Hackett: Targeted Back-Office Cuts Can Soften the Blow of an Impending Recession

Typical Global 1000 companies can save $200-$400 million annually, offsetting almost half the pre-tax profit impact of a recession, research firm says

Atlanta — July 2, 2008 — As recession looms, many companies are reacting by mandating across the board cuts in key general and administrative (G&A) areas such as IT, finance, HR and procurement. But new research from The Hackett Group offers an alternative approach: targeted, strategic reductions that can offset up to almost half the impact of a potential recession while minimally affecting service delivery and the ability to provide strategic value.

According to Hackett, typical Global 1000 companies (with $23.4 billion in annual revenue) can generate $200-$400 million per year in savings through targeted G&A cuts, an amount that represents up to 45 percent of the potential decline in pre-tax profit due to a recession. The cost reduction opportunities are focused in two primary areas. More than 40 percent of the potential savings, or up to $171 million per year, comes from IT alone. More than a third, or up to $145 million per year, comes from finance.

Hackett's research details the strategies and tactics companies can use to accomplish cost reductions, including reducing labor costs, cutting technology spending and selective globalization of business processes. Hackett also identifies the 10 process areas where companies can find the largest savings, the least risk, and the quickest return.

Best Practices Approach

Three primary approaches to improving process improvements are also detailed. By utilizing empirically proven best practices, companies can cut costs while minimizing impact on business delivery, Hackett says. Companies can also simplify or eliminate processes, an approach that often involves the use of outsourcing for activities that can be done faster and cheaper by a specialized provider. Process standardization is also a powerful approach, although it may require companies to make technology investments and can demand strong commitment from senior management.

In IT, for example, Hackett's research showed that companies can cut infrastructure management costs in half by achieving world-class efficiency levels through strategic transformation. Another area to target is application maintenance, where cost reductions of over 40 percent are possible, largely by reducing the complexity of the application portfolio, taking a more disciplined approach to application disposition planning, and improving demand management.

Hackett also announced that its REL division is currently preparing a separate research piece addressing working capital optimization strategies to address a possible recession. The current economic climate has made access to capital challenging, and many CEOs and CFOs are focusing on working capital optimization to address this. REL's research estimates the working capital improvement opportunity for an average Global 1000 company at $2.9 billion.

"No One Right Answer"

"In today's economic environment, reductions in back office functions costs are virtually a given," said Hackett President Wayne Mincey. "But one of the biggest challenges faced by senior executives is knowing when to pare back costs, where to make the cuts and by how much. Our analysis provides some very clear guidelines, identifying areas that offer the maximum potential for cost savings in the short to medium term and that are likely to put the business in the best position for long-term success."

According to Hackett Chief Research Officer Michel Janssen: "This is an area where each company is going to make its own decisions. There's no one right answer to the best way to cut costs. But our research offers companies several strong options to consider, individually or in combination. Companies can look at reducing labor costs through process optimization — basically streamlining, standardizing and implementing best practices. Technology costs, one of the largest spend areas, offer another area where inefficiencies can be eliminated, demand can be more effectively controlled and suppliers managed to drive significant savings.

"Finally, companies cannot overlook the cost savings opportunities available through globalization," said Janssen. "Under recessionary conditions, time to benefits is key, and one of the ways of accelerating the potential cost reduction is not to try to untangle a web of complicated processes but rather consider a 'lift-and-shift' scenario, that is, moving processes in their as-is state offshore to take advantage of labor arbitrage opportunities."

According to Hackett's research, companies that achieve world-class performance in back office functions achieve significantly lower overall cost while delivering superior performance and providing greater business value.

To estimate the ability of its recommendations to offset the impact of a possible recession, Hackett began with the assumption that if a recession took place in 2008, average pre-tax profit margins of Global 1000 companies could potentially fall from their 2007 level (9.3 percent) to those seen in 2001 recession (5.5 percent). Under these circumstances, the G&A savings opportunities identified in Hackett's research would absorb between a low of 21 percent and a high of 45 percent of the commensurate drop in pre-tax profits.

A Research Insight providing more details on the findings described here is available, with registration, at http://www.thehackettgroup.com/studies/ga/.