Scott Sparks, Deputy CEO & SVP Client Services, Proxima, IncPrint This Page
A phenomenon we call
Corporate Virtualization is sweeping across the global economy, transforming the ‘Company’ from what it was – a collection of employees and internal resources required to deliver the product/service to market – to what it is today, a comprehensive and complex universe of third-party specialist suppliers who are critical but sit outside the organization and all across the planet. Companies in many industry sectors are looking more regularly to these third-parties, significantly skewing the balance between labor and non-labor costs by directing most of their spending outside the organization.
Proxima recently analyzed the spend data of nearly 2,000 global, publicly traded companies and
published a comprehensive report which supports the notion of Corporate Virtualization among the numbers. Across a wide swatch of industry sectors, from retail to manufacturing to professional services, and across countries and continents, Proxima found that corporations today are directing, on average, nearly 70% of revenue toward externalized, non-labor costs with only 12.5% going toward internal, labor costs.
In fact, in nearly half the companies analyzed, labor costs account for less than 20% of revenue with non-labor expenditures chewing up more than 60%.
And while the analysis suggests that the extent of this Virtualization trend varies from industry to industry, the scenario holds true even within professional services sectors where people power is the most marketable resource and commodity.
So what are the implications of these findings for the sourcing, procurement and supply chain communities?
Right off the bat, the opportunity exists to ensure that the C-suite understands the potential value in re-thinking how procurement has been done and the impact improved efficiency in sourcing can have on the bottom line. How can we attest to this value? Of the companies whose financial data we analyzed, a reduction in non-labor costs would increase EBITDA by just over 4%. By comparison, the same 1% reduction labor costs by 1% would have netted only a .7% increase in EBIDTA – a difference of nearly $95 billion dollars in revenue.
Secondly, these findings should motivate the organization to examine the state of its supplier landscape in full. A whole universe of new specialist suppliers have emerged that are capable of delivering on the most particular requirement at a more favorable price point, and with greater speed and efficiency. Perhaps the time is right to explore not the dollar amount being paid for a particular supply, but the value of each dollar spent.
Along these lines, the findings reinforce the need to know more about one’s suppliers than ever before. In many ways, the most successful companies today are, in essence, marketing machines. They conceptualize a product or service, enlist a collection of specialist suppliers to make those concepts come to life, and then spend the bulk of their energy advertising and marketing the final product. A slip-up or misstep by one of the suppliers executing the concept is a reflection on the organization and can have a harmful impact. Just ask IKEA or Apple.
Further complicating matters, sometimes suppliers use their own suppliers, further clouding an organization’s ability to fully understand business practices and identify potential landmines in the chain. Improved knowledge, insight and management of the supplier network is never a bad thing and doing so can pay ancillary dividends beyond short-term cost savings, like protection of brand and reputation. Ultimately, it’s up to the procurement function to insulate the organization from the potential for brand damage.
Finally, the opportunity for procurement to step up to the big table has arrived, and the research findings prove it. The procurement function has often been derided as little more than an administrative obstacle concerned only with lowering the price on a supply absent any real insight or consideration as to the value of that supply and how it is used within an organization. In many ways, the job of procurement has been to aid an organization’s financial success by cutting, cutting and cutting some more while at the same time keeping suppliers at an arm’s distance and regarding them as an adversary.
Within the best organizations, that dynamic is changing, and so too must procurement more broadly. Today’s procurement teams will be expected to offer new thinking, ideas for different ways of operating and more of a business-oriented focus. It is an opportunity for procurement to move away from the laser like focus on savings-for-savings-sake and be a more thoughtful and substantive contributor to the organization, one that works more closely with suppliers to get the best out of them and uncover new and better ways to work collaboratively.
Understand that these are not only massive opportunities, they are also daunting challenges. If procurement is going to have that deeper understanding of business and develop the ability to offer that substantive insight, it’s unlikely they are going to be able to do it alone. That is where the support of a third-party strategic sourcing partner can be invaluable, helping the in-house team by bringing into the organization knowledge, unique skills sets and technology all while operating as an embedded partner and extension of their business.
The Corporate Virtualization trend shows no sign of abating. In the last three years, the companies analyzed in our study have increased their external spend by nearly 4% (as a percentage of revenue). We expect this number will only grow. The management of the supply chain will continue to become a more complex task requiring unique expertise and skill. It’s an opportunity procurement must seize.