A smarter way to cut SG&A

By Tom Kellaway, below, associate principal, The Hackett Group                                                                                          

Sales falter, share prices drop and the government announces a recession. In response, companies often lay off employees and cut expenses. This is the stock response from many companies. The unfortunate thing is that for many firms this sacrifice will bring pain without gain. When business picks up again, they will rehire and start spending just as much money as they did before. But it doesn’t have to be this way. A recent survey by The Hackett Group of the sales, general and administrative (SG&A) expenses of Europe’s 1,000 largest publicly traded companies validates what The Hackett Group has always said – you can reduce SG&A expenses in a sustainable way without compromising service efficiency or quality.

Here’s why: In 2021, median SG&A costs at European companies fell 6.8% as a percentage of revenue. While the performance was not as strong as in North America – where SG&A came down by 7.9% over the same period – it’s still notable, particularly as it happened during COVID. Overall, European companies reduced their SG&A cost as a percentage of revenue to 13.7% in 2021 – down from 14.7% in 2020. This might not sound dramatic, but between 2012 and 2020, SG&A had dropped just 1.3% overall.

But these statistics only tell part of the story. What’s most interesting is the uneven distribution of those gains. The largest reductions were made by top quartile performers, and typically those companies tended to be further ahead with digital transformation. These companies have embraced digital transformation so that they are leaner, more cost-efficient and have more agility to respond to market ups and downs.

 Top quartile extends its lead

Unusually, outstanding SG&A performance didn’t depend on the industry. Most industries had their share of SG&A winners. Top quartile performance leaders in most sectors shaved their SG&A costs by an average of 8.5%, while laggards – performers in the third quartile – actually saw their average SG&A cost as a percentage of revenue increase slightly – by 0.1% – to 23.5% from 23.4%.

Overall, laggards in Europe now spend over three times as much money on SG&A as leaders – about 23 cents to bring in their next euro of revenue, versus only 7 cents for leaders. Whether they use that dividend to cut prices, invest in research and development or risk-proof their supply chain, this differential means that top quartile firms are going into the downturn with three times the flexibility of companies in the third quartile.

But even for the laggards, these results aren’t entirely negative: The lack of dominance by a single sector suggests that SG&A excellence is in reach of virtually every business ready to do the hard work of digital transformation. It’s also a major business opportunity that can be pursued regardless of the external environment. Our analysis shows that a typical $10B company could save $88M or more annually just by achieving top performance in cost and operations.

Get ready for your close-up

 To reduce SG&A in a sustainable way, the response needs to be more tailored – the outcome of a deep self-examination: What are you trying to accomplish as an organisation? What are your unique goals and objectives? Given your goals, what structure should your support functions take? How does your SG&A cost base and structure compare to these top performers? These high-flyers – the kind of company The Hackett Group defines as Digital World Class™ – tend to share four common qualities:

  1. They have invested in their digital transformation. They use every digital tool they can find that makes their SG&A functions run more effectively and cheaply.
  1. They aren’t hypnotised by shiny objects. Top performers prioritise the most promising opportunities that they see. They digitise in a disciplined way, rolling out those technologies that have the most potential and best align with their strategy.
  1. They reduce costs only where a process can be optimised. Cutting off your right arm is a quick way to lose weight, but it isn’t a good one. Top performers make sure any cuts are into the fat of the organisation and not the flesh.
  1. They have a strong culture of performance. Their managers are open to change, willing to learn from others and don’t shy away from asking the toughest questions.

Indiscriminate, counterproductive cuts that will make investors happy for an afternoon or a targeted programme of process improvements that will make your business leaner, stronger and more successful? The results of this survey suggest that it’s not a choice you should hesitate over for long.