How top managers focus on SG&A to create competitive advantage

SG&A has been investigated for three decades in detail now and might well look a little boring but still some companies are doing a much better job here than others. Recent research confirms SG&A optimization remains one of the decisive levers to create competitive advantage: a European-wide study with 1.254 companies has shown that poor performers (3. quartile) lose around 8% EBIT-points on good performers (1st quartile) and average performers (mean) still around 5%.

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Knowing that SG&A have been addressed over the years with multiple projects on headcount reduction, management span, etc. and that transparent benchmarks are publicly available in order to set reachable targets, the performance gaps seem totally incomprehensible.

In fact there are three reasons explaining why performance gaps are still existing:

  • Top performers address SG&A external cost with effective demand management (travel, fleet, IT, office equipment, office material, etc.) and not only headcount costs (management span, shared services, etc.). Answer first is: the indirect procurement department takes care of it. Second look shows that unit costs are an indirect procurement topic but total annual spend and thus the organizational demand is a financial budgeting topic. Analyzing traditional financial budgeting top performers have found an answer to fix organizational demand at best-in-class benchmarking standards and keep employees from emptying their budgets at year-end. To provide an almost caricatured example: top performers also address the number of pencils used per capita and not only the cost of one pencil.
  • Top performers address SG&A optimization even in sound economic times. Usually, SG&A is a typical stormy weather candidate with unpopular head-count reduction programs and standardized budget cuts (“-10% on everything”). Nevertheless, especially in these good times SG&A tends to increase heavily. Effective demand management does not encounter organizational resistance even in good times and guarantees additional savings even when the weather is good.
  • Top performers create a motivational cost consciousness culture. The cultural aspect has been largely underestimated when it comes to SG&A optimization. Traditional headcount reduction programs have a huge negative cultural impact and savings effects have generally been compensated few years later. On the contrary, optimizing SG&A costs by adapting the organizational demand to its real needs is a positive action with positive cultural impact.

Hence, even though the SG&A topic might look boring and totally explored from the outside, there are still important savings potentials which most companies have not tapped as they concentrate on traditional levers. As the SG&A leverage is really important, it might be thoughtful to spend a little time even after all these years of optimization to investigate the potentials that still exist in your organization.

Marc Staudenmayer, Senior Partner, Advancy

Further information at www.advancy.de