Atlanta — December 6, 2006 — The performance gap is widening between organizations that have achieved world-class performance levels in their back office operations versus typical companies, with top performers generating significant savings while delivering improved effectiveness and reduced risk, according to new research released by strategic advisory firm The Hackett Group.
Based on its analysis of in-depth benchmarks of back office performance at Global 2,000 companies, Hackett said its 2006 Enterprise Book of Numbers research reveals a growing performance gap in sales, general and administrative (SG&A) operations between world-class and average companies.
Hackett's research found that by achieving world-class performance in four core operational areas — information technology (IT), finance, human resources (HR) and procurement — companies can reduce annual SG&A costs by $60 million per billion in revenue. At the same time, these world-class performers show superior effectiveness, delivering higher quality services, increased economic returns and reduced risk, the researchers said.
Importance of IT
To achieve these gains, Hackett found that world-class performers demonstrate strength in five best practices categories: strategic alignment of business goals and operating procedures; complexity reduction; technology enablement; business processing sourcing; and cross-functional partnering.
Across the back office, the strategic use of technology plays a key role in achieving world-class performance. Hackett research indicates that attaining world-class performance in IT is virtually a prerequisite to achieving superior performance in other functional areas. As a testament to this, the research shows that the chief information officer is fast becoming a more important member of the executive team, marking a major evolution in the position from a support function in years past to one that is strategic, reporting directly to the CEO.
"In most functional areas, world-class organizations spend significantly less than their peers and operate with far fewer staff," said Hackett Chief Research Officer Richard T. Roth. "Yet at the same time they are better aligned to strategically support business goals and are simply more effective overall. IT plays an important part in how they make this happen, and the benefits are far-reaching. These world-class performers have built more nimble SG&A operations that are better prepared to identify and take advantage of opportunities in the market and deal with unexpected challenges."
From Back Office to Competitive Advantage
According to Hackett Senior Business Advisor Pierre Mitchell: "The best companies may differ in their size, industry or regulatory environment. But what they share is their ability to use back-office functions, traditionally viewed as cost centers, to generate competitive advantage. They do this, regardless of function, by relying on specific management approaches in the five areas we've identified."
Mitchell said that world-class organizations support continuous improvement within individual functions, cross-functionally and in end-to-end processes.
"It's critical to recognize that each year these world-class performers do a little better, pulling further away from the pack," Mitchell added. "The growing gap has a multiplier effect that will make it more difficult for the lagging typical companies to compete over time, a process that may soon be irreversible for many of today's leading corporations."
Five Best Practice Categories
To be identified as "world-class" in Hackett's analysis, a company must achieve top-quartile performance across a range of efficiency and effectiveness metrics. Based on its analysis of more than 14 years of ongoing benchmark studies that span 2,100 of the world's leading companies, Hackett said it has identified five best practice areas in which the best managed global businesses excel. Key findings by best practice across various SG&A functions are as follows:
- Strategic Alignment — Instead of the traditional hierarchical organization, world-class organizations understand that "flatter" management structures are more effective. For example, an IT leader who interacts with other business leaders as an equal is more likely to be tuned into their needs and to the overall business strategy. Hackett's research shows that world-class CIOs are twice as likely to report directly to the CEO or chairman as CIOs at typical companies.
Aligning IT with the business is crucial to success, yet IT is too often seen as a "support" service and is not included in high-level decision-making. Having a "seat at the table" is essential to improved performance. At 77 percent of world-class organizations, the senior IT executive is a member of the company's primary management committee, compared to just 52 percent of typical companies.
- Complexity Reduction— While words like "streamlining" and "standardization" have become overused terms, world-class organizations achieve tangible benefits by abolishing unnecessary complexity in business processes. For example, world-class procurement organizations reduce complexity through strategic sourcing, consolidating their purchases among 78 percent fewer suppliers than typical companies. They also centralize processes; Hackett found that a typical company with $1 billion in annual spend can save $8 million in process costs alone by increasing the percentage of contracts negotiated centrally from 20 percent to 80 percent.
- Technology Enablement— Companies with world-class IT organizations now spend significantly more on IT — 7 percent more per end user — than their peers, making IT the only area studied by Hackett where world-class companies spend more than typical ones. While world-class organizations spend more on IT, their use of technology results in improved performance across other SG&A areas. Hackett's research found that of the companies that achieved world-class status in multiple functions, IT was one of those functions 86 percent of the time — suggesting that cross-functional excellence relies on world-class IT performance.
Examples of the value of IT abound in Hackett's research. In part by using technology to streamline and automate operations, world-class organizations spend 45 percent less than typical companies on finance operations, while at the same time generating tens of millions of dollars in savings by getting clients to pay their bills 28 percent faster.
World-class procurement operations show similar results, spending 25 percent less than typical organizations yet driving an additional $3.6 million in spend savings for every $1 million in procurement operations costs.
In HR, automating labor-intensive processes helps free limited staff to provide more value-added services, while reducing costs. World-class HR organizations offer 85 percent of all employees self-service access to employee health and welfare systems, making them more than three times as likely to do this than typical companies.
- Business Process Sourcing — Understanding how to effectively leverage business process sourcing options such as outsourcing, shared services and offshoring is a hallmark of a world-class company. They do this at the process level and do not hesitate to change sourcing solutions if they fail to produce the desired result. Most executives miss the potential impact of service globalization due to "under-scoping" of initiatives, not realizing that offshore resources have matured significantly in the last few years.
A good example of this is in IT. World-class IT organizations spend 17 percent more on outsourcing technology infrastructure than typical organizations, but this enables them to spend 20 percent less in IT labor, resulting in 8 percent lower overall technology infrastructure process costs.
- Cross-Functional Partnering — World-class organizations seek synergies across business functions through cross-functional cooperation to achieve common goals. For instance, procurement staff work alongside their functional peers to understand business needs, plan spending and supplier selection (at the best price), taking into account both current and future needs. World-class procurement organizations are more than three times as likely as typical companies to rely on cross-functional teaming for supplier development. World-class HR managers are up to four times as likely as their peers to partner with management in key areas such as developing business strategies.