Capitalizing on untapped SSG&A levers
As companies grapple with a series of crises (e.g., COVID-19, war in Ukraine) and disruptive changes (e.g., transition to e-mobility, energy revolution, sharp increase of interest rates), they face cost inflation (regarding materials, logistics, energy, wages), price pressure, rising financing costs, and a prospective economic downturn. Unable to pass on all cost increases to customers, many businesses are witnessing eroding margins and profits.
To counter these disruptive forces, many companies have addressed direct costs through cost-cutting programs. However, to defend and enhance margins long-term, additional cost structures warrant critical evaluation. Structural, Selling, General & Administrative Expenses (SSG&A) often offer up to 35% savings potential, but remain frequently untapped. Optimizing SSG&A functions such as purchasing, finance, HR, and marketing, poses major challenges for many companies, and realizing cost reductions in these areas often take longer than in other cost categories.
This article provides a brief overview of core SSG&A cost reduction levers, typical implementation challenges, and how to overcome them.
Three pillars to unlock your SSG&A potential
To unlock SSG&A cost improvement potential, we recommend building an SSG&A optimization strategy based on three pillars: (1) Stop all "non- and low-value add" activities ("STOP"); (2) Simplify structures and processes ("SIMPLIFY"); and (3) Drive digitization and automation, and question indirect material spend ("PERFORM").
Core levers of SSG&A cost reduction
1. STOP: Eliminate "non- and low-value add"
Companies often accumulate unnecessary processes and reports over time. However, instead of eliminating outdated procedures and documentation, new ones are often added on top. As a result, companies become burdened with many redundant reports and processes that are no longer required.
Assessing the nature, frequency, and detail of SSG&A functions’ outputs, including processes, reports/documentation, and service level agreements, can help identify improvement areas and stop "non- and low-value add" activities. Moreover, focusing corporate governance structures, decision-making processes and participant/recipient groups on core aspects can further streamline operations.
2. SIMPLIFY: Lean organization, focused outsourcing, and efficient processes
As a result of economic growth in recent years, many companies have prioritized expansion over developing efficient structures, often leading to complex, inefficient, and costly organizations. Problem areas may include redundancies, low spans of control, inconsistent hierarchy levels, as well as insufficient standardization and automation of processes. Streamlining the organization, e.g., through harmonization of spans of control, reduction of management levels, bundling, shared services, relocation and off-/nearshoring, offers significant potential.
Moving transactional activities of support functions to shared service centers and externalizing non-core processes to specialized partners (e.g., payroll, travel expense accounting, resource planning) can yield additional improvement opportunities. Moreover, simplifying complex processes, applying lean best practices and state-of-the-art reference models, can enhance efficiency. Common areas for simplification are the removal of redundant process steps, the reduction of feedback loops, eliminating the request or generation of unnecessary data, as well as the prevention of frequent mistakes.
3. PERFORM: Digitalization, automatization, and reduction of indirect spend
Another major lever to reduce SSG&A costs is the automation of recurring processes/reports and increasing the degree of digitalization. IT solutions to improve and eliminate 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 automating repetitive activities according to a defined standard. In addition, self-service functionality can be offered to decrease workload and costs (e.g., HR master data, benefits). Examining and streamlining the cross-departmental IT architecture (e.g., removing software duplications, implementing an overarching software application instead of many single software solutions) not only reduces IT costs but also complexity.
Building on the three pillars "STOP", "SIMPLIFY", and "PERFORM" to optimize SSG&A typically leads to cost savings of up to 35% across different functions for both personnel and non-personnel costs.
Mastering SSG&A optimization challenges
The successful transformation of SSG&A functions is often hindered by their indirect nature, the long lead time for improvement realization, and numerous obstacles including measurability, complexity, unclear priorities, resistance from employees and works councils as well as historically entrenched structures.
To overcome these challenges and successfully leverage SSG&A opportunities, there are several key success factors to consider:
- Holistic management buy-in and top-down objectives supported by a “burning platform” message
- Cross-functional approaches at the working level fostering best practice sharing across departments, regions, or business units
- Open and fundamental questioning of existing structures by those involved
- Building employees’ trust in the measures through training, pooling, and incentive programs. A seamless concept helps to transform existing structures (e.g., employment guarantees, pay scale groupings) into a future target state
As companies confront a multitude of disruptive developments, defending margins and reassessing cost structures become imperative.
Transforming SSG&A functions presents a prime lever to optimize an organization’s overall cost structure. The challenge lies in addressing the root cause, (1) eliminating "no-value add" processes ("STOP"), (2) simplifying structures and processes ("SIMPLIFY"), and (3) advancing digitalization and automation, as well as indirect cost reduction ("PERFORM").
If you have further questions regarding cost reduction in the SSG&A functions, please feel free to contact the authors of this blog post. By proactively assessing and implementing these strategies, your organization can navigate disruptive times more effectively and maintain a competitive edge in an ever-changing business landscape.