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McKinsey Operations

Support functions
Creating value via lean fundamentals

April 2011
Bharat Bansal
Dan Devroye
Keith Gilson
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

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.

For many organizations, general and administrative (G&A) concern is that the results so often fail to meet expectations:
or support functions such as human resources, finance, for instance, business-line leaders complain that budgeting
procurement, and legal counsel account for up to 20 percent takes staff time away from serving customers, or that working
of personnel costs. Yet by most measures, these functions’ with legal counsel is too complicated and takes too long. In
performance is highly variable. Moreover, the range of another example, bringing a temporary worker on board
services involved—and the functions’ isolation from core at one financial institution typically took about five weeks
business processes—has led leaders to treat G&A services after the candidate accepted the offer—while the functions
as administrative problems that are simply the cost of doing completed such basic tasks as background checks, badge
business. That attitude has obscured significant opportunities issuance, and office-space assignment. The delay was so
that in many cases are sitting right in the open. long that in some cases, the need for support ended before a
Realizing the untapped potential will require more than temporary worker could be brought in.
the rigid, top-down cost-cutting campaigns that companies
so often choose when they finally turn their attention to Because no business can survive for long without its support
their support units. Leaders also should not trust inflated functions, and because most senior leaders have only limited
promises for technology or third-party providers to make the experience in managing them, executives often take the
problem go away. Organizations across industries are instead existing operating models as a given. Organizations therefore
achieving standard-setting results in cost, quality, and tend to focus only on reducing G&A costs by setting top-
timeliness by applying lean methods to guide deeper, lasting down targets. But cost-centered turnarounds do little to
transformations of their support functions. For example, a improve accuracy or timeliness of services. And despite the
global bank applied lean to revamp its finance department, effort, expense, and time these programs require, even the
capturing $40 million in cost savings and simultaneously cost savings often prove to be short-lived. The results are
improving effectiveness in everything from invoice payment disappointing for three main reasons:
to strategic forecasting. And one of the world’s largest civilian
government agencies shaved the time required for its hiring Narrow scope. Organizations often look for the proverbial
process from three months down to just two weeks, and silver-bullet solution, designing their support-function
helped eliminate $10 million in annual costs due to hiring initiatives around a single big theme such as consolidation,
mismatches. automation, or perhaps outsourcing and offshoring. It may
even seem prudent to minimize disruption by using just one
Nevertheless, to produce these sorts of outcomes, lean must major approach and addressing a very few discrete problems.
be tailored substantially to address support functions’ unique Therefore, an entire program may consist only of moving a
characteristics. In this article, we identify the common function to a low-cost center or computerizing specific process
challenges with traditional G&A turnaround efforts and then steps. While this focused approach can be highly effective for
outline the key elements of a promising alternative that builds problems that really are circumscribed, without a broader
on lean to achieve substantial long-term impact. reexamination of underlying processes, the organization
may eventually find that it has forfeited significant impact.

Understanding the problem Offshoring programs have been especially vulnerable


to diminished returns over time, with hard-won factor-
Even among players in the same industry, support-function cost reductions (especially from cheaper labor) becoming
costs can vary enormously (Exhibit 1). Yet high cost is only overwhelmed by the sheer complexity of overseeing too many
one challenge that support functions pose. Of even greater handoffs among too many processing centers.
2

Exhibit 1
Support functions are a significant share of Support-function benchmarks show a wide gap between
Optimizing support total cost the top quartile and average performance …
functions is a large
General and administrative costs, Finance cost as % of HR FTE2 supported per
and untapped % of revenue revenue1 HR FTE1
opportunity Multiple of median Multiple of median

-33%
Pharma 18.0 +44%
1.00 1.44
0.67 1.00

Banking 16.4
Median Top Median Top
quartile quartile
High Tech 13.8 … while performance in core functions is much
less dispersed

Consumer Automotive industry, Insurance average multiperil


12.8
goods labor hours/vehicle loss ratio, %
-5% -10%
Telecoms 11.9

23.4 22.2 20.9 55 52 50


Travel and
10.4
logistics

A B C A B C
Automakers US Insurers

1 Illustrative benchmarks for banking sector


2 Full-time equivalent
Source: McKinsey, Harbour report 2008, Bloomberg

Siloed solutions. Acceptance of the status quo generally new behaviors. The issue is compounded in support functions,
includes deference to internal barriers, as organizations where managers tend to be promoted mainly for specialized
address each functional unit as a stand-alone concern. Yet skills rather than leadership capacity and thus spend too much
analyzing even a task that ought to be simple, such as engaging of their time resolving technical issues rather than managing.
temporary staff, reveals just how intertwined support Once the novelty of a new program has worn off, these
functions tend to be. While procurement may nominally take managers lack the capabilities needed to prevent employees
the lead, bringing contract workers on board will involve IT, from reverting to old norms—and old performance levels.
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 Identifying the opportunity
takes and on how much it costs. A program that addresses each To be sure, cost and effectiveness concerns arise just as
functional unit in isolation will be unlikely to even recognize commonly in core business operations. In that context,
possible synergies between functions, let alone achieve them. organizations in many sectors have used lean methods to
achieve substantial results that actually strengthen over time.
Mechanics over mind-sets. Finally, cost campaigns tend to Although applying lean to support functions requires some
reach only the mechanisms of how individual process steps adaptation, leading organizations have started exploring
work, without addressing the attitudes and management habits this frontier and are seeing improvements in their support
that shape performance. These “soft” factors are important functions to match what they have achieved in core operations.
across all types of change initiatives: research into thousands
of transformation programs has confirmed that a majority The approach begins with a rigorous diagnostic of each
fail because employees’ and managers’ underlying mind-sets critical support responsibility: a detailed understanding
fail to change, especially in the absence of systems to reinforce of the factors that drive work combined with an analysis of
McKinsey Operations
Support functions: Creating value via lean fundamentals 3

CONTRACT-WORKER (CW) ON-BOARDING EXAMPLE


Exhibit 2
Create new- Final notification Misleading final
Mapping value hire profile,
send initial
Badge issuance
must wait for CW’s
Drug tests and
background checks e-mail sent (“CW
ready to start”) to
Badge access
set up in
notification says CW
“ready” when only
notification to completion of conducted for all
streams shows vendor and
BU1
compliance
paperwork
CWs, even if vendor
already completed
vendor and BU
manager
system background and drug
tests done

avoidable delays, high


CW receives CW completes
risk of errors. compliance compliance Service Hiring manager BU manually
CW supplier CW goes for paperwork paperwork Background system not must approve all carries space ID
background and drug-check intuitive for requests—even to service-
and drug check paperwork sent new users their own system center

Receives e-mail Receives


Receives initial Must e-mail Enters tasks
to enter Receives
Manager notification space team to
service-system
into service approval notice,
submits location ID
e-mail get space system
request approval

Creates
HR2 system appropriate IDs
and access Too many images
Lack of and profiles;
forecasting may lengthens
Requests cause equipment computer
On-boarding User profile
Approval notice
sent to hiring
routed to shortage imaging time
created information
system manager security

BU must manually
Initial e-mail does reach out to Places order for Configures
not clearly state space team to computer/key fob computer/key fob Delivers
Desktop/ next steps for BU coordinate space computer, key
fob, phone to
phone system for CW
Configures phone assigned location
for location ID

Information- Only name


Coordination
takes time if
Delivery location
received, with no Assigns access/ required to close out
security indication if CW is
hiring manager
network key fob equipment request;
needs CW to be in
system remote or on-site
specific location
often not specified

Space Receives
upload of basic
Coordinates
space
Confirms Generates
planning CW data requirements
space location ID

1 Business unit.
2 Human resources.

current processes and capabilities. As in any application Who these customers even are may not be obvious. In HR,
of lean, the organization must understand how its support for example, the tendency is to see the job candidate or the
functions create value and which of their current practices company as a whole, rather than the work unit with the
reduce that value –and for what reason. It therefore needs vacancy to be filled, as the source of demand. Other examples,
to map its internal value streams, drawing a picture of every such as a finance function’s budgeting processes, may involve
step and every functional unit involved in achieving specific multiple stakeholders with conflicting requirements.
support-function outcomes.
Consequently, the internal value streams in question will often
For core business operations, the map starts from the turn out to be quite complex, with multiple feedback loops
and ample openings for errors and delays (Exhibit 2). But by
customer. In pharmaceuticals manufacturing, for example,
investing the effort to map the value stream, an organization
the customer is a distributor demanding a certain drug,
can use techniques including touch-time analysis to highlight
and the relevant value stream follows the drug’s synthesis
lean’s central targets: process waste, rigidity, and excess
from chemical precursor to finished product. For support
variability. In the case shown in Exhibit 2, it turned out that
functions, by contrast, the map is more complex, because the of the 34 days it took to bring a contract worker on board, the
immediate demand comes not from an external customer actual work required only 10 to 15 hours, leaving over 32 days’
but from an internal source. While the external customer’s worth of needless processing time.
needs, or “voice,” serves as a real limit on any company’s
administrative costs—and therefore imposes a degree of Meanwhile, analyzing individual productivity can reveal
discipline across all functions—an individual function’s enormous variation in output. Some of the difference will be
day-to-day activities depend mainly on understanding its due to employees who have found better working methods,
internal “customers.” which their co-workerscould learn—but inflexible work
4

PAYROLL EXAMPLE
Exhibit 3
Productivity by account
Paychecks per Work Potential drivers
Variability in worker
Country full-time employee (FTE) complexity of variation
output often has
deeper causes. Low Country B has
A 726
larger amounts of
manual inputting
B 184

Min. Avg. Max. Variations in


184 455 726 productivity
among team
Medium Lower incoming members
C 180 Work volumes for performing
Country CFTEs similar work
389 suggest an
D
opportunity to
improve
277 processes and
E
balance
workload
Min. Avg. Max.
180 282 389

High Slight differences


F 1,204 In country-specific
processes

G 1,436

Min. Avg. Max.


1,204 1,320 1,436

practices are a major contributing factor as well. In a payroll extract full value from related optimization levers such as
operation where some workers produced four times as much outsourcing and automation.
as others, one of the reasons turned out to be too little work for
some centers’ employees, suggesting a persistent inability to A lean foundation
adjust staffing to demand (Exhibit 3). For support functions, the design of a solution that will
build the necessary lean skills will comprise five mutually
This holistic perspective on support-function processes allows reinforcing elements—all of which must work in tandem
the organization to begin addressing deeper issues, including for the function to achieve dramatically better results and a
the extent to which managers and employees follow prescribed culture of continuous improvement:
processes and why the processes are in their current form.
Reaching these answers will require an assessment of current Prioritizing performance. The initial ingredient is a rigorous
managerial practices, such as performance measurement system of performance management, allowing managers
(including incentive structures), and employee attitudes, to fulfill the basic tasks of measuring output, tracking work
especially employees’ engagement in the work. status, and enforcing accountability. But which metrics
should performance be measured against? Support functions’
Building a lean-based solution diversity makes uniform output measures impossible. Each
function must therefore identify a few critical metrics that
Broadly speaking, a support-function transformation together define its performance, in terms that reflect both
covers two distinct time periods. In the shorter term, the efficiency and effectiveness in creating value for the internal
organization develops fundamental lean capabilities; over customer. These metrics serve as the basis for the day-to-day
the longer term, these capabilities equip the organization to performance tools common to all lean transformations: the
McKinsey Operations
Support functions: Creating value via lean fundamentals 5

Like many of its peers, Interbanco—one of the world’s largest financial institutions—had spent
Hidden 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
gold in a 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
finance 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
function 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.

visual boards that show project status, the daily team huddles the organization must review its demand patterns to see
that assess progress and enable resource reallocation, and the whether, for example, it could postpone certain resource-
regular performance dialogues that resolve problems and help intensive requests to its slower periods, or charge fees for
build capabilities. expedited service, or eliminate certain services entirely, such
as reports that only gather dust.
Rationalizing demand. The fact that the drivers of demand
for support functions are largely internal means that the Streamlining processes. Inevitably, even the aggressive use of
“market signals” as to which types of services are really demand management will reach a natural limit. At that point,
needed (and when) are much more likely to be diffuse, the function must address the processes that determine how
indirect, or unclear. A typical situation occurs in finance it does its work. The central challenge is to institute an end-to-
functions, which find themselves producing dozens of end perspective that allows functions to see across their units’
reports for various business units without ever knowing boundaries. Because of their long isolation, support functions
what the underlying needs really are. Therefore, demand will need a clear, top-down mandate to interact more deeply
rationalization—eliminating some unwanted drivers of with their peers. Only then will it be possible for them to
work, moving others to lower-cost channels, and smoothing recognize that most of their work occurs in streams that flow
the remaining variability—becomes especially important. from one specialized function to the next, and that improved
Once the performance-management system is in place, results will depend on closer collaboration.
6

Surprisingly, even companies that specialize in performing G&A functions for their clients can
The payoff 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
from were shrinking. Service-delivery standards were also threatening to slip as the business continued
its rapid expansion.
payroll 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.

Managing the workforce. Misallocation of resources enable the functions to reengineer their own “organizational
in subscale functional units often means that highly DNA,” so that lean informs every aspect of how they operate.
trained specialists spend much of their time on low-value Role modeling from the senior leadership will be essential—
activities. The organization will therefore need to reassess particularly from the functional leaders. Their support will
who does what, ensuring that enough employees with carry the most credibility with specialists who treasure their
the right skills are available to meet the function’s output independence and may resist conventional organization-wide
requirements. Achieving that balance on a daily basis will messages. Middle and frontline managers, with a weaker
mean strengthening two interrelated capabilities: capacity foundation than their business-unit counterparts in skills such
management, which looks at staffing levels as a whole, and as performance-driven assessment or coaching and mentoring,
workload allocation, which concerns the channeling of tasks are likely to need intensive capability building. Finally,
to specific employees. Both become more complex in support personnel at all levels must understand that for the individual
functions because the range and depth of expertise involved employee, lean is not simply a cost-cutting campaign; it is about
limits the use of cross-training. Nevertheless, a detailed helping them do their jobs more effectively.
segmentation analysis of the workers and their work will allow
managers to respond quickly to shifts in demand and available
capacity. Further optimization opportunities
Organizations that build a lean foundation benefit not only
Promoting a lean mind-set. The final element is central to from lean’s direct effects on performance, but also from
ensuring the transformation’s sustainability: establishing the additional value they will be able to extract from other
the underlying mind-sets that will not only embed the new optimization methods, such as automation or consolidation.
practices, but enable further improvements as the business In many cases, the returns from investments such as these
evolves. Over the longer term, this change in psychology will have declined markedly, diminishing leaders’ enthusiasm
McKinsey Operations
Support functions: Creating value via lean fundamentals 7

Exhibit 4
Lean transformation
increases the power
of other optimization
techniques.

Build on the foundation


with additional levers
▪ Consolidate and centralize
▪ Smart source (outsource and offshore)
Performance ▪ Enable technology
▪ Optimize organization structure and
governance

Transform to create a lean foundation


▪ Rationalize and manage demand
▪ Streamline processes
▪ Transform mind-sets and behaviors

1 2 3 Year

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, It is by combining all of lean’s insights that an organization
wasteful process designs, and inadequate workload can achieve the greatest possible returns from transforming
management. Once the barriers are gone, the organization a support function, regardless of the measurement the
can use its newly strengthened capabilities to find where these organization chooses: accuracy, productivity, time to market,
tactics could achieve new results (Exhibit 4). customer satisfaction, or employee retention.

Even a review that covers only existing investments can often For organizations that have just begun to see the opportunity
find new ways to help them yield more once lean is in place. For in their support functions, lean provides a powerful
example, after completing a lean transformation of its product- methodology that can maximize results from the very outset.
development unit, a global financial-data service provider was Likewise, organizations that are already undertaking support-
able to generate much more value from its earlier development function programs can use lean to achieve a new standard of
of an automated project-tracking system. The combination of sustained improvement. But regardless of the starting point,
the tracker and lean eliminated the delays that usually arose all organizations should review their support functions from
as projects passed from one internal function to the next. a new perspective: not as cost centers whose problems are just
Consequently, the time required for product development distractions, but as potential sources of strength in capturing
decreased by an average of 40 percent, enabling the company to strategic advantage.
double the portion of its revenues from innovation.
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 Operations
April 2011
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