Getting off the Roller Coaster

by Margaret Covell and Josh Lee

 Getting off the Roller Coaster

The average company spends 23 cents out of every dollar of

revenue on overhead, yet lacks a plan or system for managing the

spending for greater value. Managerial attention to overhead tends

to be sporadic and is often driven by the need to cut costs in the

near-term. Even if short-term cost reductions are achieved,

companies then find themselves tied to a roller-coaster cycle of
cost-cutting, costs creeping back several years later, and cost-

cutting again.

Companies that get off the roller coaster will discover not only that

the market rewards better overhead management, but also that

changing the very way they view and manage overhead can
significantly increase the return they get for every dollar invested

in their overhead assets.

Getting off the Roller Coaster : 1

 A Bad Name
Overhead has a bad reputation—and a bad name. Managers treat it
with benign neglect during good times, but overhead as a category is
one of the first places targeted for cuts when companies face financial
pressure. Everything from office supply usage to training, recruiting,
legal counsel, and executive perquisites ends up in the cross-hairs. The
name itself doesn’t help: calling it “overhead” reinforces the mistaken
view that these costs are somehow disconnected from the real work of a
business, that they sit over and above what is necessary, and that they
are uniformly unimportant.

This perception of overhead as a uniform lump of miscellaneous costs is

incomplete and misleading. Yes, some overhead is truly discretionary and
even a prime target for cost-cutting, but some of it is vital to the existence
of a firm and integral to its competitive success. Despite its potential
strategic and financial importance, however, many companies view it
as an afterthought. Indeed, very few of them have a systematic plan for
classifying it and managing it for returns.

This problem is not new. Managers have grappled unsuccessfully

with overhead for decades. As far back as the 1950s, the well-known
management writer Peter Drucker complained about the variety of costs
that accountants “lumped” together as overhead and noted that the very
term reeked of “moral disapproval.”1 He warned managers to make a
careful distinction between “productive” and “non-productive” overhead.

Yet Drucker’s advice long went unheeded. For decades, companies, guided
by armies of consultants, have driven their organizations through a
multitude of techniques in an attempt to distinguish between productive
and non-productive overhead. However, since this scrutiny often comes
only in times of financial crisis or concern—when management is more
focused on cutting spending in the near-term than evaluating its long-
term benefits—most managers lack the time and patience to categorize and
assess their company’s overhead thoughtfully. As a result, the processes

1 Drucker, Peter, The Practice of Management, Page 8.

2 : Getting off the Roller Coaster

devolve into either indiscriminate across-the-board cuts, or cuts based
on benchmarks or the aggregate, subjective perceptions of the value an
overhead service or department provides.

Benchmarks and employee perceptions can certainly be useful reference

points, but neither approach really helps companies make the distinction
referred to by Drucker. A cautionary tale on benchmarking comes from
a large industrial supplier that, believing customers bought on price,
launched a major overhead cost reduction program. The company
took pride in the finding that, when benchmarked against its primary
competitor, their customer service costs were 15% lower than the
competition. They took pride, that is, until customer satisfaction research
revealed that customers were switching to the competition for better
service. Strategic investments in overhead had given their competitor a
valuable advantage.2

Not surprisingly, soliciting employee opinion as the basis for decisions

about overhead cuts is also a flawed approach. Many senior managers
have had firsthand experience with the popular “value analysis” approach
in which aggressive 30+% reduction targets are universally applied across
cost centers, and the focus of the reduction is headcount. Small teams
are put together to rate and rank their and other departments based on
their perceived value. As in a product value analysis, the teams are then
urged to come up with as many suggestions as possible to incrementally
lower the cost of services—both their own and those of others. Because
no one wants to be a part of the reduction target, survival instincts kick
in and people are quick to calculate that they’re better off coming up with
ways to get rid of other people and programs, and lobbying for support
between meetings. Department heads then endure multiple rounds of peer-
pressured “giving” against the target, contribution tallies, and still more
requests for “giving” until the target is finally hit.

2 In the Monitor Overhead Management Survey, 44% of respondents viewed Customer Service / Care as part
of overhead.

Getting off the Roller Coaster : 3

 Clearly, neither approach adequately considers “value” and “productivity.”
First, both are based on a static, point-in-time assessment of spending
that fails to address the nature and timing of expected future benefit
streams. Since productivity and value are measured against what outputs
are generated today, what tends to get cut first are the more speculative
overhead spending programs, the potential ROI of which are ignored in
the fray. It is often the case, for example, that all unfilled job positions
are frozen or cancelled during a time of cost-cutting. This decision
assumes that all those jobs are irrelevant or unnecessary. We have found,
however, that the empty jobs are often empty precisely because they are
placeholders for missing critical capabilities.

Second, both approaches add little to management’s understanding of the

reasons behind the spending—the root drivers of costs. As a result, costs
creep back in and accumulate over time, only to be scrutinized and cut
again. This vicious cycle of overhead cost growth and cutting can go on
for years. In a survey of nearly 2000 companies, Monitor found that two
thirds of respondents endured three or more cost-cutting initiatives within
the past seven years; twenty-seven percent of them, in fact, had witnessed
over six cost-cutting initiatives. And yet, over half of the respondents felt
that these programs were at best a partial success, and only 7% felt that
they exceeded expectations. Forty-eight percent pinned the blame on a
failure to address underlying drivers of spending, and 47% have seen the
costs grow back.3

The effect of this roller-coaster cycle is dramatic. When an organization

goes through an overhead cost reduction program, people often do their
day jobs at night so that they can work on the cost-cutting task force
during the day. And when such programs recur too frequently, people
burn out, becoming demoralized and cynical. They fear they’re working
themselves out of their own jobs. Even worse, many companies discover
too late that in the process of cutting, an important organ or two was
nicked or removed entirely. Forty percent of our survey respondents
reported that the critical capabilities of their organization were not
protected during cost-cutting initiatives.4

2 In the Monitor Overhead Management Survey, 44% of respondents viewed Customer Service / Care
as part of overhead.

4 : Getting off the Roller Coaster

Tapping Overhead for Value
While many managers have learned firsthand just how damaging this
cycle can be, few are aware of the substantial upside that can come from
stepping off the roller coaster and taking a new approach to managing
overhead. Monitor Group conducted a study of the financial performance
of nearly 800 large public U.S. companies over the last five years,
comparing companies that followed the roller-coaster approach to those
that managed their overhead spending deliberately and consistently.
We looked at the five-year change in market value of companies that
consistently reduced their overhead ratio (defined by SG&A spending
to revenue) year after year and compared that to the market value of
companies that allowed their overhead costs to grow and then cut them,
only to see the costs grow again.

The results were startling. The consistency group achieved an increase

in market value two times that of the roller-coaster group. In fact, even
those companies that had lower overall reductions, but managed the
ratio down consistently, were better rewarded than those companies that
reduced their overhead more severely, but in a more roller-coaster fashion.

Granted, many factors affect a company’s share price. However, just

as the market rewards companies that manage the predictability of
their earnings, the market also clearly rewards companies that have
demonstrated predictability and stability in managing their SG&A. Given
that SG&A, on the whole, is one of the more controllable levers of overall
profitability, there is tremendous upside in taking a more thoughtful and
disciplined approach to managing overhead spending.

The bottom-line: Stopping the roller coaster can create significant value
for shareholders. To do so, the organization needs to move away from
addressing overhead by episodically attacking costs, to managing it on an
ongoing basis as a set of investments, evaluated systematically against the
true returns generated over multiple time periods.

Getting off the Roller Coaster : 5

 The Roots of Low-Performing Overhead
In most companies, no one owns “overhead.” As any company report
will attest, plenty of people do own specific cost centers that are
accounted for as overhead. These people are responsible for managing
the costs of their department or area. But the budgeting and cost
accounting systems they typically use aren’t designed to capture the
true cost of a process that crosses these organizational and accounting
boundaries. For example, we worked with one company whose
recruiting process—from recruiting planning, to placing a recruiting
advertisement, to screening candidates, and finally to extending an offer
letter—spanned five different departments, which rolled up into three
different regional and two different divisional reports. Each person in
the chain was responsible for managing against a specific productivity
metric for his or her discrete part of the process, but no one person was
responsible for the true overall cost of the recruiting process—or, more
importantly, the overall yield of the activities.

Likewise, in a global professional services firm, we discovered that while

more than 4,000 individuals were given what amounted to a blank
check for IT spending in the name of local market entrepreneurialism,
few of them were held accountable for the returns generated. No one
was required to link the investments to changes in revenue growth,
market penetration, increased efficiency, or reduced exposure to risks—all
potential returns.

These companies are not alone. Rarely is there a full accounting of

overhead spending. Because ownership and spending are so diffused,
overhead typically grows incrementally over time at local and functional
levels without the benefit of an integrative and systematic plan,
investment guidelines, or ongoing performance management tools. While
each investment may be justified at a specific level, the full magnitude
of the spending is not visible to senior management until it has reached
critical mass across the organization. This problem is further compounded
by the fact that many companies lack a measurement system that goes
beyond cost and productivity.

6 : Getting off the Roller Coaster

Monitor Survey on Overhead Management Perceptions

Monitor recently conducted a comprehensive survey • When asked about their perceptions of how
of 415 senior executives and managers regarding their much they were spending on overhead to
perceptions of overhead and overhead management. The protect against business and enterprise risks,
respondent population included Board Chairs, CEOs, General 23% perceive that they are under-investing in
Managers, and functional leaders from a wide range of protection and 21% perceive they are over-
industries. All respondents had been with their respective investing
companies for a minimum of three years, and many of them
• 32% believe they’re not spending enough to
had tenures longer than five years. The companies they
improve the efficiency of the organization; 17%
represented had annual revenues ranging from $300MM to
believe they’re spending too much
more than $50BN.
• 29% believe they’re not investing enough in
The survey results produced several interesting findings:
strategy enabling activities; 16% believe they’re
• More than 80% of respondents believe that overhead is a investing too much
potential source of competitive advantage, but a majority
• 68% of respondents reported that they lacked
also believe that their overhead is not currently aligned
adequate incentives to manage overhead spending
with their strategic goals
• Two distinct segments emerged:
 Listed in order of rank are the functions considered
overhead (i.e., where 50% or more of respondents  Satisfied that Overhead Management is
identified the function as overhead) and the Healthy: 27% of respondents
percentage who believe that the function is a - Gaining scale in overhead activities;
source of competitive advantage:
- Making appropriate investments; and,
- IT (75%), Training & Education (69%),
Procurement (65%), HR (59%), Risk - Getting expected returns
Management (58%), Finance & Accounting  Highly Dissatisfied: 34% of respondents
(53%), Legal (46%)
- Overhead growing too quickly or shrinking
• 80% believe that value created by overhead can be too slowly;
measured and managed; however, they do not know
- Investing in the wrong things; and,
the value their company gets from overhead spending
because they have no clear measures - Not getting enough value from spending.
• Two thirds of respondents believe that their overhead is  No correlation between segment type and the
missing critical capabilities demographic characteristics of a respondent
could be found; demographic characteristics
• Two thirds of respondents have gone through three or
tested included company size, tenure with
more cost cutting initiatives within the past seven years;
company, job title, and industry
27% of them experienced more than six initiatives in the
same time period Monitor’s survey results include a significant amount of data
regarding respondent views of outsourcing, but this topic is
 More than half of respondents felt that these
outside the scope of this article.
programs were a partial success at best, and only
7% felt they exceeded expectations
 48% believe that past cost-cutting initiatives failed
because they did not address the underlying
drivers of spending
 47% have seen the costs grow back

Getting off the Roller Coaster : 7

 Given the diffusion of accountability and the lack of transparency, most
companies underestimate their total support-cost spending by at least
50% and often by as much as 80%.5 What appears in management
reports is usually only the 20% tip of the iceberg. Without a direct
line of sight into what the company spends and why, it is naturally
impossible for the senior leadership of a company to manage overhead
spending for value. And, without greater attention to planned
investment, control, and visibility, it’s no wonder that companies
resort to the blunt instrument of the across-the-board cut. This kind of
imprecise, often careless cutting does not lead to a long-term reduction
in costs. Rather, it sets companies on the roller coaster that we know to
be deleterious to the creation of shareholder wealth and detrimental to
the long-term health of the company.

A New Conversation to Set the Company on a New Course

The first step in applying the brakes to this damaging cycle is to change
the nature of the conversation about overhead. As described above,
many companies resort to slashing costs indiscriminately across the board
during a downturn. They do so because they lack knowledge of their total
overhead spending and rely on anecdotal information to assess the value
of that spending. Only rarely can senior executives weigh the merits
of additional incremental spending at a location far from headquarters.
Likewise, senior managers who do not have knowledge or training in
specific functional areas are at a great disadvantage when trying to
assess spending plans generated by subject matter experts. Furthermore,
most companies are not explicit about how their overhead investments
link to the types of benefit they expect the investment to return, in what
time frame, and with what associated risks. As a result, there is a lack of
a common, shared view of what value is created by different activities
relative to the costs incurred over time. In fact, while 80% of our survey
respondents believe that overhead value can be measured and managed,
they also admit that they don’t know the value their own company derives
from overhead spending, because they have no clear measures.6

5 Monitor Overhead Management survey results

6 In the Monitor Overhead Management survey, over 80% of respondents believe that Overhead, in
general, can be a potential source of competitive advantage. However, a majority of these executives
believe that their overhead is not currently aligned with their strategic goals. Following is a list of the
top-ranking functions considered to be overhead (i.e., where 50% or more respondents identified the
function as overhead) and the percentage of respondents who believe that the function is a source
of competitive advantage: IT (75%), Training & Education (69%), Procurement (65%), HR (59%), Risk
Management (58%), Finance & Accounting (53%), Legal (46%).

8 : Getting off the Roller Coaster

 These structural impediments are not easily changed. However, senior
managers can reshape their conversations and put their overhead
management on a new course: one toward managing for value.
Reshaping the conversation requires dispensing with an “overhead is a
burden” mindset and fundamentally reframing how one views the nature
of overhead spending. It starts with challenging some basic tenets.

Think Assets, Not Costs

Core to modern accounting is the principle of matching. This principle
dictates that, as much as is practical, all costs should be associated with
specific revenue. Therefore, all costs should be recorded as expenses in
the same time period as the related revenues. This principle is clearly
problematic when applied to overhead. While some overhead spending
can be viewed as true period expenses—for example, a one-time printing
of marketing brochures for a conference—it is much more difficult to view
the type of spending in such functions as HR, IT, Finance and Accounting,
and Legal in the same light. Spending in these overhead functions occurs
many periods before the delivery of any future benefits. The accounting
profession has recognized this dilemma, but given the impracticality
of capitalizing overhead spending, it necessarily treats them as period
expenses on paper.

Managers, however, need to recognize that accounting for the spending,

which is essentially about recording the consumption of resources, is
a very different exercise from assessing the value generated by that
spending. First, treating overhead costs as period costs obscures the
fact that much overhead spending funds the development and ongoing
support of processes that create capabilities. These capabilities, in turn,
produce different levels and types of benefits over multiple time periods.
Second, overhead’s associated benefits rarely come in the form of direct
revenue. Instead, the benefits are less easily identifiable and include such
intangibles as ensuring legal and regulatory compliance.

Getting off the Roller Coaster : 9

 When overhead is de facto managed as a period cost, there is an
assumption that because “it’s in the budget,” it should stay in the budget.
Pressure may be applied to manage budget levels or the rate of increases
may slow, but seldom does anyone question whether the money should be
spent at all. Furthermore, managers in this mindset overlook the question
of optionality. Imagine, however, a situation in which the head of Finance
is looking to invest in hiring additional specialized personnel to improve
the collections process; it would be important to consider the investment
cost and return with a view as to whether outsourcing makes more sense.

Given that the fundamental attributes of overhead more closely resemble

those of an investment than of period costs, overhead is better thought of
as investments in assets. Consider the following:

1. OVERHEAD REQUIRES SUSTAINED, MULTI-PERIOD FUNDING.

For many overhead activities to operate effectively and achieve
the desired results, funding must be sustained over a period of
time. Because much of overhead is about underlying capabilities
(e.g., training and education, product development forecasting), a
company cuts funding at the risk of eliminating critical expertise,
experience, and knowledge.

2. OVERHEAD ACTIVITIES GENERATE OUTCOMES. Unlike product costs

which are essentially inputs (i.e., consumed resources); overhead
spending produces specific outcomes (e.g., received payments,
settled lawsuits, retained and trained employees).

3. OVERHEAD SPENDING BENEFITS MULTIPLE CONSTITUENCIES.

Because much of overhead spending is in cross-cutting processes
and systems, the investments tend to benefit multiple businesses,
products, functions, and geographies within a company, rather than
a single, direct beneficiary.

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Instead of costs, think assets: this is the necessary reframing. Viewing
overhead as an investment in an asset would certainly prevent stop-and-
start, roller-coaster management. It would ensure regular ROI calculations,
the explicit exploration of optionality, and adherence to standard risk-
assessment procedures. And it would change the nature of the dialogue
from a debate about cutting or adding costs to a discussion based on
investment rationale and performance requirements.

Monitor Study on Consistency

of Overhead Management
For the past two decades, companies across North America have been hell-bent
on cutting costs. They’ve downsized their workforces, reengineered and automated
their processes, outsourced their manufacturing operations, and most recently,
started sending white collar jobs overseas. Yet despite the dramatic, well-publicized
efforts of the popular success stories, the vast majority of companies have not seen
significant reductions in their overhead ratio (SG&A/Revenue).
Why? Because cost cutting is like unsuccessful dieting for some companies. They
try the latest approach, see some success, and then fall off the wagon only to see
the costs reappear like those unwanted pounds after the holidays. In fact, a handful
of well-known cost-cutting techniques are not that dissimilar to fad diets: across-
the-board-cuts, the me-too benchmarking approach, and reengineering specific work
processes. They only work for so long, because they fail to address the underlying
causes of spending growth. As a result, many companies have striven—without
success—to cut costs and to keep them down.
And, just as yo-yo dieting can damage your health, yo-yo cost cutting causes great
harm to the the overall health of your organization. In fact, our research proves that it
has cost shareholders dearly.
Monitor recently studied the financial performance of 800 large public U.S. companies
over the last five years to test a set of assumptions about the connection between
overhead management and company performance. We found that despite the many
efforts to boost productivity in back-office and support functions, SG&A spending actually
outpaced sales at over half of the companies in our study. In addition, we found that only
15% of companies were able to achieve a significant reduction (i.e., by 20+%) in their
overhead ratio (SG&A / Revenue).
Yet, for the small group of companies who did achieve substantial reductions in their
overhead ratio, market returns were substantial. Even more promising, those companies
who improved their ratio in a consistent manner— consistent progress with little annual
variation—earned returns that were about twice as high as those whose ratios fluctuated
significantly year-to-year.

Getting off the Roller Coaster : 11

 Four Classes of Overhead Assets
Just as no one person “owns” overhead, there is no one type of overhead.
The traditional classifications—“value adding” vs. “non-value adding,”
fixed vs. variable—tend to be one-dimensional and limited in helping
determine what actions one can take to improve overhead performance.
If, instead, we view overhead as investments in assets, we can categorize
them by the kind of return they are expected to generate.

We identify four classes of overhead assets based on their distinct

potential benefit streams. Each class has a different investment logic
that specifies how asset performance should be evaluated. For any
given function, activities and investments can be classified according to
whether they:

• Provide a basic service;

• Enhance the efficiency of the organization;

• Reduce or mitigate risks; or

• Enable the strategy of the firm.7

1. Basic Service Overhead Assets

Every company has to perform a set of basic activities that are necessary
to the legal and practical operation of the firm. Examples include A/P,
A/R, statutory accounting, financial reporting, payroll administration,
and voice and data system maintenance. These services require steady
investments to maintain because they are recurring, ongoing activities. As
such, these assets should be evaluated based on the efficiency with which
the services are delivered.

Basic Service Assets are clear candidates for periodic make vs. buy
evaluations. Companies typically evaluate these services based simply on
how much they cost last year—in short, did the department spend more or
less than the budget? Instead, the assets should be evaluated against the
comparative returns of the next best alternative. Management should ask
themselves whether they will get the same, or better, return if someone
else owned the assets.

7 This is an activities-driven classification; items such as utilities, rent, office supplies are therefore
accounted for via the activities to which they are relevant.

12 : Getting off the Roller Coaster

2. Efficiency Enhancing Overhead Assets

“It will increase our efficiency” is one of the more common reasons
for adding new programs or starting new initiatives—whether in MIS,
HR, Finance or even strategy planning and marketing communications.
The claim is often supported by productivity metrics (“the investment
will lower the cost per unit in my department over time”) as well as
anecdotal evidence (“we spend so much time customizing this collateral
every time someone calls”). These requests typically relate to one-time
spending on such initiatives as a process improvement program, the
development of a “turnkey solution” of a corporate program for business
units, or a software tool.

Two potential issues arise in evaluating Efficiency Enabling Assets. First,

without numerical data or direct experience in the area, an objective
evaluation of the investment hypothesis is difficult. Instead, performance
is often measured by simply comparing the estimated or budgeted expense
to the actual expense: to ask, essentially, “Did you spend more than you
asked for?” Second, the measurement of efficiency is often limited to
an individual’s sphere of responsibility. For example, one person might
be tempted to reduce unit costs in his department, unaware that the
resulting downstream effects would decrease the overall efficiency of the
process. Or, in the development of a “turnkey solution,” the efficiency
of the communications department might increase, but if it turns out the
business units must spend extra time to customize the report, then the net
efficiency will decrease.

If, however, these initiatives were viewed as project-based investments

in Efficiency Enhancing Assets, they would then be managed with a
contracting type of discipline, beginning with a target ROI based on a
process-view of efficiency and concluding at an agreed upon endpoint.
While this just sounds like good sense, we’ve found many companies in
which this doesn’t happen. More than once, for example, we’ve discovered
that a “process reengineering team” launched five years ago is still on
today’s organization chart.

Getting off the Roller Coaster : 13

 3. Protection Overhead Assets

All companies face a wide range of risks—environmental, legal, regulatory,

and financial. Based on the nature of the risk and the risk tolerance of the
individual company, the types and amount of protection assets in which
they invest will differ. Obvious forms are workplace safety programs, the
legal department, and health and internal audit programs. Less obvious
are the many overhead activities that enable compliance in legal, finance
and accounting, and health and safety. Moreover, managers from all
walks of the organization are daily taking out insurance against a host of
other risks. There are checkers to check the checkers, customer outreach
programs to guard against franchise risk, sexual harassment training
and employee conduct training to ensure the modeling of appropriate
behavior, and succession planning efforts to help guarantee good
leadership for various functions in the future.

Some risks are predictable and calculable. Others represent potential

and uncontrollable catastrophe. Both the obvious and the more subtle
investments a company makes to protect itself against these two types
of risk need to be assessed as insurance investments. To evaluate these
Protection Assets, senior executives need to ask themselves: What risks are
we willing to absorb? What risks can we efficiently and economically buy
insurance for, hedge against, or otherwise lay off? Are we over or under-
insured in certain areas?

4. Strategy Enabling Overhead Assets

A debate that occurs frequently in companies, especially during budget

time or periods of performance pressure, is about whether a given function
or activity is “strategic” or not. If it is strategic, the argument often
follows that it must remain exempt from cuts or that it deserves even more
investment. The conversation revolves around how much to spend—not
why to spend and how to measure the return on the spending. Nor is the
conversation grounded in a discussion of the actual competitive strategy
of the firm and how that activity ties directly to the capabilities required
to win in the marketplace.

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 The relevant questions are: Is this activity or investment essential to the
firm’s strategic success? Is it a “must have” for the company to deliver its
source of advantage, whether framed as responsiveness to the customer,
flexibility, service or product breadth, product innovation, quality of
care, etc.? Only “must-have” activities should be considered Strategy
Enabling Assets, and these assets should be regularly evaluated for their
contribution to specific competitive outcomes.

Assessing Potential Returns on Overhead Assets

A discussion on sorting overhead into the four classes outlined above
should focus, first and foremost, on the objective—that is, the expected
type of return—of an investment:

• Is it required to exist as a legal operating entity?

• Is it expected to increase the efficiency of a process?

• Is it designed to protect or mitigate against potential risks?

• Is it a “must have” to deliver on the competitive strategy?

The next step is the quantification of value: How much value can this
asset be expected to provide? While the specific metrics for a given class
will vary by company, the expected value of an investment can be tested
by asking the following questions:

• BASIC SERVICE OVERHEAD Is the asset more cost effective and

efficient in performing the activities at the required performance
levels, relative to either internal or external alternatives?

• EFFICIENCY ENHANCING OVERHEAD Will the net increase in efficiency

justify the initial outlay of costs and any ongoing maintenance costs,
in accordance with the target hurdle rate?

• PROTECTION OVERHEAD What is the risk / return profile of the

investment and how does that fit with the company’s overall risk
tolerance? Will the incremental investment provide marginally
greater protection than is currently available at a price we’re willing
to pay?

Getting off the Roller Coaster : 15

 • STRATEGY ENABLING OVERHEAD How will the investment increase
the competitiveness of the company along specific dimensions of
performance? Will an increase in competitiveness translate into a net
contribution, greater than the investment, to reaching the company’s
strategic goals?

Who answers these questions, what data is collected, and how the data is
collected are factors that are critical to the validity of the answers. While
each company will craft its own unique process, there are three common,
guiding principles:

PRINCIPLE 1 Ask the question at a level detailed enough to be

meaningful. When evaluating current asset performance, identify clear
performance metrics and outcomes. For example:

• To what degree have the finance activities protected the company

against financial risks, such as currency fluctuations?

• Has the recruiting function improved the tech rep retention rate by
bringing in the right applicants and setting early job expectations?

• To what degree has the new customer service representative training

program improved customer satisfaction?

PRINCIPLE 2 Gather data from a range of perspectives. Given that

overhead tends to benefit a range of organizational units across businesses
and geographies, rarely is there a single “right” view of the importance
and performance of a given activity or function. Instead, overhead assets
need to be considered from multiple vantage points, depending on the
asset and the population of its users and beneficiaries.

16 : Getting off the Roller Coaster

PRINCIPLE 3 Don’t expect to account for it all. There will be some spending
which won’t fall neatly into one of the four categories and will resist
classification. This, in and of itself, will be important: it begs the question,
“Why are we spending that money at all?” What typically remains after the
initial inventory are two kinds of spending: rework and truly discretionary
spending. Include them in the total inventory because they, too, should be
evaluated as part of an overarching overhead management strategy.

Creating an Overhead Asset Map

Building an Overhead Asset Map is critical to healthier overhead management. Here
are six process steps:
1. DECIDE WHO’S GOING TO DECIDE. Typically, the CEO jumpstarts the process
by selecting a small senior team to create the map. The team should comprise a
balanced mix of executives, operators, providers, and users.
2. TAKE AN INVENTORY OF THE FIRM’S OVERHEAD ACTIVITIES. It is important
for a central team to create a master definitions list since different business units will
define and organize their overhead resources differently.
3. SORT ACTIVITIES INTO THE ASSET CLASSES. Throughout the sorting process,
make the logic explicit as to why an activity belongs in one category or another. Note
two tendencies to watch for in this step: functional leaders may over-use the strategic
category to describe their services; and operators may over-use the basic services
category to describe the services they receive.
4. GATHER INTEGRATED COST DATA FOR EACH ACTIVITY. The map needs to
provide a clear picture of where the firm has placed its investments. Doing so is usually
more complex than companies expect; this step often requires activity-based costing
estimates and integration of data from HR systems and financial systems. Integrating
overhead data from “the field” often leads to surprising new pictures of where money is
being spent.
5. DEFINE AND POPULATE A CUSTOMIZED SET OF PERFORMANCE METRICS. Firms
will need to develop a unique approach to assessing the performance or “return” of different
functions. These metrics need to be aligned with the firm’s strategy and established at
multiple levels of granularity depending on the importance of the different sub-functions.
Important tools in this step are surveys of different user groups for different functions, and
benchmarking (especially for the efficiency-enhancing and basic services assets).
6. CONSOLIDATE THE MAPS. The asset maps should be completed first at the
level of individual functions, and then in a consolidated form across the firm’s
entire overhead portfolio. This will set the stage for strategic decision-making and overall
overhead strategy.

Getting off the Roller Coaster : 17

 Evaluating Your Portfolio
A view of the company’s overall portfolio of assets will emerge from the
sorting and inventorying process. It is important to keep in mind that
there are several factors, some environmental, that shape the composition
of the portfolio. The industry within which the company competes has
an obvious influence. For example, companies in industries dominated
by regulatory requirements or those that are undergoing heavy litigation
based on product issues or questionable practices will see a heavy dose
of Protection investments. But even within an industry, the allocation of
spending can be dramatically different.

The business context is another important factor. For example, businesses

that have enjoyed a relatively stable business environment, but now face
new forms of lower cost competition (whether due to lower-cost labor
or increased automation), may find their portfolio tilting toward
Efficiency Enabling assets as they adapt to remain competitive in the
changing marketplace.

Finally, a company’s culture and the process by which it makes overhead

investment decisions have a significant impact on the composition of
the portfolio. What messages senior leadership broadcasts formally (and
models informally) will influence how departmental managers choose
to spend. If people are regularly punished for taking risks, it stands
to reason that people will preemptively pad their budgets to mitigate
unexpected expenses. If, however, the senior leadership beats the drum of
efficiency, managers are likely to fall in step and make investments with
an eye towards achieving greater efficiency.

Equipped with an understanding of the current portfolio of 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.

The following questions provide a guide for making choices about the
kinds of investments a company should make in its overhead:

18 : Getting off the Roller Coaster

 1. What type of portfolio do we want and how might it change over
time? For example, are there regulatory changes on the horizon
that will require new risk management expertise or functionality?
Is the company setting itself up to “leapfrog” a competitor,
and does it therefore need to invest more in strategy-enabling
overhead? Has the infrastructure of the organization become
too complex and expensive over time, and is it now in need of
investments to create a step change in efficiency?

2. Given the future goals of the portfolio, where are we over- or

under-investing and why? While part of the answer certainly will
come from the performance measurement techniques described
above, the rest will be informed by how well the portfolio fits with
the company’s corporate and strategic goals. Often, this question
needs to be addressed at a functional level: IT, Finance, Legal,
HR, Government Relations, Marketing, Business Development,
Communications, etc.

3. How should we best rebalance the portfolio? Here, management

will need to decide whether and how to stop or redesign programs,
services, studies, and other activities that are not providing
adequate value, regardless of whether that implies a failure to
deliver adequate efficiency or protection, or to enable strategy.
This is also the point at which management can redirect spending.

Constructing the Right Overhead Architecture

and Reconfiguring for Value
By delving into these three key questions, senior leadership can define an
overall overhead strategy that specifies investments, performance targets
and timing, and the capabilities required to deliver against the overhead
strategy. Moreover, having an integrated overhead strategy better
positions the company to make decisions about how to structure, organize,
and manage its overhead activities.

Getting off the Roller Coaster : 19

 • BASIC SERVICE OVERHEAD activities and functions should be
organized and managed for compliance and cost efficiency. Many,
such as payroll and benefits administration, should be treated like
corporate “utilities” and therefore consolidated into centers of scale or
outsourced to maximize efficiency, depending upon the scale of the
operations and the standardization of the processes.

• STRATEGY ENABLING OVERHEAD AND PROTECTION OVERHEAD assets

that rely upon specific expertise and skills can be organized into
Virtual or Dedicated Centers of Expertise to ensure that the right
resources and capabilities are networked appropriately and leveraged
across the organization.

• EFFICIENCY OVERHEAD, which tend to be project-based investments,

should reside where they will get the most direct oversight.

To support the new overhead architecture, people need to be held

accountable for the results. Systems of reporting, performance
management, and incentives will need to be strengthened and aligned
to support the goals of the new overhead strategy.8 In particular, most
budgeting processes will have to undergo significant change to ensure
that the right frameworks are used to evaluate the different types of
investments and to judge the appropriate timing of investment outlays.
And, to help steer the organization in the right direction, companies
should adopt management tools such as performance scorecards, “early
warning systems,” and tracking mechanisms that provide an integrated
picture of total overhead costs and associated multi-period performance.

An example of a firm whose portfolio we helped to evaluate and

reconfigure is a national healthcare services provider. With our guidance,
the company pursued a multi-prong rebalancing of its overhead assets:
it increased funding of assets tied directly to the competitive strategy
(e.g., labor relations and market-level recruiting), implemented a system
to improve the productivity of assets related to efficient operations (e.g.,
reporting and benefits administration), and rationalized protection assets
where they felt they were overprotected (e.g., inside legal counsel). The
net result? A 13% overall reduction in the overhead cost structure and
significant improvement in key performance metrics, such as better union
relationships and higher recruitment and retention rates.

8 In the Monitor Overhead Management survey, 68% of respondents reported that they lacked
adequate incentives to manage overhead spending.

20 : Getting off the Roller Coaster

Managing for Returns to Sustain and Adapt
the System over Time
Valuable insights emerge just by going through the exercise of sorting
overhead into these different categories, taking inventory of the
company’s assets, and generating a dialogue among senior managers
about the specific returns generated by the different asset classes. More
importantly, however, this reframing of what overhead is and can be
transforms overhead conversations from endless tug-of-wars into a
more disciplined, informed, and productive discussion about investments
and return that places accountability for performance squarely on the
asset owners.

The process we’ve laid out is, in and of itself, an investment. Sustaining
the system over time requires the appropriate mindset and leadership
behavior. It will take work to recondition the ingrained mindset of
the organization and to go through the steps of classifying assets and
evaluating their returns, and to do so on a regular basis—not just in times
of crisis. Because the people involved will have a range of predictable,
understandable, and often conflicting interests, expect a volatile back-
and-forth between users, functional managers, and senior executives
about what parts of overhead fall into which asset categories. Yet, at the
end of the day, the payoff will be very real:

• A clear and shared investment logic: By applying defined

investment logic to spending, managers are forced to articulate what
benefits will accrue and in what time frame.

• Accountability for a range of performance outcomes, not just better

cost management: Given a shared view of the benefits generated by
an investment in overhead, it is easier to identify and hold managers
accountable for the performance of an activity, not just the cost.

• A level playing field for the conversation: By driving to real

output metrics, senior managers who lack knowledge or training
in specific functional areas are no longer at a disadvantage when
trying to challenge or shape spending plans generated by experts in
technology, finance, or legal affairs.

Getting off the Roller Coaster : 21

 • A drive to disciplined and consistent evaluation and action: By
following a disciplined investment type process, the company is less
likely to lapse into the roller-coaster cycle that breeds tension and
cynicism in the workforce.

Armed with a new framework for classifying the spend and evaluating
the logic behind the investment, management can instill a new discipline
to managing overhead. By tirelessly questioning what the company is
investing in, for what returns, and over what time frame, the company
will significantly increase the actual value inherent in its overhead and
reap rewards in the capital market. In doing so, the company might find
that the last roller coaster ride it took was just that—the last.

Case Example
Monitor worked with the management of a national, site-based service company to
survey individual site heads on their views of nearly one hundred overhead services
offered to the sites. These services ran the gamut from technical rep recruiting to
management training courses, IT application development, customer marketing and PR
support, business development, legal support, finance and accounting, tax support, and
leadership development programs. The site heads were asked to provide input on the
importance of the service relative to various objectives (e.g., protection, efficiency) and
on its performance level.
Management discovered that 46% of services were considered Low Performing / Low
Importance by the majority of site heads. These services comprised only 25% of the total
costs of all services tested, but they caused frustration, wasted time, and distracted the
site heads from their work. Clearly, the assets were not providing the right returns from
the users’ perspective. Site heads had ranked other services, such as on-line education
tools, as Low Performing but High Importance (for Strategy-Enabling). The tools had been
“home-grown” and although they were deemed helpful, they, too, did not adequately meet
users’ needs.
Based on the input, the company rebalanced its investments by reducing or eliminating
a number of the Low Performing / Low Importance services and reinvested the funds
into improving the Low Performing / High Importance services. For example, they
contracted out the development and delivery of the on-line education tools and gave
users a superior solution.

22 : Getting off the Roller Coaster

About the Authors

MARGARET W. COVELL

Margaret is a Partner of Monitor Group and a pioneer of the

Adaptive Overhead™ methodology. Adaptive Overhead™ is Monitor’s
approach to help clients optimize overhead and is based on the
concepts covered in this article. Margaret began the operations
strategy group within Monitor from which the Adaptive Overhead™
practice emerged. Margaret earned an MBA from Harvard Graduate
School of Business Administration and received a BA, with honors,
in English literature from Colgate University.

e: margaret_covell@monitor.com
t: 1 617 252 2209

JOSH LEE

Josh is a Partner of Monitor Group and the leader of Monitor’s

Adaptive Overhead™ practice. Josh has over 12 years of experience
helping clients improve the performance of their overhead
investments. He began his career as a consultant at CSC Index.
Josh received an MBA and a Masters degree in public policy from
the University of Chicago. He received his undergraduate degree
from Columbia University and was a Fulbright scholar in Germany.

e: josh_lee@monitor.com
t: 1 617 252 2370

For more information on Monitor’s Adaptive Overhead™

practice please visit www.adaptiveoverhead.com

Getting off the Roller Coaster : 23