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New rules for cost management

Jul 2, 2013 11:25:00 AM

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How 'corporate virtualization' is changing the game for Dutch businesses

Reducing non-labor costs could increase profits among Dutch AEX25 companies by billions of euros a year, a new report has uncovered.

Proxima has released a new research report today, revealing that supplier costs now account for 76 per cent of the Dutch index’'s collective revenues, meaning that just a one per cent reduction could boost profits among those companies by an average of 5.4 per cent a year.

By comparison, the same one per cent reduction in labor costs -– often seen as the first port of call for cutting costs –- produces an EBITDA uplift of only 0.7 per cent.

The research collected and analyzed financial performance data from across the AEX25 index between 2009 and 2011.  It clearly illustrates the greater influence being wielded by external suppliers -– with labor costs decreasing by 27 per cent during the period, compared with supplier costs increasing by 49 per cent.  This is being driven by an ever widening range of specialist services and technologies being required by businesses for the development and delivery of products for customers who demand greater innovation, quality, performance and reliability.

The problem is that, although management teams understand the value that employing specialist providers creates, their governance, oversight, control and risk procedures have not evolved at the same rate.  This leaves companies open to reputational, operational and financial risk, created principally by unforeseen problems occurring two or three steps up the supply chain.

Understanding the fundamentals of these changes requires some different thinking.  The nature of a company has evolved dramatically over the past few decades.  Businesses now rely on far wider and more complex network of suppliers and partners than ever before.  Engaging with suppliers more closely -– bringing them into the boundaries of an organization and aligning their processes and priorities with a company’'s own -– will increase management’s oversight of the entirety of their operations, while enabling them to demand the best levels of quality, service, innovation, performance and value for money from the whole supply base.

These trends are being seen in other global markets as well.  In Proxima’'s analysis of the FTSE-350 index in 2012, similar results were uncovered for companies listed in London, with supplier costs outstripping labor costs by more than five times (68.3 per cent compared with 12.9 per cent).  Certain sectors, including construction, chemicals and retail, also stood to tap into double digit percentage EBITDA increases just by reducing supplier costs by one per cent.

Commenting on the findings, Matthew Eatough, CEO of Proxima, said:

“"These results show that business has changed –- and that business leaders need to change the lens through which they view their supplier base.  In doing so, they will discover other ways to unlock significant improvements to shareholder value, while at the same time as helping to grow the business and improve performance.  By thinking differently about how to engage with and manage suppliers, underlying business can be made inherently more profitable, and suppliers can be turned into assets.

"“The analysis shows very clearly the extent to which management behaviors have yet to catch up to the new realities of operating large, diverse and fragmented organizations.  Products and services are becoming more complex and more management intensive to deliver, so it is essential that management leaders open up their relationships with suppliers to make them more open, direct, transparent and collaborative.

"“This approach, as our own work has shown, not only delivers a tangible improvement to bottom line profitability, but it fundamentally entrenches expectations around cost, quality, innovation, risk and performance into the supplier relationship.  With so much of large businesses'’ value being delivered by external suppliers, management must not turn down this opportunity to explore these potential improvements fully.”

The research was conducted by Proxima in conjunction with the Strategy and Research practice at FTI Consulting.


Proxima Group

Proxima research | New rules of cost management

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