Seizing control of SG & A: any benchmarking of selling, general and administrative expenses can be tricky, and companies treat such expenses in very different ways. Taking a holistic approach and observing certain caveats can help bring such expenses in line.

• Author: White, Tavor
• Position: Cost containment - Selling, general and administrative expenses

It goes without saying these days that reducing costs and maximizing productivity are paramount to staying competitive. During the recent economic downturn, few areas within companies escaped the chopping block, including selling, general and administrative expenses (SG & A). Now, with margins pressured in many industry sectors by increased energy and other commodity costs, companies are looking for new ways to minimize expenses, achieve lean overall business operations and regain their competitive edge.

The fiduciary responsibility to curtail corporate overspending remains every bit as significant in good times as well as in bad. It is not surprising, therefore, that SG & A spending--often highly discretionary in nature--is a ripe target for cost reduction.

Most companies have worked to minimize costs in manufacturing and operations. As challenging as these reductions are, they are more straightforward than containing SG & A. After all, some SG & A costs may be mandated by law or are necessary for business operations. Others are potential revenue producers. Some costs are growing as, for instance, reporting requirements increase under The Sarbanes-Oxley Act. Others are declining, as the outsourcing of selected SG & A activities grows.

Although challenging, there are very powerful ways to sort out the complexities associated with containing SG & A and contributing fundamentally and permanently to the bottom line.

How Should You Benchmark SG & A and Set the Right SG & A Targets? Truly comparable benchmarking can be useful in defining SG & A spending target ranges. Unfortunately, the highly variable way that SG & A is treated by different companies makes it difficult to understand how to benchmark SG & A costs and how to set fact-based SG & A spending targets.

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If you ask several CFOs what is in their SG & A buckets, you'll likely get different answers. Some include R & D; others do not. Some account for a high percentage of SG & A costs in the SG & A cost category, while others may account for considerable SG & A headcount and cost in the cost of goods sold (COGS). Human resources costs, for example, might show up in both SG & A and COGS. The same may be true of finance, supply chain management, IT costs and others. This is clearly illustrated in an analysis of Cost Management Index, or CMI, which represents COGS plus SG & A. In this analysis, spending seems to flow fairly readily between SG & A and COGS (see box, "The SG & A Shell Game").

In fact, appropriate SG & A levels cannot be set without...