This post is part of the 33 Ways to Amplify Your Profit Quickly.
We all have seen it. Highly efficient company with high operating margin but scanty EBITDA, simply because of the burden of high overheads. If unchecked, the overheads tend to increase year on year, until they become unbearable.
Fortunately, there are often many efficiencies in overheads – making it one of the easy levers of profit amplification.
Quickly Delayer Your Organization.
Slim Down Your Support Functions.
Reduce Your Cost per FTE.
Reduce Headcount.
1. Quickly Delayer Your Organization.
Organization delayering is one of the easy levers to quickly save costs. In many companies, over the years, they have accumulated a lot of inefficiencies in the organization while the size of the organization has been bludgeoning. The company is too obese and needs to detox. If you cut the middle management, i.e., the layers between the workers and the senior management, you can save costs without much affecting the performance – at least for the short term.
The objectives:
Eliminate ineffective or duplicate structures
Increase organization efficiency
Reduce the number of high-cost management positions.
Simplify the organization.
Steps to execute:
First, you start by stopping any changes to the organizational structure (i.e., freezing the baseline).
Halt and review ongoing recruitment processes.
Tighten criteria for resource requests.
Halt any re-organization activities.
Then, you can map and validate the organizational baseline.
Collect the organigram (of the organizational structure).
Gather the employee data (usually in SQL database or Excel spreadsheet format). Ensure the employee data contains at least: Employee ID, Supervisor ID, Job Title, Unit/Function, and Personnel cost.
Afterward, you analyze the organizational structure.
Consider organizational structure benchmarking if you are planning for massive re-organization. This way, you can also see the best practices inside and outside your industry.
Set the structural design principles, e.g., Minimum and Median Span of Controls, the Maximum number of layers, Player/Coach rules, the FTE targets, how to handle shadow resources, etc.
Assess the number of layers, the span of control, and organization dysfunctions based on the design principles.
Come out with various options for organizational structure (along with their pros and cons).
Decide the best target operating model.
Following that, you can set an ambitious target and break it down per function. Typically you can plan for a 20-30% headcount reduction.
Run "zero-based" organization-design workshops to share analysis results, agree on design principles, and set headcount reduction targets.
Identify the restructuring initiatives by function.
Develop the final blueprint of the organizational structure, function by function.
Quantify the impact and determine the timeline.
After that, you can prepare detailed plans.
Action plans for each initiative.
Align with HR and Legals on retention, work council, and severance payments. Make sure all the legal requirements are met, and key talents are retained.
Determine how to track progress.
Finally, you can implement.
2. Slim Down Your Support Functions
Support functions are areas where you can reduce the cost without affecting the performance significantly, at least in the short term.
The objectives:
Reduce personnel costs in the support function
Focusing on business/value-critical activities
Lean support functions/service centers
Steps to execute:
First, you start by reviewing the support functions:
Vision and strategy of the function
Mandate and Governance
People and behavior
Organizational design
Processes
Systems & applications
Vendors/sourcing
Then, you review the existing cost and FTE number
Map the support functions by FTE.
Find inefficient FTE allocations and double posting. Assess possible inefficiencies and pooling options by analyzing organizational structure by function (i.e., logic, layers, levels, and span of control).
If needed, conduct costs and FTE numbers benchmarking (versus peer group).
After that, you can identify savings opportunities by support function.
Prioritize support functions' activities. Terminate non-business-critical and non-value-add activities (including end non-critical support functions).
Short-term termination or renegotiation of outsourcing contracts.
Minimizing individual contributor positions by outsourcing to a cost-effective vendor.
Don't forget to quantify the impacts.
Afterward, you can prioritize actions
Conduct a round of stakeholder workshops to understand priority areas by function.
Agree on actions: talent, key processes, shared services, tools, and Make-or-Buy.
Prioritize actions and set targets.
Finally, implement the priority actions.
3. Reduce Your Cost per FTE
Costs per FTE are popular for reduction because you can easily benchmark the costs against peers. You can use them to ensure you are cost-competitive against other players. An alternative to reducing the number of headcounts is to reduce the average cost per FTE.
The objectives:
Reduce costs per FTE
Ensure a competitive cost base
Steps to execute:
First, review the existing costs (cost per FTE and per category).
Overtime usage and premiums paid.
Vacation day usage.
Performance grid.
Bonus paid.
Then, you can assess and prioritize opportunities.
Interviews to find opportunities.
Benchmark pay scheme based on job families.
Review contracts (collective and individual agreements).
Review other levers (voluntary payments and "goodwill" handling).
Analyze opportunities and quantify impacts.
Stop all voluntary payments from the company both for collective and individual contracts.
Reduce payments due to lax handling of company regulations.
Reduce overtime premiums by optimizing working shifts.
Reduce payments due to incorrect grading/allocation.
Enhance working time (number of hours, number of vacation days). For example, reduce paid break-time, or increase the number of vacation days instead of giving a pay raise.
Be rigorous in performance bonification.
Prepare introduction of lower-cost collective bargaining agreements where possible.
Prioritize opportunities based on impact and easiness.
After that, you can prepare action plans and communication plans.
Finally, implement the plans.
4. Reduce Headcount
The easy way to cut overhead is to reduce the headcount. If done smartly, it may not even affect the operational performance. This is because many companies have an inefficient level of manpower in the first place. A lot of companies tend to throw manpower into solving problems (instead of finding smart solutions).
The objectives:
Define the instrument for headcount reduction
Reduce internal FTE
Reduce external FTE
Steps to execute:
First, you review existing headcount levels (including externals and suppliers where relevant).
Then, you determine which groups are in scope for headcount reduction.
Afterward, find opportunities for headcount reduction.
Stop contracts of external employees.
End or shorten temporary contracts (e.g., students, interns).
Speed-up termination of senior executive contracts.
Realize all retirements and push for leave of absence solutions.
If existing HR regulations permit soft headcount reduction, use them to reduce staff.
Prepare a reduction program, and consider a voluntary retirement program as a quick instrument.
Set up allowance packages.
Screen opportunities (including regulations to identify leeway and possibilities).
Following that, you can set a top-down target headcount in line with your business scenarios.
Then, you need to prepare detailed action and communication plans.
Enable HR business partner to set up KPI and tracking logic.
Prepare talks with codetermination bodies (e.g., Labor Unions) if required.
Define packages for the codetermination process.
Finally, you launch the communications and implement the plans.
Tips:
I normally don’t recommend large-scale headcount reduction in the transformation scenario because it disrupts employees’ morale. This drastic measure is more for a turnaround scenario unless your company is really inefficient.
Large-scale headcount reduction is always hard. Not just for the company but also for the employees and their families. Therefore, it should only be pursued as a last resort.
I always prefer revenue growth to cost-cutting. Everyone can cut costs, but not everyone can grow revenue.
To see other ways to improve your profit, check the 33 Ways to Amplify Your Profit Quickly.
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