Focus on indirect costs, not job cuts, to boost earnings

19 September 2012

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19 September 2012 | Adam Leach

Reducing non-labour costs has the potential to deliver much more value to the bottom line of leading companies than by cutting staff.

The £10 billion profit opportunity, published by procurement outsourcing firm Proxima, calculated non-labour costs accounted for 68.3 per cent of expenditure at FTSE 350 companies, while labour costs accounted for just 12.9 per cent. The report, which is based on both primary and secondary research, said by focusing on reducing headcount in cost cutting programmes, companies are missing out on the bigger opportunity.

“The difference between these two percentages alone suggests that bringing non-labour and third-party costs under control represents a greater opportunity for leaders to make more meaningful improvements to their profits than the traditional focus on labour cost,” the study said.

Based on analysis of financial reports from the FTSE 350 companies over the last four years, the report argued companies could increase EBITDA (earnings before interest, taxes, depreciation, and amortization) by 3.6 per cent if they were able to reduce non-labour costs by just 1 per cent. Reducing labour costs by the same figure produces a increase in EBITDA of just 0.8 per cent.

Matthew Eatough, CEO at Proxima, said in a statement: “Our experience shows that removal of excess costs produces deep and long-term benefits to these businesses. And they are not just fiscal benefits – better buying behaviours, improved value and performance from suppliers, boosted employee morale and an increased ability to reinvest in the business, all result from bringing third-party costs under control.”

The study also found of those surveyed, 86 per cent of finance leaders believe shareholders should be paying more attention to cost reduction as opposed to growth potential. It argued that with an unpredictable financial climate making growth forecasts difficult to predict, cutting costs offers an alternative way of increasing profitability. 

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