buyingTeam
Research conducted by the buyingTeam casts doubt on government expectations for any early recovery in the UK economy. Despite government efforts to stimulate the economy, a survey of analysts forecasts show expectations for company revenues in 2010 to be in sharp decline.
However, the research by buyingTeam also shows that UK PLC is overlooking a huge opportunity to boost profits in the absence of revenue growth. While most companies continue to reduce employee numbers, non-labour cost savings are being overlooked. The FTSE350 companies’ labour costs for 2008 were £162.8 billion, whereas external spend was £1,059.8 billion. buyingTeam’
Outlook
Current analyst estimates show that corporate revenue expectations for 2010 are falling and have fallen by between 5& and 6% from January of this year to now.
However, UK companies could do more to boost profits through better cost management
buyingTeams’
Matthew Eatough, CEO of buyingTeam comments:
“We live in a time of austerity and cost cutting. Barely a day goes by without more promised public sector cuts from our politicians, so it's all the more remarkable that some of the UK's leading companies are missing the opportunity to drive margin growth through effective procurement. The research demonstrates that focus should be placed on non-labour costs, and ‘indirect’
The scale of the opportunity
This year’s raft of cost-saving and headcount reduction programmes have gone some way to restoring financial strength, but companies are now reluctant to make additional cuts in case of jeopardising their ability to benefit from an economic upturn or impacting company performance. But while revenues are still down and the timeline for economic recovery stretches into the horizon, companies need to look into new areas for improved performance.
Over 40% of sectors in the FTSE 350 display significant ‘in-sector’
The least efficient company in the Construction and Materials sector could benefit from as much as 140% increase in earnings given a 5% cut in procurement costs. By contrast, the most efficient company in the sector would enjoy a 27% boost to earnings.
The greatest potential opportunities for earnings leverage through efficient procurement lie in the following sectors:
• Construction & Materials
• Chemicals
• Technology Hardware & Equipment
• General Retailers
Sectors demonstrating the greatest harmonised practices are:
• Fixed Line Communications
• Mining
• Electronic & Electrical Equipment
• Beverages
Clearly, the ratio of possible procurement ‘leverage’
Matthew Eatough, continues:
“As our expectations for economic recovery are pushed further into 2010, and pricing potential remains low, the pressure is on for Boards as to how to deliver growth. With hard costs stripped out at the beginning of 2009, and expectations for top line growth stagnant in 2010, companies will have to become more innovative.
Procurement is so often overlooked as an effective tool when looking to recoup earnings. Indirect costs are a less visible part of the cost structure of many companies, but, representing on average 30% of non-labour cash spend, have significant potential for unlocking value for shareholders as our analysis suggests. As the need to make additional cost cutting continues into 2010, we believe this is where companies can deliver real immediate value whilst ensuring that they are still poised to take advantage of the eventual upturn.”
The analysis also highlights the sectors that have the greatest absolute size of improvement in EBITDA to changes in procurement costs. Our research shows these to be Energy, Food & Drug Retailers, Mining and Utilities (the largest bubbles), and also proving the link between higher EBITDA leverage and non-labour cash procurement led sectors (as compared to labour cost led sectors).
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