How to Reduce Costs While Staying Agile
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Companies can cut costs through economies of scale and scope, but they should not do so at the cost of local flexibility, which is essential for competing globally.
By Madeline Weiss
One way in which multinational companies successfully compete in today's ultra-competitive global marketplace is by reducing costs through economies of scale and scope. However, accomplishing this goal isn't easy, and some companies never succeed. Standardizing and rationalizing systems, processes, and data require collaboration and compromise across both business units and geographic locations. Even when senior management exerts sufficient pressure, significant disruptions and uncertainties often ensue. In successful cases, companies gain global efficiencies, but they often do so at the cost of local flexibility, which is essential for competing globally.
Back-office processes and systems such as finance, accounting, payroll, meeting and travel services, IT support, and procurement are often early candidates for standardization and rationalization because they tend to be process driven. Procter & Gamble, Armstrong World Industries, and Bristol-Myers Squibb are three examples of multinational companies that have centralized such functions into enterprise services organizations.
Michael Wade, professor at IMD, a business school in Lausanne, Switzerland, has conducted research for the Society for Information Management's (SIM's) Advanced Practices Council (APC) on "anchored agility," which is his term for the balance between global efficiency and local flexibility. Even with payroll and other back-office functions that lend themselves to economies of scale, Wade notes that there are processes and systems that should retain local variations. How a company makes that determination can be tricky. Wade has presented APC members with a framework for determining the correct balance. The framework can be summarized by two questions:
1. How strategically important is the process or system?
If the process or system is not a strategic differentiator, it should be a candidate for rigorous standardization or elimination. Examples of standardization candidates include many of the back-office functions, like IT support and procurement, listed above. Companies tend to underestimate the number of processes and systems that can fit into this category. Either decision makers overestimate the strategic importance of some elements or local business unit heads convince the decision makers that they have high strategic value or need to be highly locally adapted when, in fact, that is rarely true.
Even if the process or system is potentially a strategic differentiator, it might still be a candidate for standardization, but be protected from competitors through proprietary standards. A large toy manufacturer put key account management into this category. Wade noted that many companies make the mistake of baking processes and systems in this category into enterprise systems such as SAP, thereby removing any possibility for competitive differentiation since SAP and similar systems are available to all competitors. Instead of following industry best practices incorporated into commercial enterprise systems, Wade recommends using company best practices for strategically important activities that can be standardized across the enterprise. Examples of these include aspects of the supply chain, customer relationship management, innovation, business innovation, business analytics and some IT applications.
2. How strong is the need for local flexibility?
Some processes or systems require local adaptation whether or not they are strategic. Wade recommends allowing local exceptions based on a demonstrated need, with the caveat that the underlying data associated with these elements be accessible and sharable with the rest of the organization. Processes and systems that typically require local exceptions tend to fall into the market-facing side of the business, such as sales and marketing.
The Importance of Strong Governance
Since determining whether a process or system should be standardized is fraught with political infighting, strong governance is pivotal to achieving success. Not only should governance help determine whether a process or system should be standardized, but it should also provide a mechanism for moving from one category to another as the business environment changes.
In the companies that Wade studied, governance was usually provided through a combination of head office personnel, functional leaders, and individuals charged at the interface between the business and IT organizations. When this group works effectively, governance is more likely to be successful.
To download a free copy of Wade's research report, "Anchored Agility: How to Effectively Manage the Balance between Local Flexibility and Global Efficiency," click here.
About the Author
Madeline Weiss, Ph.D., is director of the Society for Information Management's Advanced Practices Council, a research-based program for CIOs and senior IT executives. This is her first article for CIO Insight.