No, you have to do this the hard way: one item at a time and in short order. Nor do your instructions allow you to push for large investments-in new technology, for example-that would enable you to replace other departments. 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. If the anticipated profit is high enough to justify the bet you’re placing today, the overhead gamble is worthwhile.įurther complicating your life are the limitations on your choices. Finally, overhead that constitutes an investment in growth should be looked at on a net-present-value basis-just as other investments are. Line supervisors and senior executives may not like being classified with finance and HR staffers, but for this purpose, they should be. This same standard should be applied to many activities not traditionally recognized as overhead. You can also rank each overhead item from most effective to least and draw the cutoff at the point you consider acceptable. Simply ask whether the measurable improvement in effectiveness pays for itself. Overhead that increases the effectiveness of your direct activities should be evaluated against a strict cost/benefit standard. Is the trade-off intentional? Increases EffectivenessĢ. If your product’s burden is greater, you’ve made an implicit decision to reduce its competitiveness. Next, compare this with the burden that your leanest competitor’s product bears. When it comes to overhead that enables your direct activities-expenses associated with being a public company, basic payroll functions, financial control, and so on-you should determine how much cost your product must bear as a result of those activities (two dollars per pizza, or 40% of net sales, or 110% of direct product costs). And each kind of overhead should be held to a different standard. Overhead should be incurred for only three purposes-to enable your direct activities, increase their effectiveness, or lay the groundwork for growth. But there is a right way to approach the question. No matter what the reason, though, an important question hangs over every cost-cutting effort: “Are we cutting enough-or too much?” Expressed more fundamentally: “What’s the right level of overhead?” Companies undertake administrative cost reductions for a number of reasons-to protect earnings, to gain synergies from an acquisition, to stave off bankruptcy.
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