Unlocking Cost Excellence: A Strategic Imperative
Intense economic pressures, including rising raw material costs and increasing competition from low-cost providers, are forcing corporate leaders to scrutinize their expenses more than ever. In response, shareholders and capital markets are demanding that companies demonstrate resilience and efficiency by achieving tighter cost control.
While much attention often focuses on labor-related costs, non-personnel expenses within selling, general, and administrative (SG&A) activities remain an underappreciated but significant opportunity for savings. These expenses cover a broad spectrum, including facilities, information systems, outsourced labor, transportation, travel, and utilities. For companies with high levels of outsourcing, non-personnel costs can account for 40% to 50% of SG&A expenses. Yet, due to their historically lower visibility, these expenditures often harbor significant inefficiencies and untapped savings potential.
Addressing these costs, however, requires more than surface-level measures. It demands a structured approach to ensure that cost reductions are both impactful and sustainable, while balancing the needs of internal and external stakeholders. Recognizing this complexity, we have developed a robust strategy to help organizations identify, quantify, and act on opportunities for reducing non-personnel costs, ensuring these changes are embedded into organizational practices.
Why Non-Personnel Costs Are Difficult to Manage
Despite their importance, managing non-personnel costs effectively presents unique challenges for organizations. One common obstacle is the fragmented approach to budgeting. In many companies, these costs are allocated at the departmental level, resulting in a lack of centralized oversight and an inflated perception of their importance. Without a single accountable “owner,” non-personnel expenses are difficult to track or control comprehensively.
Demand management represents another critical weakness. While organizations may negotiate favorable unit prices at the corporate level, the absence of centralized systems to control consumption often leads to excess spending. For instance, even with competitive rates for travel or IT services, total costs can escalate due to unregulated demand.
Further complicating matters, managers often lack the knowledge or tools to implement effective cost-reduction strategies. There is a prevailing misconception that significant savings are difficult to achieve without sacrificing quality or efficiency. Discussions about cost-cutting can also become emotionally charged, with employees and managers resisting changes that might affect their access to services or resources.
Inconsistent methodologies exacerbate these issues. During periods of growth, companies may rely on historical spending patterns, while in leaner times, they resort to indiscriminate cuts that often prove unsustainable. This lack of strategic focus underscores the need for a comprehensive, data-driven approach to managing non-personnel costs.
The Strategic Value of Cost Excellence
Rather than avoiding the challenges of optimizing non-personnel expenses, organizations should view them as a critical avenue for achieving cost excellence. Non-personnel costs span numerous categories, and the savings potential in each can be substantial. Depending on the industry and existing cost structures, savings opportunities can range widely, with categories like marketing, facilities, and utilities offering reductions of up to 35%.
Cost optimization in these areas has distinct advantages. Changes such as revising travel policies or renegotiating leases can often be implemented quickly, delivering immediate bottom-line benefits. Unlike reductions in personnel costs, adjustments in non-personnel spending typically go unnoticed by employees, minimizing disruption.
Moreover, reducing non-personnel costs enhances shareholder confidence and aligns with market expectations. Companies with lower SG&A expenses as a percentage of revenue consistently achieve higher total shareholder returns (TSR). This correlation highlights the strategic importance of non-personnel cost management in driving both operational efficiency and financial performance.
A Driver-Based Approach to Sustainable Cost Reduction
Our methodology for optimizing non-personnel costs is rooted in understanding and managing the key drivers that influence these expenditures. This approach involves four core steps designed to deliver sustainable improvements:
First, companies must thoroughly assess their current non-personnel costs and the factors driving them. By categorizing expenses into standardized groups and subgroups, organizations can achieve a consolidated view of their cost structure. This process includes identifying key cost drivers—such as employee headcount or service utilization—and gathering historical data to understand trends over time. Centralized oversight ensures consistency and quality in data collection, enabling meaningful benchmarking both internally and externally.
Second, effective benchmarking is essential. Traditional comparisons of absolute costs often fail to provide actionable insights. For instance, simply evaluating travel expenses across years offers limited value without understanding underlying drivers like the number of trips taken or cost per employee. By focusing on detailed metrics, organizations can uncover inefficiencies and identify specific areas for improvement.
Once insights are gathered, the next step is setting clear goals and implementing targeted measures. Companies should use benchmarking data and qualitative feedback from managers to define precise savings targets. Improvement strategies should balance efficiency—reducing unnecessary activities or services—with effectiveness, such as switching to more cost-effective suppliers. For example, adopting videoconferencing tools can significantly reduce travel costs without compromising business operations.
Finally, sustaining these improvements is critical. Organizations must embed cost-reduction practices into their operational processes, regularly monitor outcomes, and adapt strategies to meet evolving business needs. This long-term focus ensures that savings are not only achieved but also maintained over time.
Driving Meaningful Change Through Cost Optimization
The rewards of a structured, driver-based approach to cost management extend beyond immediate financial savings. Organizations that excel in non-personnel cost control demonstrate agility and resilience, positioning themselves to navigate economic uncertainties with confidence.
Our experience across industries has shown that this methodology can uncover savings opportunities in even the most mature organizations. From optimizing travel expenses to streamlining facility management, targeted actions have delivered measurable improvements that align with business goals and stakeholder expectations.
Cost excellence is not just a financial initiative—it is a strategic imperative. By embracing a comprehensive, data-driven approach to managing non-personnel expenses, companies can achieve a competitive advantage that supports long-term growth and profitability.
