What value is your company’s head office adding?    

Head offices don’t generate money. They consume the money generated by the underlying businesses. This is generally the case ranging from groups of businesses to holdings company structures (where the underlying entities are passively managed for their financial performance only).

The question is therefore: what value does our company’s head office add to the business? Head offices can easily become bloated structures, with too much emphasis to control or micro-manage underlying businesses.

When are head offices too big?

Firstly, analyse the head office by dissecting its activities across each function being performed by placing its costs into three cost buckets (with Finance used as example):

1. Corporate governance and leadership (e.g. portfolio management, investor management, financial reporting, treasury, audit, risk and compliance, tax, planning, corporate identity and brand management)
2. Policy making and control (e.g. financial, commercial, capital allocation, risk, delegation of authority)
3. (Shared) service provider for activities of a transactional nature (e.g. accounting).

Secondly, use the following rules of thumb and apply corrective actions:

1. If the cost of categories a & b exceeds 8% of the total cost structure of the company, raise the alarm bell. Even better, take strong action to reduce this cost
2. Obtain competitive quotes from external service providers for the provisioning of shared services (category c).

Some context:

The ideal size of a company head office depends on several factors, including the size of the organisation, the industry it operates in, and its strategic goals. A larger company with global operations may require a more extensive head office to manage complex functions like international compliance, large-scale HR, and diverse IT needs. Conversely, a smaller company or one focused on lean operations might keep its head office more compact, concentrating only on essential roles. The key is to balance the need for oversight and support with efficiency and cost-effectiveness.

Key functions of a head office include strategic planning, where they set the overall direction and goals of the company. They also handle financial management, including budgeting and financial reporting. Additionally, the head office is responsible for corporate governance, ensuring that all operations comply with legal and ethical standards. It often manages human resources policies and provides IT and administrative support to ensure cohesive and efficient operations across all branches and subsidiaries.

The value add of a company head office typically includes strategic decision-making, brand management, and financial oversight. It often serves as the central hub for coordinating activities across various departments and subsidiaries, ensuring alignment with the overall business strategy. The head office also provides essential services such as legal, HR, and IT support, which can enhance efficiency and effectiveness throughout the organisation.

Key take aways:

The days of bloated head offices are long past! Have a critical eye on your company’s cost structure – starting with a bottom-up approach: every layer above there were direct contribution to revenue generation takes place should be analysed and justified.

Even more fundamental: Why not unbundle – can’t more value be unlocked?