World-class Companies Move Beyond Cost in G&A in Response to Globalization

Companies must improve speed and agility, enhance responsiveness, inspire passion, speakers at Hackett best practices conference say

Companies must improve speed and agility, enhance responsiveness, inspire passion, speakers at Hackett best practices conference say

Atlanta  July 5, 2006  Globalization is creating new challenges and opportunities for today's companies, and one way world-class executives are responding is by demanding that their general and administrative (G&A) operations deliver more than just the lowest cost, according to speakers at the 16th annual best practices conference of The Hackett Group, a strategic advisory firm.

The best companies are strategically improving performance in finance, information technology (IT), human resources (HR), procurement, working capital and other areas in ways that help them respond to the pressures of globalization, according to speakers at Hackett's recent conference, entitled "Leveraging G&A for Competitive Advantage: From Back Office to Front of the Line."

The conference speakers reinforced common successful themes. They discussed how they continue to drive out cost in G&A in response to global forces and other market pressures. Presentations emphasized the need for speed and to drive change more quickly than their competition.

Speakers also stressed the need for agility in today's business environment, and they focused on how they are transforming their back-office operations to enable them to react more quickly. They discussed the value of "leaders who listen," and, finally, they emphasized the need to inspire passion and how that passion drives change.

Nearly 400 executives from many of the world's largest companies attended the two-day conference in Atlanta. They listened to CEOs, chief information and financial officers (CIOs and CFOs) and other senior executives from 17 companies, including Alcoa, Citigroup, Constellation Energy, HP, Greif, Nissan and U. S. Steel. In addition, The Hackett Group provided a preview of its 2006 Book of Numbers research findings, which will be formally released later this year.

At the conference, Hackett Chief Research Officer Richard T. Roth also presented Hackett's World-Class Award to three companies that have achieved world-class performance in both efficiency and effectiveness in recent Hackett benchmarks: Alcoa, for its finance performance, MeadWestvaco for its IT performance, and Southern California Edison for procurement.

Excess Cost is No Longer an Option

Driven by globalization, executives today are under more pressure than ever before, Hackett's Roth explained, facing demands that they provide superior pricing and product flexibility, deliver greater shareholder value and have keener insights into their own business, their competitors and the overall market. As a result, the best companies are doing even more to reduce G&A costs, even as they expand their efforts to generate value and competitive advantage from these operations.

"The best companies understand that in today's market, you simply don't have a choice," Roth said. "Costs must continue to drop, driven by everything from global forces and low-cost sourcing to new technology and new competitors."

In G&A, Roth continued, this means companies must raise the bar on efficiency, while maintaining a bright-line focus on operational excellence. "This is a key element of how the best achieve their competitive advantage and deliver superior results," he said.

Hackett's 2006 Book of Numbers research revealed that world-class companies are now spending 40 percent less than typical companies overall on SG&A (9 percent of revenue versus 15 percent) and as a result generate $60 million in savings/billion of revenue. By function, they spend 45 percent less on finance, 13 percent less on HR, 25 percent less on procurement and 7 percent more on IT.

IT is unique insofar as world-class companies spend more than typical ones in this area. The increased IT spending is a key strategy world-class companies use to drive cost reductions and performance improvements in other SG&A areas. In addition, top-quartile companies use 32 percent less working capital than typical companies, generating $72 million/billion of revenue in improved cash flow.

One conference speaker stressed that his company's finance staff had learned to consider whether they were truly creating value and delivering profitability long term. "We treat all our cost centers as profit centers," he said. "For example, when we found that our controller's organization was delivering over 17,000 reports to business leaders every year, we asked them to consider the cost of this and whether people would really be upset if they delivered less."

A Bias Towards Action

Speakers discussed how they maintain a bias towards action and understand the need to get their company moving and keep it moving or risk being overtaken by market forces or competitors.

Alcoa has made a major shift over the past few years, from highly regionalized, decentralized operations in IT, finance and other areas to a centralized, customer-focused organization that uses significant co-sourcing in India and elsewhere. The company has also consolidated more than 217 Oracle implementations and 52 data centers, eliminating redundancy. As a result, while Alcoa doubled in size from 1997 to 2001, operational costs in these key areas came down.

"We knew we wanted to leverage processes globally, but it's not enough to agree on a goal," said Alcoa Vice President of Global Business Services and CIO Rudi P. Huber. "You have to know how you're going to get there."

One key to driving dramatic changes in processes and infrastructure at Alcoa was to make it clear to executives that "opting out was not an option," said Huber. "If people wanted an exception to our new procedures, they knew they needed to take it all the way to the top."

Continuous Reinvention

One conference speaker said it was critical that his organization continually reinvent itself. "The speed at which businesses move today has increased dramatically. We look very carefully at our rate of change and measure how quickly our competitors are changing. We need to be moving faster, or we'll risk getting wiped out," he said.

A recent Hackett benchmark study concluded that U. S. Steel has a world-class finance operation. This ranking resulted from the combined effects over the past few years of reducing administrative staff, implementing a business service center that consolidated systems support and execution for transactional activities, and integrating systems to support acquisitions that more than doubled the size of the company. Since 2003, U. S. Steel achieved a reduction of 30 percent in its administrative workforce and annual acquisition synergies in excess of $400 million.

Executive Vice President and CFO Gretchen R. Haggerty said that while the company is ranked in the top quartile, improvements could still be made. "We are ranked high in effectiveness and efficiency, but found that we still have areas for improvement," she said. "We are long time believers in continuous improvement and are constantly looking to implement best practices. One of the key benefits of the Hackett process was to identify best practices that we can employ as we continue work on developing common global systems and implementing our business service center at our operations in Central Europe. We realize that we must continue our pace of rapid and continuous improvement to remain a first quartile finance operation."

Improving Speed and Agility

Globalization has made it more difficult than ever for companies to anticipate what the future will bring to their market. But several speakers discussed how their G&A transformation efforts have helped them react quickly to unforeseen circumstances.

At Constellation Energy, a Fortune 200 competitive energy company based in Baltimore, Senior Vice President and CIO Beth Perlman has focused on both complexity reduction and return on investment (ROI) generation to build an IT organization that is a true strategic partner to her company. Over the past few years she has integrated IT operations from several very different business units, dramatically reducing IT complexity and moving to a matrixed shared services approach to handle corporate applications and infrastructure.

"We had to be bold, pick our battles and know when to take a stand," said Perlman. "But now we're now running IT as a business and spending a lot less time doing non-value added tasks. Our IT leaders understand our company better. We don't think in terms of IT projects, we think in terms of business solutions. That's a radical shift."

Today the company is pursuing growth initiatives, and as a result of its efforts over the past few years, the company believes it is already well prepared. Benchmarking efforts are now underway to identify best practices and recommendations in IT and other back office areas.

Improving Performance in a Time of Change

HP Senior Vice President and Treasurer Cathie Lesjak has continued to guide the HP Treasury function along its journey to world-class performance in the face of significant enterprise-level change. The journey began under her predecessor at a time when Cathie was the International Assistant Treasurer. At the same time that Treasury was restructuring its processes and implementing an e-treasury solution to streamline system and process interfaces with both internal and external partners, HP spun off Agilent, merged with Compaq and last year brought on a dynamic new CEO, Mark Hurd. Lesjak credits her group's willingness to embrace breakthrough thinking, coupled with an emphasis on partnering with the organization, as key contributors to HP Treasury's achievement of world-class status and its ability to focus on providing value-added services aligned with the goals of executive management.

"Over the past few years we've aggressively executed efficiency projects and initiated programs such as working capital management that add value," Lesjak said. "This has put us in an exceptionally strong position to support the focus areas of our new CEO: capital strategy, efficiency and growth. We have grown an organizational culture that promotes a global mindset, thought leadership, innovation and solid execution."

Greif, Inc., a global industrial packaging company, has experienced dramatic worldwide growth over recent years. "During one significant acquisition, we essentially became global overnight, while doubling our revenue base," said Vice President of Corporate Business Development Rob Zimmerman. Given the number and size of the acquisitions that had been completed, the company knew that it needed to standardize its operations and ensure that it was producing an adequate return for its shareholders. As a result, the company launched a major transformation initiative intended to significantly improve its operating efficiencies, cost structure, procurement activities and also working capital.

"When the transformation began, we had little visibility into our customer profitability, were far from being the lowest cost producer and dead last in working capital compared to our peer group," said Zimmerman. "But by standardizing processes, gaining visibility into our data, creating the right analytical tools and building the capabilities of our employees, we've been able to surpass some of our original financial targets."

As an example, Zimmerman said that Greif had targeted a 12 percent operating working capital ratio. "Today, we have driven this ratio to under 10 percent. Since we launched the transformation, we have increased our stock price by a factor of three and generated well over a billion dollars in market value. But most importantly, we've gained control, improved our processes, and put systems in place to make sure it's all sustainable."

Leaders Who Listen

In a videotaped interview with Hackett President Wayne Mincey, Nissan CEO Carlos Ghosn explained that the ability to listen was one key trait he looked for in leaders, including those driving SG&A transformation at his company.

"Our strategy is product superiority supported by cost competitiveness," explained Ghosn. "Across the board, we've created a consciousness that improvements need to be in both cost and value. In SG&A, the best way to increase value is not only by looking at what the best companies in the world are doing, but also by listening to what your internal customers are asking for. To be direct enablers of success, our functional leaders cannot feel they are in their job mainly to do what they think should be done. They must be driven by their customers. Listening is extremely important."

Finding Passion

A final key strategy discussed by conference speakers is the role that drive, energy, and passion play in achieving world-class performance.

Todd S. Thomson, chairman and CEO of Citigroup Global Wealth Management, discussed the techniques he used to inspire passion as he brought together the back-office functions for three parts of his organization: leading wealth management company Smith Barney; specialized boutique organization Citigroup Private Bank, which focuses on supporting entrepreneurs; and Citigroup Investment Research, which provides a spectrum of research products and services to individual and institutional investors globally. "With dramatically different business models, client bases and compensation structures, these businesses were alien to one another, with limited, if any, experience interfacing with one another," said Thomson.

Citigroup focused heavily on creating opportunities for leadership to better understand their counterparts and their operations. Thomson moved technology staff between the three organizations so they could identify opportunities to improve efficiency and effectiveness. Weekly meetings were established where leadership could share and understand each others' problems. Finally, off-site events, including one incorporating basic-training style military exercises and a class on change management taught by a West Point professor, were used to help executives "see each other with their armor off and learn how to work together, to support each other," according to Thomson. The goal of the effort was to build understanding that they all faced similar pressures, despite the differences in their individual businesses.

This approach is generating significant returns for Citigroup, with approximately $90 million in productivity gains over the past two years through initiatives that have included the elimination of redundant back-office operations, technology transfer between the three organizations and the establishment of low-cost offshore shared services centers for technology development.

"At this point, we've built an amazing team. Everyone understands that if their peers are successful, they'll be successful. We're working together," said Thomson.

Hackett has announced that its 17th Annual Best Practices Conference will take place April 26-27, 2007, at the InterContinental Hotel in Atlanta.

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