September 2013 |

Supplier Management

Today’s definition of what a ‘company’ is varies dramatically from person to person, business to business and country to country. However, we can all agree that a company is no longer made up of just its people, its offices and its factories.

In most cases, perceptions of what a business is today will include layers of external suppliers (and Technology) feeding into, and supporting, the overarching business objectives.

This concept is known as ‘corporate virtualization‘ and is a global phenomenon, happening across sectors, albeit to varying degrees.

Our analysis into the spending habits of nearly 2,000 organizations’ found that (on average):

  • Labor costs now account for only 12.5 percent of total revenues. 
  • In contrast, non-labor costs account for 69.9 percent.

And as the table below shows, it is a continuing trend:

Year               Labor cost as a percentage of revenue            Non-labor cost as a percentage of revenue
2009 13.6% 66.2%
2010 13.1% 67.6%
2011 12.5% 69.9%

Impact of corporate virtualization on revenue, EBITDA and productivity growth

Despite the recession experienced by many economies during 2009 to 2011 (resulting in a significant reduction in the percentage of revenues spent on labor costs – as seen in the table below), total revenue across the 1,954 companies increased by an enormous 31 percent:

Data Point % change over period 2009 – 2011
Revenue 31%
Labor cost as % of revenue -8%
Non-labor cost as % of revenue 6%

While the total spent on labor costs decreased, our research found that the cost per employee actually increased; but at 8 percent over the two years, this is not markedly above the rate of inflation – and is below the rate of revenue per employee growth (standing at 11 percent). More importantly, the research found that for most sectors, overall productivity has improved on a dollar-per-employee-earned basis.

Ultimately, non-labor costs have increased concurrently with improvements in revenue and EBITDA – whether directly correlated or not (i.e. greater use of suppliers and external providers rather than following the downward labor cost trend).

Implications of corporate virtualization

The essential role that suppliers play today increases the need for management of the related external activity, as well as creating more complexity. And this management can improve business performance significantly. But to drive the full benefit from suppliers, companies must have full oversight of supply operations so that productivity, operational and reputational risk, innovation and intellectual property are all properly maintained.

However, the statistics put into sharp relief that management practice has not kept pace with this greater externalization of cost. With non-labor costs now accounting for more than 69 percent of revenue, on average, it is clear that only a relatively small number of businesses have transformed their supplier relationship management models to account for this change.

Have you noticed a similar trend in your business? Is it as cut and dry as labor and non-labor? How closely do you tie supplier performance with total company performance?