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New research - "an absolute must read for everyone in procurement"

Guy Strafford
Oct 11, 2012 6:05:00 AM

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New research, the £10 billion ($16 billion) profit opportunity, highlights the opportunity to boost growth and protect shareholder value in the face of stagnating revenue streams. Peter Smith of Spend Matters dubbed the report an "absolute must read for everyone in procurement" – we are also hoping it is a "must read" for any business leader concerned about the management of costs within their respective organizations.

In essence, the research found that the make-up of a large organisation has changed over the past 25 years. Whether attributable to the growth of global trade or increased demand for specialization, our recent research found that much of the cost base has been externalized. Today'’s average large corporate spends two thirds of their revenues on non-labor items (such as third-party suppliers). In contrast, labor costs account for only 12% of annual revenues.

The research also found that the potential to boost profits through better management of non-labor costs outstrips fiscal tightening activities, such as headcount reduction, by five times.  The research identifies that, across the FTSE-350, a 1% reduction in these non-labor (including third party suppliers) costs can boost EBITDA by 3.6%.  A similar reduction in labor costs will only improve profits by 0.8%.

This gap is highly meaningful in the current economic environment and, in several bellwether industries, the improvement is even more compelling.  Construction, with its large and often complex supply chains, has a significant opportunity, with a 1% reduction in non-labor costs potentially raising profits by up to 17% annually.  Retail, with similar supply chain characteristics, could increase annual profits by 11%.

Significantly, the research highlighted that cost management is fundamentally a leadership issue – and very much applicable to global businesses. 

Resonating with our research, there is limited capacity for business leaders around the world today to '‘optimize'’ labor and direct costs any further, without cutting into operational muscle. This opens up a huge opportunity for those who are willing to think differently about how their cost bases are managed - starting with the largest revenue expenditure item for any large business, non-labor costs.

Today, Apple doesn'’t manufacture - it’'s all co-ordinated by them through suppliers.  Today’'s car manufacturers are actually assemblers, rather than true manufacturers.  And this as true for core costs as it is for non-core costs.  Almost every organization uses external marketing agencies, security firms, logistics providers, consultants, etc.  As such, reducing headcount to combat poor financial performance, has less of an impact for today’s businesses compared to traditional manufacturing-led businesses of yesteryear – where companies boasted large in-house teams, at each stage of the manufacturing / sales process.

As we enter the fourth quarter, we will no doubt see more twists and turns.  But whether or not the green shoots that some have seen materialize into a recovery in the global economy, there remain opportunities for those who are willing to think differently.  We have been advocates of a different approach through the economic cycle and believe strongly that there are gains there for the taking.  We hope that a greater number of leaders will seize the opportunity.

The research highlights many contentious issues around cost management in business today - however, a significant finding that cost management is fundamentally a leadership issue. Do you believe this is true in your business? How high does cost management sit on today’s '“business leader’s'” agendas?

Guy Strafford

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