. Steel. I was not fortunate enough to attend this conference, so I’ve been searching for press and review articles on it since The Hackett Group is known for its top notch research.

My searches have not been in vain, and I have been lucky enough to stumble onto a few articles, including World-Class Companies Move Beyond Cost in G&A in Response to Globalization by the Editorial Staff of Supply & Demand Chain Executive. This article in particular, which starts off by noting that Globalization is creating new challenges and opportunities for today’s companies, and one way world-class executives are responding is by demanding that their general and administrative (G&A) operations deliver more than just the lowest cost, received my full attention because it revealed some research statistics from Hackett’s upcoming 2006 Book of Numbers.

In particular, the article echoes Hackett’s finding that world-class companies are now spending 40 percent less than typical companies overall on SG&A (9 percent of revenue versus 15 percent) and as a result generate $60 million in savings/billion of revenue. By function, they spend 45 percent less on finance, 13 percent less on HR, 25 percent less on procurement and 7 percent more on IT. That’s six million of savings for every hundred million of spend – and that’s significant! Some companies are saving more than this. For example, U.S. Steel, which Hackett has determined to have a world-class finance operation, has achieved a reduction of 30 percent in its administrative workforce and annual acquisition synergies in excess of $400 million over the last 3 years. Moreover, that could be a 30% redeployment of resources to strategic sourcing to allow for more advanced negotiation strategies and analyses in more high dollar buys. When you consider that last year Aberdeen Group found that the application of optimization tools to analyze total costs, and of flexible bidding functionality to uncover creative supplier solutions has enabled early adopters to identify an average incremental savings of 12% above those that basic, price-focused auctions alone have generated in its Success Strategies in Advanced Sourcing and Negotiations: Optimizing Total Costs and Total Value for the Next Wave of e-Sourcing Savings report, the potential for significant savings in world-class procurement and sourcing organizations becomes phenomenal.

Moreover, despite what you may hear, the road to riches, or in this case, to being a world class company isn’t paved with rocket science equations that need to be solved at each step. I think the quote from Rob Zimmerman, Vice President of Corporate Business Development of Greif, Inc, says it best. When the transformation [to improve our operating efficiencies, cost structure, procurement activities, and working capital] began, we had little visibility into our customer profitability, were far from being the lowest cost producer and dead last in working capital compared to our peer group … but by standardizing processes, gaining visibility into our data, creating the right analytical tools and building the capabilities of our employees, we’ve been able to surpass some of our original financial targets“. In other words, even though the road to success entails a lot of hard work, it’s within the grasp of every company willing to put in the effort (and bring in the right people at the right time to help them get there).