The average company spends 23 cents of every revenue dollar on overhead, yet most have no formal process in place to guide management decisions when it comes to thoughtfully categorizing and assessing overhead. In a recent Strategy & Leadership article, Josh Lee, a Partner of Monitor Group and leader of its Adaptive Overhead™ practice and Margaret Covell, propose a “A Strategic Approach to Overhead Management,” urging companies to get off the “roller-coaster cycle of cost-cutting” and instead, view overhead as an investment, not a burden.
Lee notes that the first step in “applying the brakes” to such a damaging roller-coaster cycle is to “change the nature of the conversation.” When thinking about overhead as assets rather than costs, companies can begin to achieve consistency in overhead management. In fact, sorting overhead into four fundamental classes of assets – those that provide a basic service, enhance the efficiency of the organization, reduce or mitigate risks or enable the strategy of the firm – should help companies to focus on assessing potential returns on overhead investment.
While every company will create a distinct process for evaluating asset performance and quantifying its value, Lee emphasizes two principles that should serve as guides. First, identify clear performance metrics and outcomes and second, depending on the asset and population of its users and beneficiaries, consider overhead assts from multiple vantage points.
“Equipped with an understanding of the current portfolio of overhead investments and the balance of spending, not only across functions and activities, but also by the type of value they should create, senior management will be better positioned to see – and to seize – opportunities to improve the performance of the portfolio and to align it more strongly with the company’s competitive and financial interests,” emphasizes Lee. Taking a more “strategic approach to overhead management,” companies will not only maximize the value of their investment, but potentially, also increase its strategic capability in the global marketplace.