Occasionally, structural costs are illustrated by the artificial term “effort costs”. With such activities, you strive for orders, for a good working atmosphere, for efficiency, for sustainability, for occupational safety and for data protection. Indisputably, the costs for management, controlling, financial accounting and payroll belong to the structural costs.
Formally, functions such as sales, marketing, research and development, quality assurance and logistics also belong to structural costs. But here you should make a fine distinction: If customers pay for quality testing and verification on a product-by-product basis, the cost of related quality assurance activities should be included in direct costs. The same applies to internal and external material transports. If these material transports are necessary to manufacture the products and make them available, the costs incurred for this are to be allocated to direct costs. The same applies to foremen in production or logistics who prepare the work for each contract production or delivery. And it also applies to work preparation, where each order is created, and to production planning, where each order is scheduled. Finally, activities in order processing and operations accounting are also direct activities, because every inquiry, every order, every bill of delivery and every invoice is handled here. The costs incurred for these activities are also direct costs.
Example: At a plant engineering company, 12% of the employees were engaged in quality assurance. Such a figure is naturally tempting to cut costs. On closer inspection, a large part of these employees carried out measurements of components and the documentation of the measurement results. A measurement of each component was a customer requirement, for the execution of which the customer paid. The alleged structural costs were therefore actually necessary direct costs.
As indirect costs we have costs for activities without which the business operations would not receive any impulses, but the basic business could certainly continue. For these activities, it is worthwhile regularly questioning the value. Don’t be afraid to put “sacred cows” to the test. Objectively compare how much these functions cost and what benefits they bring to your organization, directly or indirectly. However, assess the functions in terms of their holistic impact on your organization and identify collateral effects of a possible elimination of positions in the structural cost area. As a rule, however, there is interesting potential for optimization here. By streamlining these functions, you usually also do your organization the favor of becoming more agile.
Example: If you cut back on a coordinator, your process may no longer run smoothly. The resulting damage may far exceed the cost of the coordinator. However, if it becomes apparent that the process is not working on its own, but only through the use of a coordinator, scepticism is already warranted. Coordinators are used to compensate for inadequacies in the process. It would make more sense and be more sustainable to optimize the process and achieve ongoing coordination between the parties involved, instead of increasing structural costs.
In many companies, savings are unfortunately made prematurely in the area of operational employees, while the administration remains very comfortably positioned as a classic overhead, since the aim here is to secure supposed know-how that is often carelessly given up in the direct operational area. This can sometimes lead to grotesque constellations: An excess of overhead employees manages a minority of operational employees.
Example: The well-known English sociologist C. N. Parkinson writes – slightly ironically – on the theory of administration and economics that all administrations have the tendency to extend the initially existing work to the available time and then to supply each other with work. As a result, administrations paradoxically continue to grow and would continue to work and grow even if the actual core task of the organization has been completely eliminated.
This mismatch of capacity distribution within the organization contributes neither to its stability nor to its resilience and not only prevents economic success, but even threatens its existence. Avoid to threaten the throughput of your organization by paying special attention to a sensible cost reduction in a crisis.