Proxima report emphasises the importance of procurement

After Proxima’s recent contract win that we covered here, they’re back in the news with a piece of research that got the rare honour of a major feature in the Financial Times the other day (may be behind the pay wall – but if you register you get 8 free FT article views a month).

Proxima looked at the accounts of 315 stock market quoted firms and analysed what percentage of their revenues were accounted for by staff costs and third party spend respectively between 2008 and 2011. They ignored firms with a highly skewed business model e.g. commodity trading firms.

Now many of us over the years have used “typical” figures in presentations, perhaps quoting that half of a firm’s revenues usually go on staff costs, 40% on third party spend, leaving 10% profit. That would vary of course – manufacturing might see a greater percentage of third party spend, something like professional services less perhaps. (I’ve tended to talk about third party spend as typically being 30-60% of revenues in my presentations, lectures, articles etc.)

But Proxima found that the average staff cost was just 13%. That seems incredibly low, but I guess when you look at the growth in outsourcing over the last few years  – everything from cleaning and catering  to strategic IT or retail merchandising - and the use of contractors and interims to do work that used to be carried out by staff, it seems more understandable. Particularly as that change has taken place in pretty much every major organisation

Meanwhile, non-labour costs  accounted for 68% of revenue!  OK, that may include rent and a few other areas that don’t generally fall under our procurement responsibilities, but even so, it is an impressive number. Proxima go on to make the calculation that says a 1% saving in third party spend will boost ebitda by between 11% and 17% depending on the sector, whereas a 1% saving in staff costs will only increase ebitda by 1.5 – 5%.

What that does of course is to add even more weight to our procurement argument.  We’re not just as important as Human Resources colleagues – we’re a lot more important! (Of course I’m simplifying here, but you know what I mean).

So the report is an absolute “must read” for everyone in procurement. The analysis is not a new idea, but this is the most thorough work I’ve ever seen in this field. What’s really impressive is that Proxima have produced a piece of work that is going to be quoted literally thousands of times, for years to come, by consultants, procurement professionals, Institutes, academics...

And there’s not many examples of a bit of research or intellectual property in our profession that we can say that about.  It’s available here for download.

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