The COVID-19 situation has, is and will continue to impact businesses in the United Kingdom and around the world. While the Chancellor and HM Treasury have been creative in coming up with a range of support for businesses, there is no doubt that ‘top and bottom line’ results will be impacted in 2020 and potentially into 2021.
We’ve seen thousands of workers made redundant and many economists forecast increasing unemployment in the coming months. Staff costs are a significant outgoing for companies, but people are also often companies’ greatest asset. So, where else can businesses look to deliver savings and tee themselves up for sustainable growth in the future?
To explore a solution, Proxima has looked at the financial results of companies in the US Fortune 500 and the UK FTSE 350 as part of a new report ‘The State of Spend 2020’. What we’ve found is that for any company looking to boost EBITDA or bottom-line profits, there is only one place they should look – their external supplier costs.
The analysis focusing on the FTSE 350 found that up to 70% of a company’s spend is with third party suppliers. We revealed that cutting supplier spend by 10% could generate a 27% surge in EBITDA or bottom-line profits. Alternatively, when we looked at what the benefit to bottom line profits would be from a 10% cut in workforce costs, we estimate this to be a positive impact of 12%, far less than the saving made by optimising supplier spend.
Rather than waiting for budgets to be potentially cut in the next spending review, perhaps now’s the time for Public Sector buyers to refine their priorities and address supplier costs
Our report conclusively shows that cutting supplier spend can positively impact bottom-line profits by over twice as much as cutting workforce costs. However, it is important to ensure that bringing down supplier spend is done in a professional and structured manner. With 70% of the average large company’s spend going to suppliers, it’s likely that suppliers are a key source of innovation and drive the delivery of key business outcomes. It’s not as simple as cutting 10% – the professional buyer needs to identify which suppliers are adding real value and where the fat could be trimmed.
So what does our State of Spend report mean for Public Sector Buyers, who have a continuous focus on achieving value for public money? The answer could be a dusting off and re-use of the successful ‘More for Less’ strategy implemented by the Government back in 2010 under the leadership of the then Minister for Cabinet Office - Lord Maude. The critical success of ‘More for Less’ was based on an understanding of the entire supply chain, costs and margin, with an identification of strategic and tactical suppliers, and a new focus on social value. These core factors, whilst still being applied, have perhaps lost their emphasis in recent years, as focus rightly turned to improving and developing capability.
In my experience in both sectors, the efforts of procurement in the private sector are seen by the Board as having the potential to positively impact the most important of metrics for any shareholder - specifically ‘bottom-line profit’. Within the public sector, importance is placed on helping the Department or Government function work to the budget. Rather than waiting for budgets to be potentially cut in the next spending review, perhaps now’s the time for Public Sector buyers to refine their priorities and address supplier costs, as their successful private sector counterparts are already doing. While it can’t directly impact the ‘bottom line’, a clear focus on ‘more for less’ whilst ‘ensuring supply’ might be in order now and for the foreseeable future.
If you want to find out more about how companies in the Fortune 500 and FTSE 350 are spending their money, including sector breakdowns, then you can download The State of Spend 2020 here.
For more relevant resources – click here.
John Collington is chairperson - public sector practice at Proxima.