With a technique called overhead value analysis, a score of corporations in the United States and Europe, threatened by potentially dangerous cost situations, have in the past three years successfully cut their overhead costs (defined very broadly) by roughly 15 % to 30 %. Recently, however, there have been some notable exceptions to the pattern of ineffectual dealing with overhead costs. Small wonder that most knowledgeable managers tend to look elsewhere for ways of improving the “bottom line”! And because the cuts are almost always restored after the heat has died down, the savings turn out to be ephemeral. When management does specify activities that it wants cut, it usually sticks to a few highly discretionary, “big-figure” areas like training programs, advertising, or overtime pay, ignoring sizable opportunities elsewhere. Since the “survivors” thus become overburdened, frustrated, and demoralized, the cuts are not effective. In either case the jobs these employees held still have to be done. Sometimes substantial cuts, based on quick employee assessments, are made at every level. Sometimes only a few recently hired employees are laid off in each department. So the edicts go out: “Cut overhead costs by 10 % across the board!” or “Hold this year’s budget down to the level of last year’s actual costs.”Įmployees understandably perceive such actions as unfair and arbitrary, as indeed they are. Rather than evaluate each of these activities by itself and in relation to others, as a thoroughgoing attack on overhead would require, top management typically chooses an easier way. In the average company, thousands of small, frequently unrelated activities make up the bulk of overhead costs. In most cases there is a simple explanation for this: past efforts to chop overhead expenses have yielded only a meager, short-lived trickle of savings. Usually, however, even in real crises, one major area of cost-overhead-escapes successful application of the cost-cutting axe. Thus inventory slashing and all-out attacks on material and direct labor costs are very much the order of the day in many companies. A growing number are fighting for survival and trying to cut costs to the bone. Deepening recession and continuing inflation have caught many companies in a cruel cash and profit squeeze.
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