Eliminate More Overhead Costs

What is an overhead cost? Definitions vary, but most people agree that any cost not directly used to produce or to supply an offering to a customer is an overhead cost.

Why begin this lesson about zero-based analysis with eliminating overhead costs? Such costs are not only large, but overhead activities add many other unnecessary costs. Here's an example. A survey showed that following up on casual comments and questions by CEOs often occupied more than 20 percent of all working hours within a company. A similar effect also occurs among employees who are lower in the chain of command whenever any more senior person in the company (from the CFO down to the lowest-level supervisor who has people working under him or her) makes a comment or asks a question.

In addition, most people would like to have more people reporting to them. When more people report to a supervisor, most organizations will pay more to the supervising person. Any time you add a person to an organization to supervise someone else, empire building is encouraged and unnecessary costs are likely to be added.

There is also a lot of self-satisfaction among company leaders who believe that because they are at or near the organization's top, they must be good at what they do. Right? Not necessarily. Someone who has simply run healthy businesses in good economic times often rises in a company as fast as someone who has done a good job of dealing with difficult challenges.

In an organization where there are few problems, promotion mostly follows popularity. As many people describe who is promoted, it's like being back in high school trying to stand out as the coolest guy or gal.

A particularly harmful set of behaviors often occurs when company leaders think that they are well above average in performance, but they are not. When such a victory of self-confidence over reality occurs, the door is usually closed to cost cutting, outsourcing, and new strategies. A more useful belief for company leaders to hold is that everyone else knows a lot more than the leader does, but that the company's leader can find out what others know by doing the right homework.

What's the ultimate in reducing overhead costs? Not having any such costs. You won't find many companies approaching that ideal, but these days it's possible to come a lot closer than it used to be.

You might be skeptical that much can be done about reducing overhead costs because you wonder how costs of complying with government regulations can be avoided. Well, in many countries regulatory costs are inevitable. But you don't have to operate in all countries. In countries with less regulation, you may be able to restructure your operations so that many, if not all, such regulatory costs can be eliminated.

Here's an example. You might be thinking about operating in country A. If the cost of regulation is the only reason not to be there, you can approach country A's government with an offer to open an operation if the regulatory costs can be eliminated. While the law may require complying with such regulations, the government may still have the flexibility to grant you tax credits or provide other incentives that offset the regulatory costs to operate there.

Companies can also often reduce the minimum number of employees required to accomplish necessary overhead activities. As an example, you might help the most effective of your key employees to establish businesses that provide such critical activities to your organization. Through contractual arrangements, you could obtain favorable terms and also restrict such businesses from serving your competitors.

If you still have employees, you can transition from mostly fixed compensation to variable compensation that's tied to performance that each employee can directly influence. Such a compensation switch might mean production incentives for manufacturing personnel, more emphasis on commissions for salespeople, and bonuses for cost reductions and adding customers for those who can influence those activities.

While such ways of eliminating overhead sound fine in the abstract, how practical are they? Nucor, the pioneer in producing steel from scrap materials, has been very successful with such methods. Nucor began by looking at customers' minimum requirements. For many applications, steel made by using virgin raw materials had no advantage over steel made with less-expensive recycled materials. Naturally, if you can simply melt old steel, it's a lot cheaper than if you begin with iron ore, coke, trace minerals, lots of liquid oxygen, and huge facilities.

Most steelmakers pay their employees high wages. Nucor had a different idea. Its employees would receive low wages and a big percentage of the value of any productivity gains they made. This approach meant that even a floor sweeper would earn more than half of his or her pay in the form of productivity bonuses rather than from hourly earnings.

Because Nucor was frequently adding new facilities, the company was able to negotiate for tax savings from local and state governments, providing offsets for regulatory and employee-benefit costs. Their facilities also don't pollute as much as traditional steel operations.

What if you have a marketing business? The costs of adding customers can be more than the cost of goods. Today, even marketing has become an area where performance counts. Many media today don't charge by the amount of advertising displayed but, rather, by the results gained from the advertising. In essence, more and more media are operating as sales agents you pay only when a sale is made.

Offerings that employ less overt marketing are often more successful than those that use traditional methods. Newer marketing methods might include a branded offering sponsoring a contest that most people will support while trying to gain any attention for the offering. If you would like to read more about this alternative, take a look at Buying In (Random House, 2008) by Rob Walker. You'll be amused to find out how often savvy customers today deliberately pick the lowest-priced offering that doesn't advertise.

What about the costs of litigation? Eliminate mistakes and you won't have nearly as many lawsuits. Buy the right insurance or self-insure for the mistakes that remain, and you can cut some of the remaining costs. It's almost always cheaper to settle legitimate claims than to contest them. There are also many alternative dispute resolution programs that can save money. If you go to trial, law firms are increasingly willing to work on a contingency basis tied to the results that are gained through settlement or litigation.

What about the corporate headquarters building? Put it on a piece of land that goes way up in value, and you'll eventually be able to pay for the building's construction through selling the underlying land.

I'm sure you appreciate the point: aim for zero overhead. After minimizing your core offering, reducing overhead becomes a lot easier to do. You'll be amazed at how many overhead costs are required to perform activities that aren't needed for your core offering.

What's the key point about eliminating overhead? You can use zero-based analysis to create 2,000 percent cost-reduction solutions for eliminating overhead to help reduce costs by more than 96 percent or increase social benefits by more than twenty times for all stakeholders where they believe that they will gain the most profit and cash flow.