Proxima Report – Corporate Virtualization and the central role of suppliers in business (part 2)

We covered earlier this week the launch of the Proxima report,  "Corporate Virtualization  - A global study of cost externalization and its implications on profitability".

It looks at the steady rise in the amount of organisations' spend that goes to third parties as opposed to internal staff - 69.9% of firms revenues went to suppliers in 2012/13, according to the study. Proxima propose three main reasons for this growth - technology, specialisation and globalization.

So technology means that you have to be truly expert to keep up with and exploit the latest developments, which most businesses can't do without help. Specialisation is a similar drive - no organisation can be good at everything these days, in our complex world, so outsourcing and buying in goods and services rather than internal production is the order of the day. Finally, globalisation, through factors such as currency liberalization, free trade, and better transport options has made buying easier and the options much wider and more attractive.

The end result, as Proxima put it, is "what was once a pay slip, is now a supplier invoice".

I might add to that something around flexibility, both operational and financial. Firms are sensitive to working capital and funding issues, so buying in rather than making internal investment is often favoured. And the flexibility to reduce or increase purchases quickly depending on market conditions is another benefit of sourcing externally.

These underlying reasons behind the growth in third-party spend suggest this trend isn't going to reverse anytime soon. One might assume however that there s some point at which it will stop - an organisation with no employee cost might be a step too far! But there seems no reason why that 69.9% external cost figure couldn't reach 80 or even 90% in some firms.

 Yet this raises a number of questions. The report draws the conclusion, quite rightly, that getting more out of suppliers  should sit right at the heart of the CEO's priority list. Taking 1% out of third-party costs will have far more impact on the bottom line that doing the same for staff costs. But it is not just the financials - the risk and governance elements around supply chains are significant, and the Proxima report highlights these as another reason for strong supply base focus.  "Business leaders should seek greater assurance that activities in their extended and more complex supply chains are acceptable" as it says.

So the case for investment in this area appears to be very strong.  But we also know that procurement and supplier issues in many firms aren't priorities. And, more often than not, the Human Resources Director outranks the Chief Procurement Officer, and supply / supplier related issues are rarely debated at Board level.

In our next post, we'll look at some reasons for that, drawing on one of the most startling pieces of evidence from the report. And you can download the report here, free on registration.

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