Business has changed. Has yours?
We recently hosted a webinar - discussing the findings of our latest research - The £10 billion profit opportunity - and their implications on business today. This post recaps the discussion and poses some thought prompters for what looks to be another turbulent 12 months ahead.
Click the image to watch the on-demand recording of the research discussion
Heard the one about the boiling frog? You almost certainly have - it’s a very old anecdote often used as a business metaphor.
It suggests that a frog in a cold pan of water that’s being heated won’t realise it’s in peril because the temperature change is gradual. Eventually, the water boils and the frog perishes.
Despite its venerable origins, it’s a pretty good analogy for the change that’s been happening around business spending over the last couple of decades.
As a recent Proxima webinar highlighted, labour’s share of costs within business has been steadily declining. Yet many organisations are still focused on slicing into headcount to bring down overall spending.
Proxima’s research shows that labour costs are now less than 13% of revenues (based on the available data from FTSE350 companies). Even in the past three years, that figure has declined from nearly 16%.
It’s actually simple. Over the last 25 years the cost base of large organisations has been externalised.
Henry Ford used to own rubber plantations, mines, steel furnaces and glass works - now car manufacturers are assemblers of components made by suppliers.
This is as true for costs that are core (to a business) as it is for non-core - almost every organisation uses external marketing agencies, security firms, logistics providers, consultants and so on.
This shift means organisations ought to be able to achieve much more significant savings from addressing the larger, and growing, slice of outgoings – the procured goods and services. A 1% reduction in labour, on average, will boost EBITDA by just 0.8%. But a 1% fall in non-labour costs yields a 3.6% rise.
As Jamie Lyon, ACCA’s head of corporate sector, explains in the discussion, that fact alone pushes the need for efficiency in procurement firmly into the finance function’s orbit. “This is an issue of visibility and ownership for the finance function,” he says. “Finance typically doesn’t ‘own’ procurement, but has to account for and explain the finance implications of their decisions. So this is about extending finance’s influence across the organisation and driving transparency in the cost base.”
Getting finance involved - and using its skills to create transparency around those decisions throughout the organisation - is a key step in avoiding the boiling frog problem.
Change is imperative and urgent
Regulatory change, globalised markets and increasingly specialist suppliers will only continue to push more organisational costs outside businesses. More importantly still, businesses are realising two important factors explored in the webinar.
First, the “new normal” for business - a sluggish economy, unpredictable markets and the potential for large shocks – means organisations need to be able to flex. Fast reaction demands brainpower inside businesses to support and execute strategic decisions - so cutting headcount soon becomes counterproductive as a means of delivering sustainable support for profitability.
And second, it also means having more creative and progressive relationships with external suppliers. Businesses need to come at procurement from a much more holistic perspective. (As Lyon points out, finance reaches across any organisation, so it’s ideally placed to help break down those silos). Only by addressing strategic issues in partnership with their entire supply chain can they deliver the kind of change that will sustain their bottom line.
Interestingly, on the customer side of the supply chain, businesses have been shocked into change. The emergence of the web as a sales tool and the rapid arrival of global competition has forced every business to think differently about reaching and managing customers.
The heat on the supply side has been building much more slowly. But as our research shows, it’s no less compelling. Smart management teams are starting to address it - but it’s not too late to for every business to act on procurement and avoid being boiled alive.
Our latest research reveals that businesses spend, on average, two-thirds of their revenue on non-labour costs – 68.3% in 2011. This far outstrips their collective labour 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?