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Can Corporate America Get Out From Under Its Overhead?


Industries: Commentary

CAN CORPORATE AMERICA GET OUT FROM UNDER ITS OVERHEAD?

Throughout the 1980s, Corporate America whacked away at labor costs. It tamed unions, exacted givebacks, and laid off millions of hourly workers. Yet, multitudes of U.S. companies still can't compete with their international rivals, and big operations such as General Motors Corp. and Du Pont Co. are going through new rounds of restructuring. Why is competitiveness still so elusive?

Maybe top executives and managers should look in the mirror. The dollar's fall, on top of cost-cutting, has helped lower U.S. unit labor costs by 42% vs. those of America's major trading partners since 1985. Now, experts say, the problem is overhead, chiefly plump white-collar bureaucracies. A 1990 survey conducted by Boston University found that overhead equaled 26% of sales for U.S. manufacturers, vs. 21% for Western Europe's and 18% for Japan's (chart).

FAIL-PRONE. "Excessive overheads," says Dexter F. Baker, head of Air Products & Chemicals Inc. and chairman of the National Association of Manufacturers, are "why you're now seeing so much cutting of white-collar work forces and delayering of management." Adds William J. Fife Jr., chairman of machine-tool giant Giddings & Lewis Inc.: "The labor content of a product today is probably less than 15%. So, I don't care how much I cut labor, it's not going to get to the bottom line. We have to get at overhead costs."

If past is prologue, most such efforts are likely to fail. GM, Du Pont, and others reorganized with great fanfare in the 1980s, but they're still fighting overhead. "It's like your front lawn," says Mark F. Blaxill, a vice-president at Boston Consulting Group Inc. "It just keeps growing back."

One reason is that most companies go about the job all wrong. After years of staff buildup, big white-collar layoffs may be an unavoidable first step. But simply axing paper pushers isn't enough. Just as important, many companies have found, is to use so-called activity-based accounting to track costs. This technique assigns costs to each task performed by employees--even mail opening and phone answering by secretaries--making it easier to identify waste.

An even more important step may be stamping out unproductive work processes. Otherwise, staffers will just frantically work harder, trying to take on the tasks their departed colleagues once did. Stephen M. Moss, a consultant with Rath & Strong Inc. in Lexington, Mass., says managers in restructured companies sometimes put in 80-hour weeks and carry two beepers to keep up. Little wonder that staffing springs back once a recession is over.

What's the best way to boost white-collar productivity for good? Oddly, the process starts with giving more power to blue-collar workers, often through a quality program. Companies that organize workers into self-supervised teams and train them to do key tasks such as quality control can eliminate layers of supervisors and inspectors. Most Japanese manufacturers have mastered this approach, but few of their U.S. counterparts get it right--even after years of trying.

Many U.S. companies are also just starting on the crucial next step: an all-out war on bureaucracy. In the past few years, a cottage industry has developed among consultants who advise companies on how to attack the numbing accretion of report-making, bean-counting, and strategizing that builds up in the arteries of most corporations. The idea, says Kenneth J. Stancato, vice-president and controller at Weyerhaeuser Co., is to analyze work processes and eliminate as many "redundancies and non-value-added activities" as possible. General Electric Co. Chairman John F. Welch Jr. was adamant at GE's annual meeting on Apr. 22: "We need to cultivate a visceral hatred of bureaucracy."

WORKER INVOLVEMENT. GE is trying to become the model for that approach. Since 1989, Welch has focused heavily on improving white-collar efficiency. Under its Work-Out program, it holds corporate "town meetings" at which lower-level blue- and white-collar employees and even customers grill bosses and suggest ways to improve efficiency. The boss is supposed to approve or deny most suggestions immediately. The aim isn't to cut head counts but to get every employee involved in improving efficiency. Welch contends that Work-Out is the key to why GE's real productivity grew by 4% last year, more than twice the rate during the recession of 1981-82.

The problem is, companies don't usually go for such gains until they're under the gun. Troubled Chrysler Corp., for one, has cut its staff to the bone since 1989--making it "the model for white-collar efficiency" among Western carmakers, says analyst Maryann N. Keller at Furman Selz Inc. After a huge loss last year, GM hopes its latest reorganization will work as well.

For GM and others, the recovery will be the acid test. At Weyerhaeuser, overhead barely ticked down, to 9.65% of revenues in 1991 from 9.7% in 1989, because sagging lumber and paper prices depressed revenues. Now, the company is vowing to keep overhead flat as prices recover and revenues rise. It's a drama that will be played out at hundreds of companies. And its outcome may have a much greater bearing on U.S. competitiveness than flushing away blue-collar jobs.Thane Peterson


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