Even under the best of circumstances, leaders of corporate functions face enormous cost constraints. Tougher times only raise the pressure to make functions as efficient and effective as is humanly possible. What makes the job even harder is the widespread belief that efficiency and effectiveness counterbalance each other: focusing on efficiency could damage effectiveness, and vice versa.
But what if a more optimistic scenario were possible, where effectiveness and efficiency rise in tandem? What if leading organizations could go beyond battling their immediate cost challenges to reset their G&A expenses—and even reimagine what corporate functions do and the role they play in revitalizing the entire business?
That’s the crucial finding of our latest research, which draws upon detailed assessments of company practices over the past five years. We defined “efficiency” simply as the spend associated with a particular corporate function, such as finance or HR, relative to the size of the overall organization. “Effectiveness,” for our purposes, is a high level of maturity against six specific factors (see sidebar, “Our methodology”). It turns out that companies that have achieved superior cost efficiency are also leaders in six dimensions of effectiveness. These organizations’ experience reveals how leaders can prioritize investments and more effectively sequence interventions made to improve performance.
The link between effectiveness and efficiency
Our methodology
We rated the performance of over 50 finance and HR departments against six dimensions (exhibit) on a four-point scale, with four representing the most advanced practices.
Each dimension’s rating was derived from ratings for specific subpractices. For example, a function’s score for “agile operating model design” reflected its scores for a range of subpractices, including the effectiveness of its offshoring, the optimality of its management spans of control, and the clarity with which decision rights in the function had been codified and assigned.
Next, we correlated the scores for each of the six dimensions against each company’s cost, labor, and other input-factor data, normalized for company size, industry, and geographic footprint. This step allowed us to identify which factors were most closely associated with highly efficient corporate functions.
Our data indicates that companies with higher average effectiveness ratings across the six dimensions tended to have more efficient finance and HR departments.
To quantify the potential results that functions can achieve from making significant improvements across the six effectiveness dimensions, we looked at the impact that might result from a one-level increase in a function’s effectiveness scores—moving from “two” to “three” on the four-point scale. We calculated that for a finance function, this one-point effectiveness improvement could yield a 34-percentage-point improvement in cost efficiency versus peer departments—enough to propel a below-average performer at the 42nd percentile to one of the top performers at the 76th percentile (Exhibit 1).
In HR, the correlation between effectiveness and efficiency is less dramatic but still significant: a similar one-point increase in effectiveness would translate into a potential 17-percentage point improvement in cost efficiency relative to peer organizations.
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The impact of different levers on functional efficiency
While a higher overall effectiveness score was associated with gains in cost efficiency, not all six dimensions appeared to be equally important. For finance functions, process optimization and digital transformation had the biggest impact, while for HR, strong demand- and capacity-management practices and optimizing the function’s operating model were the most important factors (Exhibit 2).
This distinction may be important for organizations seeking to optimize their investment decisions as it indicates that, all other things being equal, finance and HR leaders may want to prioritize different types of initiatives as they look to contain costs and head count growth.
While the reasons for this difference are uncertain, it may be that the finance function’s greater focus on transactional data and information-processing activities lends the organization to better returns from digitization and workflow improvements. By contrast, HR roles often require a mix of highly interpersonal, transactional, and analytic activities, which makes the function less amenable to routine automation. Improving role clarity, better triaging of demands on staff time, and clearer channeling of work to the most appropriate part of the organization may have a comparatively outsized impact for the HR team.
Across both functions, talent deployment—acquiring, developing, scaling, and retaining staff with the right skill sets and mindsets—was of comparable importance, having the third largest impact on cost efficiency.
In both types of functions, the analysis revealed that certain effectiveness factors had little correlation to efficiency. For finance functions, function strategy and operating model showed only minimal predictive power, perhaps reflecting that operating models among finance departments vary less than in HR.
For HR, higher ratings for digital technologies tended to be associated with lower—not higher—cost efficiency when analyzed in isolation. HR leaders may want to temper their expectations about digital investments. This finding suggests that they pay off only when made in conjunction with improvements in the other effectiveness dimensions.
What global business services need in 2023
Implications for corporate efficiency and effectiveness
For finance and HR functions, the drivers of efficiency and effectiveness are complementary, not conflicting. To sustainably manage costs, leaders of these functions can balance efficiency measures with a relentless focus on increasing effectiveness.
Indeed, the latest edition of our annual survey of more than 200 CHROs, CIOs, and CFOs indicates that over 96 percent expect to undertake some type of cost reduction effort in 2023. At the same time, most of these leaders say they plan to maintain or even increase investment in areas such as digital, analytics, talent, and process optimization. Furthermore, the benefits these executives say they expect from these investments center less on cost efficiency and more on improving other outcomes, such as generating better insights or responding more quickly and accurately to business requests.
Far from having to choose between reducing cost and raising efficiency, businesses can achieve both—provided they understand where synergies are most likely. And by following a thoughtful approach, corporate function leaders can help unlock new value for the entire organization.
