It is becoming increasingly difficult for companies to follow their strategic priorities while ensuring sustainable, long-term profitability growth. Although the reasons for this are multifaceted, it is clear that businesses have faced a greater number of challenges in recent months, such as the ongoing shortage of skilled workers, rising personnel costs, as well as higher interest rates and inflation. Matters are made even more difficult by increasingly fragile global supply chains, limited raw materials with inconsistent availability and, of course, the mounting geopolitical challenges facing the global community.
In order for companies to remain competitive in this environment, it is imperative to ensure that general and administrative (G&A) functions are lean and efficient. One important aspect in achieving this is known as “G&A Rightsizing”: the optimization of organizational structures and cost reduction within a company’s administration and management structures, particularly its headquarters. KPMG’s Elevate approach allows companies to identify, quantify and implement the changes which have the greatest potential to optimize support functions. In so doing, KPMG can help clients harmonize and standardize their processes whilst minimizing costs and inefficient steps. This leads to improved profitability and greater capacity to concentrate on the company’s strategic priorities.
KPMG’s Elevate approach to G&A Rightsizing comprises four steps:
1. Define the baseline
This relates to the detailed analysis of headcount and financial data per function, thus enabling transparency of the organizational structure. A set G&A baseline is the foundation which allows companies to identify optimization potential and define specific goals to achieve this.
2. Compare to benchmarks
There are two potential types of benchmarking analysis which can be carried out. Competitor benchmarking allows the company’s own G&A costs to be compared to its peers. Functional benchmarking, by contrast, refers to the comparison of individual metrics (e.g., the costs of the finance function) against industry benchmarks. The results can then be used to ascertain opportunities to optimize processes in the company.
3. Analyze spans and layers
The spans and layers analysis enables the development of an ideal organizational structure. This includes analyzing the number of employees per manager (span of control or “spans”) and the number of management levels within the company (layers). In an ideal corporate structure, the span of control per manager should be between 9 and 14 employees. At the same time, the number of management levels should be no higher than necessary, although, in our experience, this is not always the case. Whilst the layers of management are often too high, the span of control per manager is normally too low.
4. Prepare zero-based budgeting
This approach is an important step in optimizing G&A functions, as it enables long-term cost savings and redirection of existing resources through the elimination of unprofitable workflows. To implement the methodology, you must first ask yourself the following question: “how would this function be set up if it did not yet exist?” The so-called “green field approach” involves a comprehensive redesign of the corporate structure. Once the ideal function has been fully developed, it is compared with the current structure so as to highlight the differences and identify savings potential.
Dr. Tim Berger
Partner, Advisory, Strategy Group
KPMG AG Wirtschaftsprüfungsgesellschaft
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