Over the past six years, we have collected and analyzed data on overhead costs from about 300 companies, primarily multinational in scope, across more than a dozen manufacturing and service industries. Our goal was to find out how the best of these companies squeeze savings from their general-services and administrative budgets.¹ We found that decentralization, so popular in the 1990s as corporations expanded, makes sense when decisions might affect the strategy or the operations (such as recruiting) of an individual unit or location. But decentralization creates fragmentation, and in many administrative areas a simplifying approach is better.

The most successful of the companies we studied have examined their administrative operations to pinpoint cases in which local rules or business concerns really make variations necessary. They then eliminate the needless ones, so that similar operations are carried out in the same way in all of their sites. Uniformity not only fosters economies of scale—the same manuals can be used throughout a company, for example—but also enables best practices to be shared widely whether the actual work remains decentralized or takes place in a shared service center. Common processes also put the spotlight on (and therefore increase the effectiveness of) any remaining variations in the way different places in a company conduct their operations.

In general, we found that larger corporations achieve some economies of scale in managing their overhead costs. A comparison of 93 profitable companies in the manufacturing and service sectors, for instance, showed that the average ratio of human-resources workers to total employees declines steadily as companies get bigger (exhibit), though increased operational complexity—another by-product of growth—costs many businesses potential advantages of scale. Measured against average performers in most industries, our sample’s top quartile of companies (determined by their ratio of overhead to revenue) typically realized about 1.5 percentage points of additional profit margin from lower administrative expenses.

Top performers have generally identified the common processes underlying their dispersed operations and utilize their enterprise-resource-planning (ERP) systems to support and improve those processes; a company may, for example, have scores of different ways, each created locally, of monitoring its cost accounts. Among other efficiency gains, the harmonization of processes and information promotes the deployment of homogeneous ERP systems that help spread best practices throughout organizations and eliminate the need for different people in different places to make the same decisions over and over again (for example, decisions about whether to add or delete a "spouse" field from a personnel database). Creating common formats for processes isn’t easy, however; external factors, such as differing national tax systems, employee regulations, and holidays, create local variations no matter how hard a company tries to avoid them.

But companies that excel at cutting their overhead costs focus on harmonizing the factors they can control. The first step is often surprisingly simple: to give the same name to identical processes that have different names in different places. A second and more onerous task is to ensure that ERP systems are integrated, which among other things allows legacy or national systems to exchange information smoothly, so that customer or employee data entered in one location becomes available to different functions throughout the company.

Such standardization not only eliminates the need to reenter information into the system but also makes it possible to use the data in a more productive way. These two important steps set the stage for the development of common, corporate-wide processes and of systems that exploit this commonality. Two of what for many corporations are the most costly administrative functions—HR and finance—illustrate some of the possible savings.

The best companies in our study have a human-resources cost advantage of about 50 percent over the average performers. Our analysis shows that corporations can simplify almost half of their HR activities into common processes. Activities such as running elective-pension and private health-insurance programs or the processing of pay slips have only a minor (if any) impact on the implementation of an operational unit’s strategy, so such activities don’t have to differ from one site to the next. Differences in data structures and in procedures for updating databases create unnecessary complexity as well.

Companies can capture savings by standardizing their personnel files, evaluation forms, and other documents throughout the organization, thus simplifying the process of collecting data from every part of it and eliminating unnecessary variations. Additional economies can be achieved by standardizing HR policies such as compensation plans and pension programs; unified policies encourage the creation of common processes to execute them. These decisions go beyond the scope of HR operations, however, and will therefore require higher-level approval. The development of common finance processes has a similar impact: the best organizations paid about 45 percent less in finance costs than did the average performers in our sample. More than half of this advantage comes from standardizing highly repetitive subfunctions such as accounting and billing.

Once again, organization-wide databases—especially those used to conduct highly repetitive tasks such as accounts receivable, invoicing, and credit collection—can be standardized. In order to extract additional savings, companies can create common processes in their purchasing and accounts payable by integrating networks and standardizing supplier contracts.