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Follow on Google News | Study confirms reducing supplier costs more effective for improving profitBy: Proxima The research demonstrates that companies are continuing to externalize their cost base, concentrating a greater portion of spend on third-party suppliers. As a result, reduction and efficient management of non-labor costs will have a much more pronounced and positive impact on profitability than headcount reductions. Key findings from the research, corporate virtualization: * Among companies analyzed, 69.9% of revenue is directed toward externalized, non-labor costs with only 12.5% going toward internal, labor costs * In nearly half of the companies analyzed, labor costs account for less than 20% of revenue, while non-labor costs chew up more than 60% * In the last three years alone, companies have increased their external spend as a percentage of revenue by nearly 4% * Conversely, labor costs, as a percentage of revenue, have declined by just over 1% during that same period * A 1% reduction in non-labor costs would mean a 4.1% (or $115 billion) uplift in EBITDA, while the same reduction in labor costs would only accrue a 0.7% ($21 billion) increase “Our research demonstrates quite conclusively that the notion of ‘Corporate Virtualization’ This latest research initiative corresponds with Proxima’s 2012 UK study of FTSE 350 companies that found that a 1% reduction in non-labor costs would result in a 3.6% EBITDA lift, while a similar labor cost reduction (http://insight.proximagroup.com/ “Companies tend to look to headcount reduction as a first response to economic uncertainty and as a means to improve financial performance,” In an analysis of companies by industry sector, Proxima found that certain sectors have more to gain. According to Proxima’s P-PEP index (../corporate- “We’re not surprised to see the Corporate Virtualization trend continue across a number of sectors given the variety of drivers pushing companies toward increased third-party spend. The nature of logistics, the increased focus on specialization and the belief that externalizing costs removes HR burdens from the organization have all played a large role in the changing definition of the Company,” concluded Eatough. “That said, the sourcing that is needed to enable all of this brings its own unique set of reputational and operational risks. Companies can mitigate that risk and drive innovation through a more intelligent and strategic approach to their supplier partners. As the research suggests, there is significant bottom-line incentive to do so.” End
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