The changing nature of business (pt 3): Who’s really responsible for cost management?
If you talk to a CFO about ‘costs’, you’ll be listened to. It’s clearly the CFO’s area of responsibility. Yet if you talk about ‘procurement’ to a CFO, in most cases you will get very little air time. And yet, they’re the same thing. How has this situation come about?
The truth is, over the last 30 years the cost base has been largely externalized – as our latest research shows. Internal costs, much of which were labor costs, have been externalized and are now third party/ supplier costs. But it’s still a cost.
For example, when Thomas Ford set up his first factory, he had to first set up a power plant, then a steel works, and so on – all with direct employees. 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 is true for core costs as it is for non-core costs. Almost every organization uses external marketing agencies, security firms, logistics providers, consultants, etc.
The big issue is that standard business practice has not kept up with this fundamental shift in how organizations operate.
Understanding this change in practice is one of the several paradigm shifts that need to occur before businesses are able to maximize the value they achieve from their cost base. And the benefits that can arise are not only substantial, but very wide ranging:
- Substantial improvements in profitability – and we’re talking about uplifting profitability by 5-10%
- Streamlining operational activities and business rules
- Greater cross functional co-operation
- Improved customer service / offering through supplier led innovation
- Greater management control
- Better compliance
- Reduced risk in the supply chain
- Aligning the corporate strategy with the day-to-day activities of people within the business.
These are all benefits that would sit firmly under a CFO’s responsibility. So my question is simple: Why are CFOs not more interested in ensuring the cost base is well managed?
Our latest research reveals that businesses spend, on average, two-thirds of their revenue on non-labor costs – 68.3% in 2011. This far outstrips their collective labor costs, which averaged just 12.9% of their revenue. Yet headcount reduction is traditionally seen as the best way to tackle cost. This raises a number of questions:
- Are businesses ensuring that their non-labor cost base is being effectively managed?
- If not, why not?
- And what are the potential benefits of making that investment?