SG&A Cost Management Mistakes Hurt Profitability

As anemic top-line growth, heightened economic volatility, and global political uncertainty continue, finance executives, once again, are turning to cost management to deliver profitability. Unfortunately, the typical short-cuts used to cut costs focus squarely on SG&A. Traditional SG&A cost cuts follow three distinct paths, each involving a typical mistake that management fails to consider.

Mistake #1: “Cost Sledgehammer”

The Cost Sledgehammer method usually takes the form of a broad cost mandate (e.g. “X% of last year’s spending”); this approach mistakenly treats all SG&A costs as equal and ignores the lagging impact of some spend categories such as procurement because of a lack of visibility into their connection to growth. Instead, finance executives should manage SG&A costs and activities differently depending on their impact on top-line and bottom-line performance. Elite Cost Cutters have more flexibility in their SG&A due to their acute understanding of how those costs impact growth.

Mistake #2: Benchmarking Versus Peers

Historical benchmarks on relative spending performance provide little guidance on the appropriate cost structure for the future. While benchmarking is a useful “sanity check” for total spending levels, it generally ignores the degree to which your cost base should align with and support your firm’s the long term strategic plan. Furthermore, benchmarks traditionally compare performance by industry and company size and fail to account for differences in strategies – factors that drive differences in companies’ cost structures.

Mistake #3: Cost Moves Lockstep with Sales

Similar to the sledgehammer approach above, it is too easy to make large cuts or increases in costs that do not reflect the requirements of individual business units when using this technique. Recessionary cost cuts are generally undone in a recovery, eroding margin gains. As sales return, companies lose sight of the costs necessary to propel growth, allowing large increases in expenses in areas that do not lead to revenue. Almost 46% and 59% S&P 500 companies saw costs rise in lockstep or faster than sales following the 1990 and 2001 recessions respectively.

Successful cost reduction programs benefit companies over both the short and long terms. To enable financial success through cost cutting actions, finance executives should do the following:

1. Be selective about which expenses to eliminate; avoid unintentionally hampering sales generation.
2. Rather than demanding across-the-board cost decreases, understand the strategic impact of SG&A costs.
3. Identify costs that don’t support the growth strategy (as well as those that do).
4. Create flexibility while exerting tighter control over SG&A by establishing clear expectations on the upper and lower control limits for all spend categories.

What CEB is Doing for its Members

CFO Executive Board research:
Look at how Aviall helps its internal stakeholders identify strategic SGA&A costs.

CFO Executive Board research:
See how Johnson & Johnson helps functions prioritize initiatives globally across its decentralized organization.

CFO Executive Board research:
See how Intelligent Growth companies have identified costs critical to sales growth:

If you would like further information about this or related topics, please contact Thomas Roberts.