Senior managers and the boards that oversee them are struggling to meet investors' twin demands of higher growth and better margins.
This isn’t an easy task at the best of times but the fact that the budgets for many general and administrative (G&A) functions (IT, HR, etc.) are increasing at a greater rate than revenues means many difficult conversations for the world’s CFOs.
Two novel factors account for the rises in G&A spend.
- Organisations are increasingly international. The average large firm now operates in 25 countries, transacts in 20 currencies, supports eight different languages internally and adds a new country as a source of revenue annually. Geographical expansion means more ad-hoc work by central G&A functions to support local market needs.
- G&A work is more bespoke. Traditionally, most G&A work has been “rules-based”: a series of routine activities that must be completed accurately, on time, and at minimal cost. But, as CEB data show, rules-based work has dipped below 50% of the overall requirement, and will fall further. G&A functions now undertake more “judgment based” work that is usually more valuable to the business but also more bespoke, ad-hoc, and expensive.
The traditional techniques used to control overhead expenses work well with rules-based work but not for judgment-based activities. As most corporate functions change, CFOs must change cost management practices also.
The key is to categorise overhead costs by type of work done (rules-based or judgment-based). Successful finance teams do this in three ways.
- Increase cost transparency with internal customers: Some companies have created G&A service catalogues to evaluate G&A spend and align the supply of judgment-based work with service demand (or lack of it).
- Differentiate G&A budgeting models based on the nature of work: Traditional G&A budgeting models are based on last year’s spend and so lack precision given the constant fluctuation in demand for G&A services. Leading companies determine in advance where changes in complexity will affect G&A workloads, and budget according to the amount of new complexity.
- Think cost benefit, not cost control: Most judgment-based work is discretionary. Therefore, benchmarking how efficiently this work is done doesn’t answer the bigger question as to whether this is the right type of work to drive the business forward.
Ultimately, everyone in an organisation—from boardroom to backroom—should understand that G&A functions have become more like professional services firms than customer service centres; cost management must change accordingly.
Read our whitepaper for more detail on the shift to judgment-based work in the world's corporate functions and the ramifications for CFOs and the finance function
