The changing nature of business (pt 5): Introducing the Profit Enhancement Index
Oct 24, 2012 2:21:00 PM
We've already seen how non-labor costs are 4.8 times higher than labor costs. But our analysis of FTSE 350 data also reveals the potential enhancement to profitability that can be brought about by proportionally lower reductions to the non-labor cost base.
This index - we call it the Proxima Profit Enhancement Potential (P-PEP) - provides a company with an industry benchmark for their cost management investments (click the below table to view in full screen or print mode).
The table highlights that, if non-labor costs were reduced by 1%, the constituents of FTSE 350 would increase profitability by 3.6%; equivalent to more than £10 billion ($16 billion). The impact of deeper cost management then rises exponentially. In comparison, the impact of reducing labor costs by 1% adds only 0.8% to profitability.
This visibility of the potential benefits provides finance leaders with a testing mechanism to understand more fully the effectiveness of existing cost management measures. It can also help them to decide whether sufficient investment is being made in managing the different areas of their cost base - and provides a guide as to what is achievable through increased investment.
While economic conditions remain adverse, the P-PEP also enables finance leaders to compare themselves with peers that have similar business models.