Proxima Report – Corporate Virtualization and the central role of suppliers in business

Last Autumn, we featured a fascinating piece of research by procurement outsourcing service providers Proxima. They looked at the accounts of 350 FTSE companies to see how much those firms spent on third-party costs versus internal staff costs.

Now Proxima have repeated the exercise but this time on a global basis, with a major emphasis on US firms. Their research is captured in a new report, just published, which seeks to understand the cost base of organizations across the globe, by analysing the cost base of almost 2,000 businesses across 58 countries for 2009,10 and 11. Jason Busch, my US colleague, and I wrote the Foreword to the report, which we believe is a really important document for the procurement community, as we’ll see later.

The report was featured in the Sunday Times business pages yesterday – the article is not behind their pay wall fortunately, so you can read it here.

In it, various senior executives talk about the importance of addressing supply costs rather than thinking chopping headcount is the easiest way of saving money. (It also features my old friend Tim Ussher, now CPO of Regus). And there’s a typically leftfield (but accurate) quote from Guy Strafford of Proxima.

“The analogy I use is that it’s like swimming in the sea. There are times when you can see down 10ft, then suddenly you look down and you can’t see the bottom. It’s a bit like that in terms of organisations understanding their suppliers: there can be a whole level that’s invisible to them.”

Anyway, back to the report . The results are just as startling as they were for the UK report. Across the sample of 2,000 firms, internal staff costs accounted for (on average) 12.5% of revenues. By contrast, third party costs represented 69.9%.  And that’s up from 66% in 2009.

Almost  70%! Far more than the 50% or so I’ve been quoting in presentations and reports for most of my career.

Clearly, this data should be superb ammunition for anyone arguing the importance of procurement activity , and suppliers, to their organisation. That’s five times as much expenditure going to third parties as being spent on staff. Yet how much discussion does each topic get at Board level? Who is more senior – the CPO or the HR Director?

But the Proxima report gives more than just the bald figures. It gets into a perceptive discussion around the trends that have led us to this point, because certainly the numbers would have looked very different 50, 30 or even 10 years ago. Why has that ‘external’ percentage grown so much?  And is it likely to reverse anytime soon? (“No” is the unsurprising answer to that question).

And it also looks at what this means to organisations. There’s the financial calculation, for a start, that says saving 1% on supplier costs is going to boost profits far more than a similar saving on staff costs. But there’s also the obvious boost to procurement’s cause, emphasising the need for effective supplier engagement and management.  And perhaps more importantly in the greater scheme of things, what are the consequences for CEOs in terms of overall business strategies and approaches? What does it mean (or perhaps, what should it mean) to be running a business where close to 70% of your revenues are spent with suppliers?

So we’ll come back shortly and take a look in more detail at those aspects of the report, and draw some further conclusions of our own perhaps. But in the meantime, you can get your very own copy here, free on registration. It’s well worth a read, and essential material to have in your library - a vital tool to help stakeholder engagement and promotion of the whole procurement raison d’etre!

 

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