How to Make the Most of Your Back Office: Cost Cutting Strategies

When times get difficult and sales are falling, companies often make back office cuts in departments that provide support. Departments that usually face these cuts are finance, human resources and other cost centers that don’t directly generate revenue.

However, a recently study conducted by Bain found alternatives to support center cuts can actually be more effective. This study examined 37 companies in a variety of industries and found that reconfiguring support services and trimming, instead of cutting costs, is a more effective strategy to recovering from falling sales.

Evaluating Department Activities
When trimming costs, managers need to work together to identify which activities aren’t essential. Focus on keeping the activities that are adding the most value to customers, and cut activities that have less impact.

This task will require managers to carefully evaluate the steps involved in each process. For example, human resources may evaluate the recruiting process and find that applicant information is entered in two different places. Consolidating that information into the same database reduces inefficiencies, freeing up additional time and saving costs.

Implementing Department Accountability
If a specific business unit is incurring large expenses from items such as ordering reports - change the way the money is budgeted. For example, the department may have to take those costs directly out of their budget instead of a general cost center. This will encourage the department manager to generate guidelines for ordering reports, which effectively cuts out non-essential ordering costs.

Automating Tasks
When trimming expenses, evaluate opportunities for automating back office tasks. Implementing Customer Relationship Management (CRM) software may allow your sales force to operate quicker and generate faster quotes. This will also enhance customer satisfaction and reduce the amount of time spent generating sales quotes. Have managers work diligently to identify these cost saving opportunities.

Cutting Expenses
When companies examine expenses, they often find areas for improvement. For example, regulating hotel and travel expenses more carefully can save the company money and cut down on wasted resources.

Restructuring Departments
When evaluating each business unit’s tasks, it often makes sense to restructure the entire department. For example, a company that operates in five states might have a marketing department in each state. After careful analysis, senior managers might discover that consolidating the department into a regional office will save resources and positively impact the bottom line.

Outsourcing Business Functions
Before outsourcing, make sure to invest time in weighing the costs and benefits. Evaluate how the decision will affect the customer experience. This is especially true when outsourcing customer service functions. If customers are disappointed with the outsourcing result, it can decrease sales, which leads to decreased profit.

Implementing these cost-saving strategies can minimize the amount of employee cuts and make a company more efficient. And when business starts to pick up again, the company will be positioned better for increased growth and profits.

Resource:Paul Rogers and Herman Sawnz. “How to Make the Most of your Back Office.” Results Brief Newsletter.

Mark Jordan is the Managing Principal of VERCOR, an investment bank that creates liquidity for middle market business owners. He is the author of “Driving Business Value in an Uncertain Economy,” “Selling Your Business the Easy Way,” “Enhancing Your Business Value…The Climb to the Top,” and co-author of “The Business Sale…A Business Owner’s Most Perilous Expedition.” For more information, contact him at 770.399.9512 or email him.

Lessons Learned from Private Equity: Enhancing Performance

As private equity firms become more successful, many public firms are learning how to implement these companies’ winning strategies. According to McKinsey research, about 75% of private equity firms do not experience better success than the stock market. However, the remaining 25% of these firms consistently achieve results that outperform the stock market.

This high performing group has mastered several components to enhancing performance. For example, deals in the private sector that are worth over $100 million, did not evolve because private firms paid less then market value. Instead, these private equity firms are using calculated strategies to determine which companies to purchase.

Researching Deals
Public firms can enhance success during acquisitions by investing in a strategic assessment of potential deals. This assessment is typically taken during the first few months of a deal, and accomplishes several goals:

• Determining which costs to cut
• If there are new markets to pursue
• Potential portfolio changes

Once these components have been evaluated, a value creation plan can be implemented. In this plan, managers will determine the possible risks and value from acquisition activities.

Compensation Strategies
Private equity firms are highly committed to overseeing investments once the deal is closed. A method used to enhance performance is using compensation strategies to align high level managers with strategic objectives. This entices managers to invest more of their time in collaborating with the board and completing research to help set the direction of the company.

According to McKinsey research, private equity partners using this strategy invested about 50% of their time three months after the deal closed. While, less successful private equity firms devoted only 15% of their time.

Successful partners also spent more time working with management to determine if staffing changes needed to be made after the deal closed. Active partners also used operation indicators to measure performance instead of standard financial measures.

Realigning Governing Structures
Although many companies use financial engineering or price arbitrage to measure performance, private equity firms are finding these tools to be less effective in current market conditions. The highest performing equity firms are adapting governance arbitrage, which involves realigning governing structures that are not aligned well.

Public Firm Challenges
Many public companies are focused on compliance instead of enhancing the effectiveness of governance. This is partially because of the growing number of regulations and codes that are evolving.

In addition, those who are not at the executive level do not always experience financial gains when the company is performing well. However, if the company experiences hardship, these individuals are affected. Since these individuals are often recruited from professional management positions, they are usually more emphatic with managers than shareholders.

Spending more time on strategy and developing talented managers can help board members have a better understanding of the company’s initiatives and objectives. Currently, most executives feel that the board has limited understanding of goals and corporate strategy.

Sharing Information
Public companies can implement strategies used by private equity firms such as creating a free flow of information between managers and non-executives. This includes sharing information that is not financial in nature – like strategies and initiatives. Although public companies do not have incentives, implementing these strategies can help boost performance.

External Benchmarking
There are also external benchmarks that can be used to determine performances initiatives. For example, these benchmarks may include overhead costs, cost per unit production, manufacturing processes and purchasing. Benchmarking these areas can give a company a competitive edge.

The benchmarking process should also provide independent verification that the benchmarks are being achieved. Companies also need to evaluate how often benchmarks are created. Since this process can be time consuming and expensive, companies can reevaluate these areas every few years.

Performance Challenges
Unlike pubic firms, private equity firms can offer managers equity stakes, investment opportunities, and bonuses for meeting objectives. In fact, top managers in equity firms own up to 19% of the equity. This creates personal motives for outperforming the competition.

When a private equity firm is having difficult times, management is quick to act swiftly – spending more time with management, minimizing underperforming areas, and hiring consultants to improve performance.

Because incentives are structured differently with public firms, the strategies and actions are often less aggressive. This is an area of opportunity for public companies. Taking aggressive steps to improve performance will ensure that actions are better linked to value creation objectives.

Searching for Talent
Finding a management group that is ready for extreme change can be challenging. If executives are not completely behind the changes, they will not be effective. These leaders must also have a high level of understanding of each team’s strengths and identify weak players.

Although public companies may face challenges, learning a few lessons from private equity firms can enhance performance. Revamping the governance structure will allow public firms to compete more effectively with leading private equity firms.

Resource:Andreas Beroutsos, Andrew Freeman and Conor F. Kehoe. “What Public Companies Can Learn from Private Equity.” McKinsey on Finance, Winter 2007.

Mark Jordan is the Managing Principal of VERCOR, an investment bank that creates liquidity for middle market business owners. He is the author of “Driving Business Value in an Uncertain Economy”, “Selling Your Business the Easy Way”, “Enhancing Your Business Value…The Climb to the Top” and co-author of “The Business Sale…A Business Owner’s Most Perilous Expedition.” For more information, contact him at 770.399.9512 or by email.