'Corporate virtualisation' increases supplier spend

10 September 2013

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11 September 2013 | Marino Donati

Firms across the globe are spending an increasing amount on third party suppliers as the trend for “corporate virtualisation” grows, new research says.

The study, by procurement outsourcing firm Proxima, also concluded reducing supplier costs, rather than cutting jobs, is the most effective way to boost profitability.

The survey provided more evidence of the trend of “corporate virtualisation” where companies are increasingly externalising non-labour functions, Proxima said.

The study surveyed 2,000 publicly traded companies in 58 countries and 16 industry sectors. Just under 70 per cent of revenue is spent on non-labour costs. Labour costs accounted for less than 20 per cent of revenue in nearly half of the companies. Companies have increased their external spend as a percentage of revenue by nearly 4 per cent in the last three years.

Proxima chief executive Matthew Eatough said there were a variety of drivers pushing companies toward increased third-party spend. “The nature of logistics, the increased focus on specialization and the belief that externalising costs removes HR burdens from the organisation have all played a large role in the changing definition of the company,” he said.

“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.”

Proxima also calculated that a 1 per cent reduction in non-labor costs would equate to a 4.1 per cent uplift in EBITDA. This compares with a 0.7 per cent boost from the same reduction in labour costs.

Retail companies, which often have the most complicated supply chains, along with the automotive and healthcare sectors, have the most to gain from streamlining non-labour costs.

Eatough said that concentrating on reducing head count to cut costs was a “flawed approach”. 

“Instead, companies should direct efforts to tightening management of the supplier base, which can result not only in revenue lift but better operational performance, increased innovation and improved risk mitigation,” he said.

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