Operating Imperatives to Mitigate an Increasingly Volatile 2012

In the face of shrinking economic growth projections and continued business volatility, The Hackett Group, Inc. today issued research detailing six operational imperatives designed to help companies combat economic uncertainty by enhancing the efficiency and effectiveness of business services, including finance, HR, IT, procurement, and supply chain operations.

According to The Hackett Group’s new research, by focusing on six imperatives and making significant process improvements and other changes to various elements of their Service Delivery Model (SDM) for business services, a typical global company (with $33.4 billion in revenue) could cut the cost of business services by up to $302 million, or more than 25 percent. At the same time, companies can improve the quality and timeliness of performance information and decision-making processes, and also enhance business agility and responsiveness.

The International Monetary Fund and others have notched back their economic growth projections this year, in the face of an array of potential challenges, including sovereign-debt defaults, the collapse of the Euro currency the so-called “fiscal cliff ” in the U.S., and a slowdown of growth in the Chinese economy. Any of these scenarios could trigger a return to recession; in fact, the worst-performing European countries are already experiencing this “double dip.”

“Top performing companies have moved beyond an exclusive focus on cost reduction in their transformation of business services,” said Sean Kracklauer, The Hackett Group President of Advisory and Research. “Their overriding emphasis is to create better alignment to business objectives, whether that means growth or scale-backs.”

They understand that each area of business services has a crucial role to play if their company is to succeed in today’s more challenging environment.

This conclusion mirrors that made last June when IDC Manufacturing Insights announced the results of the 2012 U.S. Supply Chain Survey.

“Our research clearly shows how companies can gain the most value from their business services,” said Kracklauer. “We’ve identified six principal imperatives for service delivery, based on our SDM transformation framework, which ties the design of each service component directly to business strategy, and empirical data from our ongoing research and benchmarking with the world’s largest and most complex global companies.”

The Hackett Group’s SDM framework is designed to help companies create an architecture and supporting design model for business services that is scalable and also flexible enough to support both operational agility and excellence. The SDM defines the who, where, what, why and how for the execution of all business function processes in support of the enterprise’s goals and objectives. It includes the strategies, models and defined business benefits for information, along with: service placement; process sourcing; process design; enabling technology; skills and talent; and the governance and organization of the business function. An optimized SDM can help drive desired enterprise performance outcomes in terms of increased growth and agility, plus decreased risk and cost.

The six imperatives outlined in The Hackett Group’s new research are as follows:

Imperative #1 - Pursue World-Class Cost Levels

Continuing uncertainty about business conditions ensures that business services organizations will continue to be pressured to take out cost. The Hackett Group recommends that business services benchmark their current costs, identify the gaps to world-class levels, and put in place transformation initiatives to close the gaps.

The Hackett Group’s research quantifies the significant cost reduction opportunities available here. Typical companies can realize average savings of 27 percent on the delivery of their main business services functions by achieving world-class performance levels. This translates into $302 million/year in savings for a typical company with $33.4 billion in revenue.  The savings include $162 million/year from finance (47 percent cost reduction),  $70 million from IT (13 percent cost reduction), $48 million from human resources (32 percent cost reduction) and $22 million from procurement (25 percent cost reduction). In total, these savings amount to nearly one percent of revenue.

Imperative #2 - Reduce Complexity

Non-value-added complexity is one of the biggest impediments to performance improvement. In finance, for example, reducing application architecture and data complexity can enable process cost reductions of nearly 50 percent. Application architecture complexity also erodes the quality of information, decision-making processes and operational agility.

Any SDM transformation initiative should consider the amount of deviation from standard systems and processes – and how much organization complexity – that is truly needed to support the business. The Hackett Group’s research indicates that companies are very aggressively pursuing global standards across their SDM.

Imperative # 3: Redesign Process, Governance and Organization Models

The Hackett Group’s research finds that two principal factors correlate with significant differences between companies in terms of service delivery performance: first, the level of end-to-end process orientation, and second, the presence of systems, governance, skills and organization models needed to effectively implement it. The research shows strong growth in the adoption of business process reengineering focused on an end-to-end approach for both transactional and knowledge-centric process.

Imperative #4: Move from Functional Centralization to Global Business Services

Global Business Services (GBS) represents the evolution of shared services organizations into global, multi-function and multi-process business services organizations. Over the last few years, adoption of GBS has become a defining trend in the delivery of business services. The Hackett Group’s research indicates that companies are aggressively moving resources which are involved in delivering business services into GBS organizations. These organizations go through three progressive stages of delivery of business value, beginning with basic complexity reduction and culminating in strategic business enablement.  Today, most companies are looking to migrate their GBS centers from Stage 1 to Stage 2 with the goal of significantly enhancing their value to the enterprise.

Imperative #5: Build a Common Integrated Technology and Information Architecture

Consolidation of the technology, information and application architecture should be an objective of business services delivery organizations. Architecture complexity drives higher costs by requiring more IT resources to support it. Plus, it increases the cost of business processes supported by the architecture. Furthermore, process standardization and end-to-end processes are much harder to implement on fragmented technology platforms. The linkage with quality and timeliness of information, as well as improved decision-making, is even more visible.

The Hackett Group’s research confirms that the IT strategy of technology architecture rationalization is a top priority. Companies are planning to significantly reduce both application platforms and instances over the next two to three years.

Imperative #6: Upgrade Talent to Support Today’s New Realities

Talent is the most critical competitive differentiator today. The common theme of the most successful business leaders of the past few decades has been their ability to surround themselves with top talent and create a culture of performance excellence.