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Cost reductions can improve earnings before interest, taxes, depreciation, and amortization (EBITDA). Operating leverage can change how EBITDA grows. Six decisions can influence the outcome.
Why growth alone is not enough
For companies backed by private equity (PE), operating leverage is becoming one of the most reliable ways to create value.
At its simplest, operating leverage means structurally changing the cost base and operating model so that EBITDA can grow faster than revenue. For CFOs and operating partners, that difference matters.
We often see portfolio companies where revenue is growing strongly and selling, general, and administrative (SG&A) as a percentage of revenue appears stable – or even improves. But underneath, little has changed. SG&A continues to grow with the business, processes remain labor-intensive, and each incremental dollar of revenue brings incremental support cost with it. That is margin supported by growth, not operating leverage built into the business. The difference can become more apparent when growth slows. Revenue momentum may weaken while much of the cost structure remains.
PE-backed companies can be particularly susceptible to this problem – not because of management quality, but because of how these businesses evolve.
Carve-out and bolt-on residue: Transition services agreements (TSAs), acquisitions, and integrations can leave duplicated functions, processes designed for a former parent, and multiple inherited delivery models
Underinvestment in support functions: Investment appropriately follows the commercial thesis, while finance and other support functions accumulate process and technology debt
Process and data debt: It's difficult to improve what cannot be measured – and even harder to demonstrate the improvement at exit
Support cost that scales with revenue: If each increment of growth requires a corresponding increase in support cost, it becomes more difficult for EBITDA to sustainably outgrow revenue
These issues may not appear as a single line item on the profit and loss statement, which can make them harder to address through conventional cost programs.
Why it matters now
Three factors are raising the stakes.
Returns increasingly have to come from operating performance. Multiple expansion is less predictable. More of the investment case therefore depends on EBITDA growth and the operating model that supports it
Buyers are increasingly focused on earnings quality and repeatability. A cost reduction with no structural mechanism behind it can be viewed differently from an operating model that demonstrably processes more volume, with fewer exceptions, at lower unit cost
Operating leverage may take time to become visible. A structural improvement demonstrated over several years is more compelling than a cost action completed immediately before exit. Start in year one, and you can show a trend. Start in year four, and you may only have a number to defend
Six decisions that can help build more sustainable operating leverage
1. Measure whether the business is actually creating operating leverage
Stop managing SG&A primarily as a percentage of revenue. Measure whether the cost base is structurally scaling more slowly than the business.
The SG&A-to-revenue ratio is useful, but revenue growth can make it look better without underlying productivity changing.
Instead, track the relationship between revenue growth, SG&A growth, and EBITDA growth – and understand what is driving the gap.
The objective is not simply lower SG&A. It's an operating model in which incremental revenue requires progressively less incremental support cost, allowing EBITDA to grow faster than the top line.
Consider reporting that relationship to the board quarterly. It makes productivity visible and creates a track record that can ultimately support the exit story.
2. Build process intelligence before deploying technology
Effective AI deployment often depends on strong process intelligence. Many transformation programs automate the documented process without first examining how work actually gets done. That difference is often where the cost sits.
Before selecting technology, establish transaction-level visibility into where exceptions occur, who touches them, how often they occur, and why. In many finance operations, a relatively small number of exceptions consume a disproportionate amount of effort. If you don't understand the causes of those exceptions and don't redesign the underlying processes, automation can simply make a flawed operating model run faster.
This is one reason AI pilots can struggle to move from proof of concept to scaled impact. The constraint is not always the technology. Often, the underlying process was never redesigned for automation.
3. Sequence the transformation to help offset the cost of the journey
Standardize before automating, and when you achieve early savings, consider reinvesting them in the broader transformation.
The greater value typically comes from combining operating-model redesign, process standardization, technology rationalization, analytics, and automation rather than pursuing any one intervention in isolation. But sequence matters. Capture rapid, low-risk opportunities first. Use those benefits to help fund the broader transformation. Redesign the delivery model. Standardize processes. Then automate what remains.
Leading with technology before establishing a stable operating model often produces activity without structural leverage.
4. Remove carve-out and acquisition residue early
Carve-outs and bolt-ons can create a distinct form of structural cost. A TSA can temporarily obscure duplicated functions, processes designed for a much larger parent, fragmented technology, and inherited working-capital practices. Identify that residue explicitly before building the future-state operating model.
An example: In a separation involving GE Lighting, a Savant company, an ERP migration had contributed to a backlog of nearly 16,000 line items, while close to a quarter of major-retailer receivables were past due. The response was not simply to add technology. The underlying dispute and deduction processes were repaired first and then instrumented to make performance visible. Past-due receivables ultimately fell by 75%, net past-due declined from 16.3% to 5.9% within 12 months, and $3.8 million of deductions were recovered over 2.5 years.
The sequence mattered as much as the technology.
5. Be realistic about execution capacity
Transformation capacity is often the hidden constraint. The finance team expected to redesign the operating model is often the same team that closes the books, produces the forecast, and supports the business every day.
Every transformation plan should therefore answer a simple question: Who is going to do the work – and what will they stop doing to create the capacity?
There are several legitimate answers: build the capability internally, buy additional capacity, or partner with an organization that can both transform and operate the process. The important thing is to answer the question before approving the plan, not six months after execution begins.
6. Build the evidence trail from day one
Structural transformation has greater value when you can demonstrate its impact. Baseline the operation before changing it. Then measure the mechanism of improvement: cost per transaction, cycle time, exception rates, productivity, working capital, and other relevant operational metrics.
By exit, the story should not simply be "We reduced SG&A." It should be "This business can support materially more growth without proportionately increasing its support cost – and here is the operating data that proves it."
That is the difference between a cost-reduction story and an operating-leverage story.
The point
SG&A transformation should not primarily be viewed as a cost-cutting exercise. The objective is to structurally change how the business scales so that EBITDA can grow faster than revenue.
Achieving that objective typically involves more than reducing headcount or implementing technology. It requires redesigning processes and delivery models, standardizing before automating, creating sufficient execution capacity, and measuring the operational drivers of improvement from the beginning.
For CFOs and operating partners, the question is not how much SG&A can be removed today. It's whether the operating model can support the next wave of growth without proportionately increasing cost.
Companies that achieve that shift may improve EBITDA while also strengthening how the business scales. They may build operating leverage that strengthens over the hold period and can be demonstrated at exit.
