Traditional thinking around corporate business models is changing. In this year’s AlixPartners Disruption Index, 94% of the 3,000+ executives we spoke to told us that their business models must change within the next three years in order to respond to the magnitude and frequency of disruption that their businesses face.
What’s more, 57% of executives said they were worried that their company was not adapting fast enough to the pace of change, and with 72% of CEOs stating they are worried about losing their jobs due to disruption, it is clear that organizational transformation is imperative.
The ‘fiction of scale’ has given rise to trends of increasing consolidation and centralization of diverse operating company portfolios. Operational decision-making has been entrusted to distant, bloated corporate and regional structures, shifting significantly away from end customers and marketplaces. As a result, putting a finger on the pulse of business health and evolving consumer preferences becomes more challenging, with these structures sacrificing efficiency, accountability and agility in the process – three business characteristics that are so critical in such volatile times.
The search for synergies and enduring cost benefits
As corporate operating models evolve, companies are facing greater scrutiny to drive real operating model transformation and demonstrate the measurable benefits to EBIT – rather than simply shuffling the pieces.
Many companies are now re-evaluating their operating models, turning to a solution that drives greater end-to-end autonomy within operating units and – to varying degrees of success – reduces the costs of their central functions. The emergence of new technologies can also facilitate the realization of scale through different measures (AI, tools, virtual collaboration, outsourcing specialists), all presenting viable alternatives to traditional centralization and shared services located in low-cost countries, although these opportunities are often untapped.
Initiatives in HR, finance, legal, communications and IT all aim to leverage synergies and achieve economies of scale by merging business units or sites. Outsourcing to shared service centers or third parties, for example, are regularly identified as the way forward.
However, the expectations of these efficiency programs often fall short: Costs are only reduced once, but then proceed to rise again. Synergies are not leveraged, and economies of scale are not realized because processes are not standardized. Moreover, overlapping activities between central functions and functions within the business units and national companies have not been eliminated.
Sustainable and measurable increase in efficiency and performance of central functions
Large conglomerates and corporates are now casting their gaze to companies like Danaher as case examples of how to drive ‘efficiency through accountability’ and create ‘Lean Corporate’ structures to drive cost savings.
The goal of ‘Lean Corporate’ is to clearly define the accountability of the business units for their markets, employees, and costs, allowing the corporate headquarters to focus purely on group tasks and governance.
To achieve this, the Lean Corporate approach first defines the role of the central functions in their interactions with the corresponding functions in the business units and national companies. The various responsibilities (meaning responsibility combined with accountability) are defined for all essential activities, thus eliminating overlaps and duplication.
Activities, the responsibility for them and the cost of delivery are then divided into:
Central: Standards and tasks that are defined and performed once by corporate headquarters.
Shared: Transactional activities that can be unified or similarly performed for multiple business units.
Specific: Business unit-specific activities that have no overlap with other business units and are performed without corporate headquarters involvement.
For full cost accountability – based on the real need and affordability by the respective business units – the business units perform their "Specific" support activities themselves and thus bear the full costs.
The "Shared" services are commissioned based on a service catalogue and paid for as they are used. The costs for these must be measured against external providers, and annual efficiency and cost reduction targets must be agreed. The remaining true core activities of corporate headquarters ("Central") are focused on group-level and corporate governance activities and should ideally be so small that they do not need to be reallocated, or at least are not taken into account for the performance assessment of the business units.
For more detail on the Lean Corporate approach, you can listen to our (German language) "When It Really Matters" podcast and learn how we led such a transformation from detailed design through badge level implementation, saving several hundred million Euros in costs (net effect) within 12 months and completely eliminated allocations from corporate headquarters to the business units.