April 2011

Bharat Bansal

Dan Devroye

Keith Gilson

Creating value via lean fundamentals

Support functions

McKinsey Operations

Contents

Support functions: Creating value via lean fundamentals

Understanding the problem 1

Identifying the opportunity 2

Building a lean-based solution 4

A lean foundation 4

Further optimization opportunities 6

1

For many organizations, general and administrative (G&A) or support functions such as human resources, finance, procurement, and legal counsel account for up to 20 percent of personnel costs. Yet by most measures, these functions’ performance is highly variable. Moreover, the range of services involved—and the functions’ isolation from core business processes—has led leaders to treat G&A services as administrative problems that are simply the cost of doing business. That attitude has obscured significant opportunities that in many cases are sitting right in the open.

Realizing the untapped potential will require more than the rigid, top-down cost-cutting campaigns that companies so often choose when they finally turn their attention to their support units. Leaders also should not trust inflated promises for technology or third-party providers to make the problem go away. Organizations across industries are instead achieving standard-setting results in cost, quality, and timeliness by applying lean methods to guide deeper, lasting transformations of their support functions. For example, a global bank applied lean to revamp its finance department, capturing $40 million in cost savings and simultaneously improving effectiveness in everything from invoice payment to strategic forecasting. And one of the world’s largest civilian government agencies shaved the time required for its hiring process from three months down to just two weeks, and helped eliminate $10 million in annual costs due to hiring mismatches.

Nevertheless, to produce these sorts of outcomes, lean must be tailored substantially to address support functions’ unique characteristics. In this article, we identify the common challenges with traditional G&A turnaround efforts and then outline the key elements of a promising alternative that builds on lean to achieve substantial long-term impact.

Understanding the problemEven among players in the same industry, support-function costs can vary enormously (Exhibit 1). Yet high cost is only one challenge that support functions pose. Of even greater

concern is that the results so often fail to meet expectations: for instance, business-line leaders complain that budgeting takes staff time away from serving customers, or that working with legal counsel is too complicated and takes too long. In another example, bringing a temporary worker on board at one financial institution typically took about five weeks after the candidate accepted the offer—while the functions completed such basic tasks as background checks, badge issuance, and office-space assignment. The delay was so long that in some cases, the need for support ended before a temporary worker could be brought in.

Because no business can survive for long without its support functions, and because most senior leaders have only limited experience in managing them, executives often take the existing operating models as a given. Organizations therefore tend to focus only on reducing G&A costs by setting top-down targets. But cost-centered turnarounds do little to improve accuracy or timeliness of services. And despite the effort, expense, and time these programs require, even the cost savings often prove to be short-lived. The results are disappointing for three main reasons:

Narrow scope. Organizations often look for the proverbial silver-bullet solution, designing their support-function initiatives around a single big theme such as consolidation, automation, or perhaps outsourcing and offshoring. It may even seem prudent to minimize disruption by using just one major approach and addressing a very few discrete problems. Therefore, an entire program may consist only of moving a function to a low-cost center or computerizing specific process steps. While this focused approach can be highly effective for problems that really are circumscribed, without a broader reexamination of underlying processes, the organization may eventually find that it has forfeited significant impact. Offshoring programs have been especially vulnerable to diminished returns over time, with hard-won factor-cost reductions (especially from cheaper labor) becoming overwhelmed by the sheer complexity of overseeing too many handoffs among too many processing centers.

Support functions: Creating value via lean fundamentals

Organizations are applying lean methods to their oft-ignored support functions, thereby achieving major improvements in speed, quality, and efficiency.

2

Siloed solutions. Acceptance of the status quo generally includes deference to internal barriers, as organizations address each functional unit as a stand-alone concern. Yet analyzing even a task that ought to be simple, such as engaging temporary staff, reveals just how intertwined support functions tend to be. While procurement may nominally take the lead, bringing contract workers on board will involve IT, security, HR, legal, and finance personnel as well. No matter how efficient the procurement function becomes, by itself it will have only a marginal effect on the time the entire process takes and on how much it costs. A program that addresses each functional unit in isolation will be unlikely to even recognize possible synergies between functions, let alone achieve them.

Mechanics over mind-sets. Finally, cost campaigns tend to reach only the mechanisms of how individual process steps work, without addressing the attitudes and management habits that shape performance. These “soft” factors are important across all types of change initiatives: research into thousands of transformation programs has confirmed that a majority fail because employees’ and managers’ underlying mind-sets fail to change, especially in the absence of systems to reinforce

new behaviors. The issue is compounded in support functions, where managers tend to be promoted mainly for specialized skills rather than leadership capacity and thus spend too much of their time resolving technical issues rather than managing. Once the novelty of a new program has worn off, these managers lack the capabilities needed to prevent employees from reverting to old norms—and old performance levels.

Identifying the opportunityTo be sure, cost and effectiveness concerns arise just as commonly in core business operations. In that context, organizations in many sectors have used lean methods to achieve substantial results that actually strengthen over time. Although applying lean to support functions requires some adaptation, leading organizations have started exploring this frontier and are seeing improvements in their support functions to match what they have achieved in core operations.

The approach begins with a rigorous diagnostic of each critical support responsibility: a detailed understanding of the factors that drive work combined with an analysis of

Exhibit 1

Optimizing support functions is a large and untapped opportunity

A

23.4 20.922.2

CB

1.000.67

Topquartile

Median

-33%

1.441.00

Median Topquartile

+44%

Support-function benchmarks show a wide gap between the top quartile and average performance …

… while performance in core functions is much less dispersed

-5%

55 52 50

CBA

-10%

Finance cost as % of revenue1

HR FTE2 supported per HR FTE1

Automotive industry, labor hours/vehicle

Insurance average multiperil loss ratio, %

1 Illustrative benchmarks for banking sector2 Full-time equivalent

Support functions are a significant share of total cost

Source: McKinsey, Harbour report 2008, Bloomberg

General and administrative costs,% of revenue

High Tech

11.9

Consumergoods

13.8

12.8

Travel andlogistics

18.0

Banking 16.4

10.4

Telecoms

Pharma

Multiple of median Multiple of median

Automakers US Insurers

McKinsey Operations

Support functions: Creating value via lean fundamentals 3

current processes and capabilities. As in any application of lean, the organization must understand how its support functions create value and which of their current practices reduce that value –and for what reason. It therefore needs to map its internal value streams, drawing a picture of every step and every functional unit involved in achieving specific support-function outcomes.

For core business operations, the map starts from the customer. In pharmaceuticals manufacturing, for example, the customer is a distributor demanding a certain drug, and the relevant value stream follows the drug’s synthesis from chemical precursor to finished product. For support functions, by contrast, the map is more complex, because the immediate demand comes not from an external customer but from an internal source. While the external customer’s needs, or “voice,” serves as a real limit on any company’s administrative costs—and therefore imposes a degree of discipline across all functions—an individual function’s day-to-day activities depend mainly on understanding its internal “customers.”

Who these customers even are may not be obvious. In HR, for example, the tendency is to see the job candidate or the company as a whole, rather than the work unit with the vacancy to be filled, as the source of demand. Other examples, such as a finance function’s budgeting processes, may involve multiple stakeholders with conflicting requirements.

Consequently, the internal value streams in question will often turn out to be quite complex, with multiple feedback loops and ample openings for errors and delays (Exhibit 2). But by investing the effort to map the value stream, an organization can use techniques including touch-time analysis to highlight lean’s central targets: process waste, rigidity, and excess variability. In the case shown in Exhibit 2, it turned out that of the 34 days it took to bring a contract worker on board, the actual work required only 10 to 15 hours, leaving over 32 days’ worth of needless processing time.

Meanwhile, analyzing individual productivity can reveal enormous variation in output. Some of the difference will be due to employees who have found better working methods, which their co-workerscould learn—but inflexible work

Exhibit 2

Mapping value streams shows avoidable delays, high risk of errors.

Must e-mail space team to get space

Receives initial notification e-mail

Initial e-mail does not clearly state next steps for BU

Manager

On-boardingsystem

Desktop/ phone system

Information- security system

Spaceplanning

CW supplier

Create new- hire profile, send initial

notification to vendor and

BU1

CW goes forbackground and drug check

CW receives compliance paperwork

CW completes compliance paperwork Background

and drug-check paperwork sent

Final notification e-mail sent (“CW ready to start”) to vendor and BU manager

Coordinates space requirements

Confirmsspace

Generateslocation ID

HR2 systemCreates appropriate IDs and access

User profile created

Receives e-mail to enter service-system request

Approval notice sent to hiring manager

Receives upload of basic CW data

Places order for computer/key fob

Configures phone for location ID

Enters tasks into service system

Receives approval notice, submits approval

Requests routed to information security

Assigns access/ network key fob

Receives location ID

Configures computer/key fob Delivers

computer, key fob, phone to assigned location

Badge access set up in system

CONTRACT-WORKER (CW) ON-BOARDING EXAMPLE

BU manually carries space ID to service- system center

Hiring manager must approve all requests—even their own

Service system not intuitive for new users

Drug tests and background checks conducted for all CWs, even if vendor already completed

Badge issuance must wait for CW’s completion of compliancepaperwork

Misleading final notification says CW “ready” when only background and drug tests done

Too many images and profiles; lengthens computerimaging time

Lack of forecasting may cause equipment shortage

Delivery location required to close out equipment request; often not specified

Only name received, with no indication if CW is remote or on-site

Coordination takes time if hiring manager needs CW to be in specific location

BU must manually reach out to space team to coordinate space for CW

1 Business unit.2 Human resources.

4

practices are a major contributing factor as well. In a payroll operation where some workers produced four times as much as others, one of the reasons turned out to be too little work for some centers’ employees, suggesting a persistent inability to adjust staffing to demand (Exhibit 3).

This holistic perspective on support-function processes allows the organization to begin addressing deeper issues, including the extent to which managers and employees follow prescribed processes and why the processes are in their current form. Reaching these answers will require an assessment of current managerial practices, such as performance measurement (including incentive structures), and employee attitudes, especially employees’ engagement in the work.

Building a lean-based solutionBroadly speaking, a support-function transformation covers two distinct time periods. In the shorter term, the organization develops fundamental lean capabilities; over the longer term, these capabilities equip the organization to

extract full value from related optimization levers such as outsourcing and automation.

A lean foundation For support functions, the design of a solution that will build the necessary lean skills will comprise five mutually reinforcing elements—all of which must work in tandem for the function to achieve dramatically better results and a culture of continuous improvement:

Prioritizing performance. The initial ingredient is a rigorous system of performance management, allowing managers to fulfill the basic tasks of measuring output, tracking work status, and enforcing accountability. But which metrics should performance be measured against? Support functions’ diversity makes uniform output measures impossible. Each function must therefore identify a few critical metrics that together define its performance, in terms that reflect both efficiency and effectiveness in creating value for the internal customer. These metrics serve as the basis for the day-to-day performance tools common to all lean transformations: the

Exhibit 3

Variability in worker output often has deeper causes.

B

A

Work complexity

Productivity by accountPaychecks per full-time employee (FTE)

Low

Medium

High

Variations in productivity among team members performingsimilar work suggest an opportunity to improveprocesses and balanceworkload

Country

E

D

C

G 1,436

F 1,204

Min.1,204

Avg.1,320

Max.1,436

Min.184

Avg.455

Max.726

Min.180

Avg.282

Max.389

Potential drivers of variation

Country B has larger amounts of manual inputting

Lower incoming Work volumes for Country CFTEs

Slight differences In country-specificprocesses

180

389

277

PAYROLL EXAMPLE

726

184

McKinsey Operations

Support functions: Creating value via lean fundamentals 5

visual boards that show project status, the daily team huddles that assess progress and enable resource reallocation, and the regular performance dialogues that resolve problems and help build capabilities.

Rationalizing demand. The fact that the drivers of demand for support functions are largely internal means that the “market signals” as to which types of services are really needed (and when) are much more likely to be diffuse, indirect, or unclear. A typical situation occurs in finance functions, which find themselves producing dozens of reports for various business units without ever knowing what the underlying needs really are. Therefore, demand rationalization—eliminating some unwanted drivers of work, moving others to lower-cost channels, and smoothing the remaining variability—becomes especially important. Once the performance-management system is in place,

the organization must review its demand patterns to see whether, for example, it could postpone certain resource-intensive requests to its slower periods, or charge fees for expedited service, or eliminate certain services entirely, such as reports that only gather dust.

Streamlining processes. Inevitably, even the aggressive use of demand management will reach a natural limit. At that point, the function must address the processes that determine how it does its work. The central challenge is to institute an end-to-end perspective that allows functions to see across their units’ boundaries. Because of their long isolation, support functions will need a clear, top-down mandate to interact more deeply with their peers. Only then will it be possible for them to recognize that most of their work occurs in streams that flow from one specialized function to the next, and that improved results will depend on closer collaboration.

Like many of its peers, Interbanco—one of the world’s largest financial institutions—had spent decades growing by acquisition. The result was a highly fragmented operation, including the finance function. With more than 1,000 employees spread throughout Interbanco’s most important financial centers and a budget of over $150 million, the unit was falling short in several of its most important activities. Budgeting was slow and painful. Revenue-allocation errors led to frequent mismatches, complicating the institution’s planning cycle. Simply paying an invoice took an average of over two months, compared with less than half that at leading competitors, and exposed the institution to needless penalties.

A deeper diagnostic revealed that the unit’s highly specialized employees spent more than half of their time on basic tasks such as data collection and report generation, with little clarity about how their work supported larger institutional goals. Weak talent-management practices frustrated high-potential employees and failed to provide managers the support they needed to be effective. And a lack of common metrics left senior leaders unable to identify and respond to problems, while also undermining communications with other functions.

Developing new metrics therefore became a central task for the transformation. At the same time, Interbanco needed to undertake a more detailed examination to determine what its finance function was really for, so that it could limit demands on the group and refocus its activities to take better advantage of employee skills. With a more manageable scope, the function realigned its general-ledger processes more closely to the needs of the function’s core customers: business units and especially their strategic-planning groups. In similar fashion it streamlined cash-disbursement activities, reducing payment times. Standardized service-level agreements and scorecards gave managers the tools they needed to allocate resources flexibly and dynamically. Finally, a capability-building program strengthened lean-management skills, building a higher-profile identity for finance so that it could become a magnet for internal talent.

By integrating all of these changes into a single transformation, Interbanco was able to achieve savings of $40 million—itself an attractive outcome. More important, it also improved the function’s efficiency and effectiveness even as the cost reductions took hold.

Hidden gold in a finance function

6

Managing the workforce. Misallocation of resources in subscale functional units often means that highly trained specialists spend much of their time on low-value activities. The organization will therefore need to reassess who does what, ensuring that enough employees with the right skills are available to meet the function’s output requirements. Achieving that balance on a daily basis will mean strengthening two interrelated capabilities: capacity management, which looks at staffing levels as a whole, and workload allocation, which concerns the channeling of tasks to specific employees. Both become more complex in support functions because the range and depth of expertise involved limits the use of cross-training. Nevertheless, a detailed segmentation analysis of the workers and their work will allow managers to respond quickly to shifts in demand and available capacity.

Promoting a lean mind-set. The final element is central to ensuring the transformation’s sustainability: establishing the underlying mind-sets that will not only embed the new practices, but enable further improvements as the business evolves. Over the longer term, this change in psychology will

enable the functions to reengineer their own “organizational DNA,” so that lean informs every aspect of how they operate. Role modeling from the senior leadership will be essential—particularly from the functional leaders. Their support will carry the most credibility with specialists who treasure their independence and may resist conventional organization-wide messages. Middle and frontline managers, with a weaker foundation than their business-unit counterparts in skills such as performance-driven assessment or coaching and mentoring, are likely to need intensive capability building. Finally, personnel at all levels must understand that for the individual employee, lean is not simply a cost-cutting campaign; it is about helping them do their jobs more effectively.

Further optimization opportunities Organizations that build a lean foundation benefit not only from lean’s direct effects on performance, but also from the additional value they will be able to extract from other optimization methods, such as automation or consolidation. In many cases, the returns from investments such as these have declined markedly, diminishing leaders’ enthusiasm

Surprisingly, even companies that specialize in performing G&A functions for their clients can run into trouble managing certain types of support activities. For example, one global outsourcing provider discovered that although revenues from its HR services unit were increasing, margins were shrinking. Service-delivery standards were also threatening to slip as the business continued its rapid expansion.

Further examination showed that in handling payroll tasks such as garnishment and tax withholding, processes and forms varied significantly and without much reason. Slightly different versions of the same queries would therefore arrive through multiple channels. Rigid “first in, first out” rules for responding to client requests meant that employees were constantly changing the type of work they were doing, increasing the risk of error. And frontline staff had little understanding of broader operating and performance goals and had few individual targets to meet.

To respond, the company built a new performance system that combined clear enterprise-wide and individual metrics and regular performance dialogues with simple tools such as visual-tracking boards. Call-center workers were allowed to resolve the simplest queries, and standardized forms eliminated redundant work requests. A new operating structure, comprising dedicated pools of employees for specific tasks, enabled managers to allocate work more efficiently and employees to build their skills more consistently. Finally, a new emphasis on communication and continuous improvement encouraged deeper problem solving at all levels of the organization.

Within four months, these changes increased the payroll group’s productivity by 50 percent while maintaining existing delivery-quality standards.

The payoff from payroll

McKinsey Operations

Support functions: Creating value via lean fundamentals 7

for them. Yet the underlying issues that can weaken an IT or business-process outsourcing program are the same ones that lean is so effective at addressing: low employee motivation, wasteful process designs, and inadequate workload management. Once the barriers are gone, the organization can use its newly strengthened capabilities to find where these tactics could achieve new results (Exhibit 4).

Even a review that covers only existing investments can often find new ways to help them yield more once lean is in place. For example, after completing a lean transformation of its product-development unit, a global financial-data service provider was able to generate much more value from its earlier development of an automated project-tracking system. The combination of the tracker and lean eliminated the delays that usually arose as projects passed from one internal function to the next. Consequently, the time required for product development decreased by an average of 40 percent, enabling the company to double the portion of its revenues from innovation.

It is by combining all of lean’s insights that an organization can achieve the greatest possible returns from transforming a support function, regardless of the measurement the organization chooses: accuracy, productivity, time to market, customer satisfaction, or employee retention.

For organizations that have just begun to see the opportunity in their support functions, lean provides a powerful methodology that can maximize results from the very outset. Likewise, organizations that are already undertaking support-function programs can use lean to achieve a new standard of sustained improvement. But regardless of the starting point, all organizations should review their support functions from a new perspective: not as cost centers whose problems are just distractions, but as potential sources of strength in capturing strategic advantage.

Exhibit 4

Lean transformation increases the power of other optimization techniques.

Transform to create a lean foundation▪ Rationalize and manage demand▪ Streamline processes▪ Transform mind-sets and behaviors

Build on the foundation with additional levers▪ Consolidate and centralize▪ Smart source (outsource and offshore)▪ Enable technology▪ Optimize organization structure and

governance

Year1 2 3

Performance

Bharat Bansal is an associate principal in McKinsey’s London office. Dan Devroye is an associate principal in the Washington, DC, office. Keith Gilson, based in Toronto, is the director of knowledge for the global Service Operations practice.

The authors would like to acknowledge the contributions of their colleagues Puneet Chandok, Kevin Dolan, Sanjeev Sahni, and Jaap Versfelt who all provided thoughtful comments and case examples. Also, special thanks to Christian Johnson, who did a superb job synthesizing our findings and crafting this working paper.

Contact for distribution: Keith Gilson Phone: +1 (416) 313-3974 E-mail: Keith_Gilson@mckinsey.com

McKinsey OperationsApril 2011Copyright © McKinsey & Company