Shaping up at head office
With profits easing, many mining managers are taking a hard look at overhead costs. After any festive season, looking in the mirror can reveal that we have some excess fat to trim. Resist the temptation to simply tighten the belt. Reviewing the value delivered by overhead functions ensures sustainable benefits, writes Alasdair Johnson* of Partners in Performance.
It is easy to forget that overhead functions exist to deliver value to operations. They become part of “the way we do things”, and can sometimes take on a life of their own.
Before tackling overhead cost reductions, it is important to take a step back and clarify the deliverables from each function, and the value of each. Only in that context can you be sure you are truly reducing cost - not simply driving it back into operations.
There are three main steps in optimising overhead functions as follows:
1. Develop your fact base of value and cost - A solid fact base provides the data starting point for cost analysis, and is your reference document for discussions about opportunities. For each department, identify outputs and assess their value. Where in the organisation is the value being delivered, and how does it impact overall profitability? For example, the value of recruiting is ultimately measured by the value that recruits can deliver once they are on board and have reached full productivity, and in the cost to the organisation when roles are not filled.
At one site, ‘downtime due to no operator’ on loaders and trucks was the bottleneck. It was causing 30 truck hours of downtime a day, resulting in almost $400M of lost profit per annum. Speeding up recruitment, reducing absenteeism and increasing retention were therefore high-value end products for the HR function - of far greater value than reducing the department’s direct costs. The project team worked with the HR department to develop much faster recruitment approaches, train managers in proactive absentee management, and introduce initiatives to improve retention. In combination with other initiatives, this effort resulted in over $300M in increased profit per annum.
A fact-based understanding of value and costs provides a clear view of the economics of each overhead function. In addition, it allows for the definition of relevant KPIs to be used by managers in directing and then tracking the performance of these functions.
2. Identify and lock in actions - The second stage is to generate, prioritise, implement and lock in actions that increase the value of the function and/or reduce its costs.
For example, a significant portion of overhead costs for multi-national operations can be office rental. Measuring the various sites against internal and external best practice, and exploring the root causes of differences between sites can produce multiple opportunities.
One multi-office company was able to reduce its total real estate cost per office-based FTE by more than 10 per cent in the short-term, through a mix of hot-desking, consolidation of vacant office space, and re-configuration within offices to reduce the footprint of a standard workstation. Relaxing the constraint placed on the organisation by existing lease arrangements, the team also mapped out a plan to reduce real estate costs per FTE by over 20 per cent over the following two years.
Finally, having identified and evaluated ideas against the highest value KPIs, it is time to prioritise them, turn the highest-priority ones into cash, and lock them in.
3. Wire the organisation - To ensure existing ideas are sustainable, that costs do not creep back in and that the organisation gets ongoing, incremental improvement, you need to set up your ‘wiring’. Wiring covers processes, systems, accountabilities and behaviours that determine how individuals and the organisation behave and therefore perform. Good wiring sustains improvements and ensures that the business is managed for continuous improvement.
In the context of overhead functions, wiring work might include defining accountabilities, input and output KPIs and metrics, establishing KPI measurement, and setting up scorecards and reviews.
Following these three steps will help to optimise overhead functions, not just reduce their direct cost. Better yet, they will ensure that the change is sustainable - so you will have nothing to fear from looking in the mirror the next time around.
* Alasdair Johnson is a principal at operational improvement firm Partners in Performance.
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