The Covid-19 pandemic has shifted the path of many businesses. While some companies are enjoying a boom, many others are experiencing significant distress. In this difficult and uncertain environment, executives report increased pressure to reduce costs in HR, finance, and other general and administrative (G&A) functions. For example, a McKinsey survey of more than 300 global CxOs found that cost-reduction targets for G&A functions increased by up to five percentage points between the second and third of quarters of 2020.
That survey also showed that most companies were still pursuing a one-size-fits-all approach to G&A cost management—a finding reinforced by research conducted in early 2021. CxOs reported cost-reduction targets of 10 to 20 percent across all G&A functions, and 80 percent said the dispersion between the targets for individual functions was less than 20 percent.
These findings suggest that companies may not be learning the lessons of the past. In the 2008 financial crisis, blanket cost-reduction measures ended up reducing the effectiveness of already-efficient functions, or harming organizations’ ability to achieve their strategic objectives.
So how can a business make smarter resource-allocation decisions in G&A? Part of the answer lies in recognizing that a company’s growth trajectory has a significant impact on the optimum size and makeup of individual functions. To examine this effect, we took an in-depth look at the HR and finance functions of around 300 manufacturing companies following different long-term growth paths (see sidebar, “Our methodology”).
Exhibit 1 summarizes our top-level findings. It shows the average “improvement opportunity,” or the difference between the size of the HR and finance functions in the companies we analyzed and their best-performing peers. All of the groups in our survey had the potential to improve their efficiency, with significant gaps to the top performers in their sectors. We were most interested, however, in the differences between the shrinking, stable, and growing groups.
As the chart shows, the two functions exhibit opposing effects. Among shrinking companies, the HR function was 19 percent more efficient than in the stable and growing groups. But the finance function was a different story: at shrinking companies, it was 13 percent less efficient than in stable ones, and some 25 percent less efficient than in growing group.
That finding makes intuitive sense. Shrinking companies are less likely to need to recruit new staff, and are more likely to reduce their headcount. Over the long term, that leads to lower demand for recruitment, staffing, and personnel-development resources. In finance, by contrast, falling profits might increase the need for cash-flow control, planning and budgeting, and expense-policy reinforcement.
A deeper dive into the data reveals a more nuanced story. In a second analytical step, we looked at the makeup of the two functions within companies. We compared the relative numbers of strategic roles, such as talent sourcing or tax planning, and operational roles, such as payroll or invoice processing. Once again, we found important differences between functions.
A split in HR: Shrinking operational roles
“Strategic” HR functions proved to be relatively similar across all three groups of companies in our analysis, with shrinking companies only slightly smaller, and growing companies slightly larger than their stable counterparts (Exhibit 2). That’s unsurprising: strategic HR teams always have work to do in adjusting an organization’s workforce to its changing needs. The nature of that work will change, however, with shrinking companies seeking to optimize the performance of their existing workforces, while growing ones focus on finding ways to acquire talent and fill emerging capability gaps.
Operational HR functions in shrinking companies, by contrast, are significantly smaller than those in stable companies. There are two likely drivers here. First, operational HR staffing demand correlates both to the organization’s overall level of employment and to its rate of growth. For example, the talent-sourcing and recruiting function in the shrinking company group was 35 percent smaller than the equivalent function in stable or growing companies. Second, the nature of operational HR activities makes them primary targets for optimization levers such as centralization or automation.
Finance function: A premium for strategy
Different growth trajectories had the opposite effect on strategic and operational roles in finance. Our analysis revealed only small differences between the relative numbers of operational roles at shrinking, stable, and growing companies. Shrinking companies, however, invested more than 50 percent more resources in strategic-finance activities than did their stable or growing peers (Exhibit 3).
In shrinking companies, demand for higher levels of strategic finance-function support could be driven by a number of factors. Thoughtful forecasting and budgeting, diligent P&L statement analysis, and strict internal reporting policies will all increase the workload of the finance department. And companies under financial stress also are more likely to need to minimize the cost of capital by optimizing debt-equity structures and better managing the timing of cash inflows and outflows, both of which are the responsibility of treasury teams.
Demand for operational tasks in finance, by contrast, tends to remain fairly stable whether a company is growing, stable, or shrinking. At one major chemicals company, for example, financial distress forced a large-scale cost-cutting effort across the business. Managers realized that there were few opportunities for savings in the finance organization’s shared-service center, however, since the work was driven by the differing requirements of the various regions in which it operated.
The case for tailoring cost management
This analysis reinforces the case for a targeted approach to cost management in G&A functions. Rather than imposing across-the-board savings targets, companies would likely do better to consider the impact of their short- and medium-term growth trajectory on demand for the services those functions provide. And the same reasoning applies at a more granular level. Within functions, different growth patterns will affect the demand for strategic and operational resources in different ways.
Furthermore, our analysis reveals standard practice, not best practice. Shrinking companies may need more strategic resources in their finance functions because there is more work to do. Or it may be because they are not flexible enough to deploy resources where they are needed most. Similarly, stable and growing companies might have larger HR functions because they lose focus on efficiency and cost discipline.
Every company, regardless of its growth trajectory, can aim to improve the effectiveness of G&A functions as well as their efficiency. That requires the use of more sophisticated levers than top-down cost targets. Ramping up automation and digitization, for example, allows G&A tasks that are more transactional to be completed using self-service portals with little human intervention. Equipping strategic staff with advanced-analytics tools—and the skills to use them—helps the existing workforce generate more value, more rapidly.
Those levers can be easy to forget when an organization focuses exclusively on tough G&A cost targets. The struggling chemicals player we described above avoided cuts to its operational finance function, but leaders were unable to secure investment in a digitization project that they knew would deliver significant long-term efficiency improvements.
When they understand that demand for some roles will rise while it falls elsewhere, companies can also reskill or upskill existing staff to meet emerging needs. That approach retains experience and knowledge within the business, and moving personnel between functions can lead to improved mutual understanding and more effective cross-functional collaboration. High-performing G&A functions are increasingly adopting agile organizational approaches, with pools of specialist staff who flow to wherever demand is highest, forming cross-functional teams to deliver projects that address the highest priorities of the business.
Benchmarking reveals evidence of nuanced decisions in how businesses structure their G&A functions depending on their strategic growth needs. These findings argue for flexibility and strategic thought in translating financial strategies into frontline operations.