00:00:02
i want to welcome reinhard mesenbach
00:00:04
he's a partner and managing director at
00:00:06
the boston consulting group also
00:00:08
known as pcg and he's an expert in cost
00:00:11
and efficiency
00:00:12
and he's going to talk to us today about
00:00:14
that and especially about
00:00:16
getting cost more costs removed and
00:00:18
efficiencies
00:00:19
in the support function of of
00:00:22
organizations
00:00:23
uh thank you for joining us today thanks
00:00:25
for coming to philadelphia it's a
00:00:26
pleasure to be with you steve
00:00:28
you're also a co-author of a piece of
00:00:30
bcg research a recent piece that's
00:00:32
called beyond cost cutting
00:00:34
and uh i want to ask you about that the
00:00:38
cost and efficiency uh it's been the
00:00:41
focus
00:00:42
for many companies in in this long
00:00:44
downturn and yet
00:00:45
it seems like some of them still haven't
00:00:47
gotten it right so could you talk
00:00:49
generally about that that there's still
00:00:52
a lot that companies haven't learned yet
00:00:54
yeah
00:00:55
i think when we when we look at uh cost
00:00:58
issues for companies
00:00:59
what we typically find is that there is
00:01:03
reasons and and scope well beyond
00:01:06
cost that need to be addressed so
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what do i mean by that when when we
00:01:12
think of
00:01:13
cost uh it's basically a resource
00:01:17
people or anything you procure
00:01:20
and you put it to some sort of use so
00:01:22
beyond
00:01:23
making sure you get it at a right cost
00:01:26
level
00:01:27
you also need to make sure you use it to
00:01:29
the appropriate
00:01:31
sense that you want to achieve and what
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we often find especially in
00:01:35
support functions and that's the focus
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of this paper
00:01:40
is that this this letter question what
00:01:42
do you get
00:01:43
from your support function is a terrible
00:01:46
difficult one
00:01:47
because people do not see anything
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really being produced by these support
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functions
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and hence you can look at the cost of
00:01:56
them and often you find these efforts
00:01:59
which
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we call a cut and cope so you reduce
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and then somehow hope people will do
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something sensible afterwards
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but very often you find that people
00:02:09
don't spend much time and thinking
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around
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what do these people and what should
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they be doing
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and therefore give the support functions
00:02:17
a different kind of role
00:02:19
within an enterprise it's interesting
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because
00:02:23
support function by definition the word
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support suggests it's not
00:02:27
central to the company right it's a
00:02:29
support function
00:02:30
and yet your your study and a lot of
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your work is
00:02:34
is based around the idea that that's
00:02:37
you're really missing something if you
00:02:38
think of it that way
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um so could you talk about why
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the support functions are in your
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opinion far more important than most
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people
00:02:48
give it credit for so
00:02:51
the reasons why we think our support
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functions are critical and
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and that's also what evidence shows us
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is they're
00:02:58
first and foremost they're close to the
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decision makers
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so board members typically
00:03:04
exercise power over the organization via
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support functions
00:03:09
and that being hr finance
00:03:12
controlling procurement so why are
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running for example a budgeting process
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with controlling
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you exercise power over all your
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production facilities or your monthly
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reporting
00:03:24
so there are the support functions in
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that sense they're basically brain and
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nervous system
00:03:29
of an organization and help you to steer
00:03:32
it
00:03:32
and hence they're not just a cost bucket
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and
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albeit often a small one compared to uh
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procuring large machinery or raw
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materials
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but they are they're elemental for both
00:03:46
the culture you have in an organization
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and also the way the whole organization
00:03:50
is run
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you mentioned what some of the support
00:03:54
functions
00:03:54
are it might be good to define what
00:03:57
define the functions
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yeah so well and they're a you know it's
00:04:01
a
00:04:01
it's a difficult uh term to define
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because
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support means different things in
00:04:07
different industries just maybe picking
00:04:09
one
00:04:09
uh in the banking industry a risk
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function
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monitoring credit risk and and
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is is really closely embedded in the
00:04:19
business or at least it should be
00:04:21
while uh the same applies in an oil
00:04:23
producing company
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but if you are if you for example you're
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you're selling uh paper then risk
00:04:32
doesn't really come that close enter and
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then it becomes more of a support
00:04:36
function than a core business function
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so we have i think the the typical
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functions that we always see is hr
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finance controlling legal strategy
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business development
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and then there's some more let's say
00:04:49
special ones like
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compliance or risk investment
00:04:54
procurement which have a have a bit of a
00:04:56
business speciality to them depending on
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the industry you're in
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and then within them we find different
00:05:03
different roles they actually do so for
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example let's say
00:05:07
in hr you have something which is quite
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strategic
00:05:11
like setting the leadership training
00:05:14
program or
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recruiting the right leaders and
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developing them and then you have some
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very transactional
00:05:20
activities and roles like payroll for
00:05:22
example so
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again these support functions then have
00:05:28
to live these double lives
00:05:29
of being on the one hand a driver of the
00:05:33
business
00:05:33
and the business agenda of the senior
00:05:35
management while on the other hand doing
00:05:37
some transactional things
00:05:39
cheap and to high quality standards
00:05:42
you mentioned finance as being a support
00:05:45
function
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some might think that finance was a core
00:05:48
function so maybe we could drill down
00:05:50
into that idea of what a support
00:05:52
function is a little bit more
00:05:53
okay let me uh give you another way of
00:05:56
defining this
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when we are when we define support
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functions what we are typically
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including there is anything that doesn't
00:06:03
have direct
00:06:04
client interaction so finance interacts
00:06:08
with other departments be it
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sales or procurement but it typically
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doesn't interact with the real customers
00:06:17
of a company and
00:06:18
these parts of a company that basically
00:06:21
lie
00:06:21
within the company and help to run it
00:06:24
that's what we call support functions
00:06:27
what key issues do you
00:06:28
tend to see around your clients when it
00:06:30
comes to support functions on
00:06:32
a strategic level what we often see is
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sir
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that there's a difference between what
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the
00:06:40
what the enterprise actually tries to
00:06:42
achieve the company
00:06:44
and what these support functions are
00:06:45
delivering so one of the core question
00:06:48
is
00:06:48
what role should a support function
00:06:51
actually exercise should it be for
00:06:53
example be the driver
00:06:54
of the business or should it provide
00:06:57
numbers to stay with the
00:06:58
finance example and depending on
00:07:02
that role that you give your finance
00:07:04
department you have a very different
00:07:06
setup
00:07:07
and you have probably different
00:07:09
distribution of resources
00:07:11
between the finance function and the
00:07:14
actual production facilities
00:07:16
and you have a completely different
00:07:17
governance so if you have a
00:07:19
center function in finance that is
00:07:21
driving the business
00:07:23
you might have a finance committee
00:07:25
that's chaired by finance
00:07:26
well if you have a very strong
00:07:29
production
00:07:31
areas who are actually using finance as
00:07:34
a provider of numbers
00:07:36
you might not have such a committee and
00:07:38
that sort of governance so
00:07:40
it's crucial to organize
00:07:43
based on what you try to achieve so that
00:07:46
you have clear understanding of the role
00:07:48
and the mandate of a support function
00:07:51
what do you typically find companies are
00:07:53
missing when they look at
00:07:55
these functions from the strategic level
00:07:58
what we often find is that
00:07:59
these support functions they evolve and
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develop over time
00:08:03
so after several years and
00:08:06
maybe after some changes in the
00:08:08
environment you find
00:08:10
that the role that the support function
00:08:11
is actually exercising
00:08:13
doesn't fit what the company really
00:08:16
needs
00:08:17
so you might have an hr function
00:08:20
that is trying to exercise some sort of
00:08:23
process control
00:08:24
in the various businesses while these
00:08:26
businesses do not want that
00:08:28
and uh what happens so you then
00:08:31
start to replicate functions so the uh
00:08:33
let's say the
00:08:34
the recruiting guys from the hr center
00:08:37
function
00:08:38
they try to uh to recruit for the
00:08:41
business but the business doesn't want
00:08:42
them to recruit for them so they build
00:08:44
their own people
00:08:45
and their then hr tries to put a layer
00:08:49
on this and
00:08:50
for example creates a recruitment board
00:08:53
so
00:08:54
then the business needs to uh employ
00:08:56
people the business line
00:08:58
to actually provide data for that
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recruitment
00:09:02
board and and support it and over time
00:09:05
you actually
00:09:06
create complex structures which all come
00:09:09
from
00:09:10
not discussing what the real role of hr
00:09:12
should be should they provide that sort
00:09:14
of support or should they not
00:09:15
and if you do not align this you create
00:09:18
inefficiencies
00:09:20
this uh special thing about the support
00:09:23
functions
00:09:23
is that you do not see these
00:09:25
inefficiencies or
00:09:27
we might call it waste in lean you don't
00:09:29
see this
00:09:30
lying around on the shop floor so after
00:09:33
some time you just people
00:09:34
find themselves complaining about
00:09:36
complex processes
00:09:38
long time to decision endless amounts of
00:09:41
alignment which they've all created
00:09:44
themselves
00:09:45
but they don't remember what actually
00:09:47
led to that sort of situation
00:09:49
and that's what they find themselves in
00:09:50
and in order to overcome it
00:09:52
they typically build another layer on
00:09:54
top of it another governance another
00:09:56
committee another person who handles and
00:09:58
provides more data
00:09:59
and that usually escalates the problem
00:10:01
rather than solve it
00:10:03
that's at the more strategic level what
00:10:05
about at a tactical level what kinds of
00:10:07
mistakes do you see going on
00:10:09
okay well we are let's assume the
00:10:12
the actual mission of our support
00:10:14
function and uh
00:10:15
the leadership's idea of what they
00:10:17
should do that's aligned and then
00:10:19
the next step is to operate in the right
00:10:23
structures and processes
00:10:24
and so we have to first of all look at
00:10:27
typically we look at structures
00:10:29
and structures we mean two things one is
00:10:33
the organizational the org chart
00:10:36
how many layers do you have and and
00:10:39
thereby how fast does information flow
00:10:41
up and down in the organization and how
00:10:43
distributed is it across boxes what do
00:10:45
you lump together so to ensure
00:10:47
a flow of information the other part
00:10:50
that's also important is
00:10:51
what's your your actual relation to the
00:10:54
businesses
00:10:56
give you an example uh we worked with a
00:10:58
client where we found that
00:10:59
the businesses were very self
00:11:03
mandating so they were doing basically
00:11:05
all hr work in the hr department
00:11:07
themselves
00:11:08
so they had their own hr people they did
00:11:10
people development training recruiting
00:11:12
and so on
00:11:13
so after discussing this they decided
00:11:16
that it would make much more sense to do
00:11:18
some very
00:11:19
operational things like shift planning
00:11:21
at
00:11:22
the place where it really needs to
00:11:24
happen in the sites but to
00:11:26
bundle uh the more general things like
00:11:29
training
00:11:31
via the hr department but have the
00:11:33
people still sit where they were
00:11:35
originally sitting so
00:11:37
getting the governance and the location
00:11:39
of the people right so that you both
00:11:41
have
00:11:42
effects of bundling things but at the
00:11:44
same time you are close to the business
00:11:45
where you need to be close to the
00:11:47
business
00:11:48
as a second step processes and service
00:11:52
levels need to be aligned
00:11:53
what do we mean by that it's important
00:11:56
to have a discussion around
00:11:58
how often do you need something how big
00:12:00
does it have to be how deep and how well
00:12:02
explained
00:12:03
so a typical thing where this where this
00:12:06
happens is
00:12:07
and goes overboard our reports we we
00:12:10
tend to find
00:12:12
many many reports none of them are made
00:12:15
with bad intentions but they typically
00:12:17
after some time the reason why you
00:12:20
create a report
00:12:20
and the fact that you create a report
00:12:23
they don't match anymore so
00:12:25
for example we are a few years back we
00:12:28
are we helped an energy company in in
00:12:30
germany and
00:12:31
that was in the 2000s and they were
00:12:34
still producing a report for the allied
00:12:36
forces
00:12:37
which have left many years back yeah and
00:12:41
it's not that they didn't know history
00:12:43
it was basically
00:12:44
they were produced at the report someone
00:12:46
found it useful and it became
00:12:48
it got a life of its own and after her
00:12:51
time it was still existing so
00:12:53
looking at for example the list of
00:12:55
reports understanding who does really
00:12:57
need it how often do you need it how
00:12:59
deep does it have to be
00:13:00
you can cut it down and thereby also
00:13:03
install
00:13:04
interaction between those who are
00:13:07
provide a service and those who actually
00:13:10
use it and thereby have a discussion
00:13:13
which you often find
00:13:14
doesn't exist you also write about in
00:13:17
the study
00:13:18
and and talk about elsewhere the idea of
00:13:21
complex historically grown structures
00:13:23
that
00:13:24
that just grow up and keep going similar
00:13:26
to the report example that you use
00:13:28
later and then there's no feedback loop
00:13:32
with customers to
00:13:33
to get things aligned and on track could
00:13:36
you talk about that whole idea
00:13:38
now we i think first of all it's
00:13:40
important to mention
00:13:42
no one creates inefficiencies on purpose
00:13:45
so these things grow over time and
00:13:48
what we find is that one of the typical
00:13:50
mechanisms if something happens
00:13:53
we we add things so that's also one of
00:13:56
the reasons why it's so difficult to
00:13:58
overcome it when you discuss
00:14:00
with with the head of risk
00:14:03
whether he needs another person to
00:14:05
fulfill some sort of
00:14:07
bank of england's new regulation kind of
00:14:10
report
00:14:11
you can't win because obviously this
00:14:13
report is required
00:14:14
otherwise the bank will close so having
00:14:17
a discussion
00:14:18
around priorities of all the other
00:14:20
things that you're actually doing in
00:14:22
your department and then finding out
00:14:24
could we leave something out could we do
00:14:25
something more efficient is a different
00:14:27
way
00:14:28
of tackling these things and
00:14:30
historically what we find is that people
00:14:32
usually
00:14:32
don't have these sort of discussions you
00:14:34
don't have a discussion between someone
00:14:36
who's doing something
00:14:37
and their internal customers in a
00:14:39
structured way
00:14:41
you are you have discussions when a need
00:14:43
comes up
00:14:44
that someone raises their hand and say i
00:14:46
need more resource
00:14:47
another person another building another
00:14:50
machinery
00:14:51
whatever because there's something and
00:14:53
then you have a very
00:14:54
small tight area in which you discuss
00:14:57
and in which you always tend to lose if
00:15:00
you try to win it
00:15:02
a customer of mine said it's easier to
00:15:05
send a camel through a small
00:15:07
hole in a needle than to get a forklift
00:15:10
out of the budget
00:15:11
in one of our factories and that's
00:15:13
because once you discuss the forklift
00:15:16
people will come to you and say
00:15:17
everything will break down if we don't
00:15:18
have the forklift and we can't deliver
00:15:20
to china anymore and so on and so forth
00:15:22
but you don't have a discussion about
00:15:24
priorities and
00:15:26
would there be something else we could
00:15:27
do and decommission
00:15:29
and thereby actually fund the forklift
00:15:31
so this
00:15:32
what can we do instead what are our
00:15:34
total priorities how do we
00:15:35
use our all of our resource best that's
00:15:38
a discussion we often find is missing
00:15:40
and that enables a lean but also a
00:15:44
focused center
00:15:45
and support function that do things that
00:15:48
their customers
00:15:49
actually desire and want them to do you
00:15:52
bring up this
00:15:54
specific point of not having a proper
00:15:57
feedback loop around this issue could
00:15:59
you talk about that
00:16:01
what's often difficult for support
00:16:03
functions is
00:16:04
that they don't have someone who is
00:16:07
giving them
00:16:09
orders or who demands things from them
00:16:11
so they are they tend to self-mandate
00:16:14
themselves so
00:16:15
all of a sudden you find in your inbox
00:16:18
an email from someone who says
00:16:20
we have now delivered and developed a
00:16:22
new training manual
00:16:23
for something or a new training course
00:16:26
or a new procurement process and so on
00:16:28
you and
00:16:29
people ask themselves where is this
00:16:30
coming from who asked for it
00:16:32
and why is it useful so these questions
00:16:36
tend not to be raised and the the actual
00:16:40
support function is self-mandating and
00:16:43
and thereby creating in in all honesty
00:16:46
they're trying to do the best for the
00:16:48
company
00:16:48
but they might often so best intention
00:16:51
is
00:16:52
often the worst action and and therefore
00:16:55
what's really critical is to have a
00:16:57
feedback loop between those
00:16:59
who are create a service like a new
00:17:01
procurement process
00:17:02
and those who are on the receiving end
00:17:04
and who actually have to live with it
00:17:07
so there are decisions taken whether
00:17:10
the the whole element to which you do
00:17:13
this the whole
00:17:14
complexity is actually serving a purpose
00:17:17
or not and then in worst case you can
00:17:20
escalate this
00:17:21
to your board members for them to decide
00:17:23
whether you want to have more
00:17:25
clarity and crisper procurement process
00:17:28
to stay in this example
00:17:29
or you want to have leaner smoother more
00:17:32
flexible ways of procuring things
00:17:34
and you can take that decision and based
00:17:36
on a discussion
00:17:38
rather than the opinion of one unit
00:17:41
which is basically creating their own
00:17:43
work
00:17:44
one obvious question is why don't
00:17:46
companies fix
00:17:47
this they they don't see it what's
00:17:49
what's the problem
00:17:50
sounds like there's a there's a lot of
00:17:52
issues that's they should be seeing some
00:17:54
of them
00:17:54
one would think i think that takes us to
00:17:57
some sort of uh
00:17:59
specialities or of human behavior i
00:18:02
think
00:18:02
after living in a complex process for a
00:18:05
while
00:18:06
people tend to live with it and manage
00:18:09
within a process rather than
00:18:11
stepping out of it and trying to fix it
00:18:13
so what we find if
00:18:15
we often find is that uh if something
00:18:18
doesn't work
00:18:19
people tend to put extra resource on top
00:18:22
of it or another governance layer in
00:18:24
order to
00:18:24
to fix it so if you're if you're
00:18:26
budgeting process
00:18:28
creates strange numbers people basically
00:18:31
extend the whole process and put maybe
00:18:33
some extra
00:18:34
checkpoints into it and a budgeting
00:18:37
governance body
00:18:38
in order to run it rather than step back
00:18:40
and say something doesn't work
00:18:42
here we need to do it differently but we
00:18:44
still need to stay
00:18:45
lean so you you often find that there's
00:18:47
extra control
00:18:49
if something doesn't work rather than
00:18:50
fixing the original problem
00:18:53
and again this is not because people are
00:18:56
stupid
00:18:56
but because they come out of an
00:18:58
environment
00:19:00
they are used to and so their solutions
00:19:02
are typically
00:19:04
fitting the environment they find
00:19:05
themselves in
00:19:07
and one of the one of the core elements
00:19:10
to uh to overcome this especially in
00:19:12
companies and you mentioned it at the
00:19:14
beginning some have gone through one
00:19:16
two rounds of cost reduction or cost
00:19:18
optimization
00:19:19
is really to change uh
00:19:22
the uh the whole setting in which such
00:19:24
discussions happen
00:19:26
you need to help people to find a reason
00:19:29
why now it's possible to do things
00:19:32
differently
00:19:32
so think differently about the whole
00:19:35
way of how we run things think
00:19:38
differently
00:19:39
about the whole amount of services we
00:19:42
provide
00:19:42
the service levels we provide the way we
00:19:45
interact
00:19:45
and that is often the difficult thing
00:19:47
how do you really break this up so you
00:19:49
have a discussion
00:19:50
which is free of historical other
00:19:52
discussions that have happened in the
00:19:54
past
00:19:55
and thereby allow to really radically
00:19:57
transform
00:19:59
the support functions and thereby then
00:20:00
also indirectly the rest of the
00:20:04
organization
00:20:26
you
