Having spent my fair share in both the entrepreneurial and large enterprise world it always made me wonder why in big companies overhead gets out of hand. Before you start rolling your eyes consider this - in most areas of the enterprise scale provides leaner processes and organizations - larger companies have better negotiating power (efficient sourcing), better supply chain (lower overall cost of supply chain), lower transportation costs, more cost-efficient distribution and so on. But not in real overhead - the way we define it.
Our definition of Real Overhead is the following:
Real Overhead: The percentage of your workforce that does not interact with either the product or the customer
This is always a fascinating conversation with customers. In my last startup we had 2.6% of the workforce in this category. 97.4% was interacting with the product or the customer. I just worked with a Fortune 500 client where this ratio is around 25-35% (they can’t quite figure it out). In their case thousands of people do something else but what makes the company create value.
I think the term overhead just covers up the essence of the problem which is actually simple.
Buffering for lack of information
So the big aha is actually quite obvious: organizations buffer for lack of information and the resulting ambiguity. Depending on the company it will be the most accessible form of resource which is usually
- commitment levels - this is my perennial favorite and a massive enterprise disease. Almost every group in a large organization plays with commitment levels. It means keeping more inventory than necessary, sandbagging sales forecasts to leave room for error and so on.
- capacity (machine or human) - this one is also obvious. We cannot plan for 90 or 100% utilization of any resource with downtime (machine) and time off (people). So most organization plan for a lot less and execute at an ever lower level.
- people - This is the Real Overhead because the easiest ambiguity buffer is people. Almost everywhere where information flow is a problem you will see hordes of analysts, controllers and also proliferation of spreadsheets and meetings. This is the most accessible measure of Real Overhead as stated above.
In any organization if the Real Overhead is above 15% there is a structural information problem.
The prescription is better information, of course, but that can come from a variety of approaches ranging from
- simplified processes
- enterprise integration
- better analytics
- better workflow
More importantly it is not always a technology solution.
Part of the advantage of a startup is that it has fewer products/services, fewer channels and therefore fewer ambiguities. So companies that simplify their product portfolio or channels or customer/supplier base typically see a reduction of Real Overhead. Also companies that move from an operating company to a holding company many times reduce their real overhead.
Unfortunately many large companies we dealt with do not even know exactly how many people work for them, let alone what they do all day. Nonetheless measuring RO is a always revealing for those taking that tentative first step…
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