You’ve been a good manager of a large department for some time now. You’ve run a tight ship. When possible, you’ve cut costs. But now an order has come down (from high enough above that you don’t have the liberty of debating its wisdom or feasibility) decreeing that you must find an additional 10%, 20%, or even 30% in administrative cost reductions, severance aside. You just don’t see how it can be done.
What’s the Right Level of Overhead?
Further complicating your life are the limitations on your choices. Because you don’t report directly to the CEO, you’re not in a position to advocate strategy changes or pursue wholesale shifts like offshoring. Nor do your instructions allow you to push for large investments—in new technology, for example—that would enable you to replace other departments. No, you have to do this the hard way: one item at a time and in short order.
You are not alone. Over the past 30 years, we have worked in, led, or provided consulting assistance to numerous organizations in this situation—including manufacturing companies, financial institutions, professional-services firms, high-tech start-ups, utilities, and universities. Our experience shows that administrative cost-reduction opportunities follow similar patterns virtually everywhere. The lessons we’ve gleaned may not solve your entire problem, but they should give you a substantial jump on it.
As you begin your quest for administrative cost savings, keep two key points in mind:
First, forget about finding a single idea that would radically change the cost structure of your organization or department, thereby solving your problem in one go. (If such an idea existed, it would most likely entail so much risk that the organization would never be willing to implement it.) Instead, you should plan to reach your goal with a combination of 10 or more actions.
Second, the degree of organizational disruption caused by your reductions will usually be proportional to the degree of cutting you do. Therefore, you should tailor the reductions you pursue to your savings goal. Incremental ideas with minimal impact on other departments can allow you to trim up to 10% of costs. Redesign or reorganization ideas often eliminate the lowest-value activities, with moderate impact on other departments, and can help cut expenses by up to 20%. Cross-department and program-elimination ideas are usually necessary when you’re aiming for 30% or more, but they have the greatest potential to be organizationally disruptive.