Published by linker 5
Posted on October 9, 2020
By Gareth Evans, CEO, Proxima
One of the most painful impacts of the pandemic has been the devastation it has wreaked on the global employment market. Unemployment figures have soared as countless businesses have made the painful decision to cut staff in an attempt to shore up losses on their balance sheet.
Millions of workers in the UK and US have already been laid off, and many economists forecast increasing unemployment in the coming months. The reality is that with the contraction of demand, some businesses are just smaller than they were at the beginning of the year. But as well as a being a cost, people remain a core strategic asset, and will be key to the return to growth. Lessons of the past tell us to cut with caution.
With this in mind, as most of us enter a second wave of the virus and more businesses hunker down for the economic winter by cutting staff, they should pause. Where else can a CEO or CFO look to deliver savings, whilst still putting themselves in a position to grow in the coming years?
In our new report The State of Spend 2020, an analysis of the supplier costs of FTSE 350 and Fortune 500 companies in conjunction with the Centre for Economic and Business Research (CEBR), our research shows that reducing supplier costs has a much most dramatic impact on EBITDA then cutting staffing costs. In fact, supplier cost reductions would improve EBITDA of FTSE 350 companies by over twice as much as reducing headcount (by the same amount), while Fortune 500 companies would see an even greater boost to EBITDA from cutting supplier costs.
Within these wider statistics, there are also telling trends between industries that business leaders should note. External supplier costs are more significant among FTSE 350 firms in the utilities, energy and basic materials (mining) sectors, where labour costs make up just 13%, 16% and 17% of total outgoings, respectively. One salient example of this is the case of Centamin PLC, where gold mine production costs made up the vast majority of outgoings in 2019, leaving the share of employment costs in total expenditures at just 1%.
Similarly in the Fortune 500, high capital costs mean that supplier costs account for 82% of business’ total expenditure in the basic materials sector, reflecting very high levels of expenditure on raw materials, machinery, and other capital expenditures. The wholesale and retail sectors sit in a similar place in terms of labour costs, with relatively low wages and low fixed resourcing meaning that fixed headcount is a small percentage of overall costs.
The industrial and healthcare sectors in both FTSE 350 and Fortune 500 firms occupy the middle of the table. This is consistent with the fact that these sectors typically deploy a more balanced mix of both labour and capital in their production and operations.
In the main, margins are tight among both FTSE 350 and Fortune 500 companies. Given that in most industries external supplier costs make up the lion’s share of total expenditures,
the largest gains can be realized through reductions in these outgoings. On average, Fortune
500 companies could expect a 32% surge in EBITDA from a 10% cut in their supplier costs.
By comparison, a 10% reduction in labour costs would achieve just an 11% increase EBITDA In the FTSE 350, this means that a 10% reduction in external supplier costs would raise EBITDA by 27%. In comparison, a 10% decline in employment costs would increase EBITDA by only 12%. This emphasises just how important supplier costs are to business performance.
That said, this isn’t just a debate about cost. This is also about growth and having the right balance of internal and external resources to grow at pace when the opportunity arises. Understanding the roles suppliers play in major businesses has wide implications. For example, if businesses are becoming more reliant on suppliers, that positions them as a primary source of speed, innovation and change – but also risk. As the pandemic challenges the status structure of global supply chains, business must analyse and assess how they understand the supplier contribution, and how they choose to work with their suppliers.
The State of Spend report has pulled back the curtain on the strategic importance of suppliers to global companies. Whether business leaders are looking to free up spend to invest in new business areas or bring in external expertise to accelerate a project, suppliers are at the heart. Yet few businesses can truly say they have a joined-up approach to managing suppliers that at the same time optimizes costs, mitigates risks and focuses investment in areas that will drive growth.
As all businesses navigate these difficult economic waters, it is essential that they think in the long term as they cut costs. Headcount and staff are often the engine that can help drive businesses into recovery, and companies should therefore look elsewhere before slashing jobs. Our research shows that headcount is already often streamlined, and further highlights the crucial importance of managing external supplier costs to drive savings. Business leaders should now be treating supplier cost management as a strategic priority.
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