The Corporate Virtualisation phenomenon, by Proxima

A phenomenon we call Corporate Virtualization is sweeping across the global economy.

It is transforming the ‘Company’ from what it was – a collection of employees and internal resources required to deliver the product/service to market – to what it is today, a comprehensive and complex universe of third-party specialist suppliers who are critical but sit outside the organization and all across the planet.

Companies are looking more regularly to these third-parties, skewing the balance between labor and non-labor costs by directing most of their spending outside the organization.

Proxima recently published a comprehensive analysis of nearly 2,000 global public companies and found support for this notion of Corporate Virtualization. From retail to manufacturing to professional services, and across countries, Proxima found that corporations today are directing, on average, nearly 70 percent of revenue toward externalized costs with only 12.5 percent going toward internal, labor costs.

In fact, in nearly half the companies analyzed, labor costs account for less than 20 percent of revenue with non-labor expenditures chewing up more than 60 percent.

So what are the implications of these findings for the sourcing, procurement and supply chain communities?

The opportunity exists to ensure that the C-suite understands the potential value in re-thinking how procurement has been done and the impact improved efficiency can have on the bottom line.  Of the companies whose financial data we analyzed, a reduction in non-labor costs would increase EBITDA by just over four percent. By comparison, the same one percent reduction labor costs by 1 percent would have netted only a 0.7 percent increase in EBIDTA – a difference of nearly $95 billion dollars in revenue.

Secondly, these findings should motivate the organization to examine the state of its supplier landscape in full. A whole universe of new specialist suppliers has emerged capable of delivering on the most particular requirement at a more favorable price point with greater speed and efficiency. Perhaps it is time explore the value of each dollar spent.

The findings reinforce the need to know more about suppliers than ever before. The most successful companies today are, in essence, marketing machines. They conceptualize a product or service, enlist specialist suppliers to make those concepts come to life, and then spend the bulk of their energy advertising and marketing the final product. A misstep by one of the suppliers is a reflection on the organization and can have a harmful impact. Just ask IKEA or Apple.

Sometimes suppliers use their own suppliers, further clouding an organization’s ability to identify potential landmines in the chain. Improved knowledge, insight and management of the supplier network is never a bad thing and doing so can pay ancillary dividends beyond short-term cost savings, like protection of brand reputation. Ultimately, it’s up to the procurement function to insulate the organization from the potential for brand damage.

Finally, the opportunity for procurement to step up to the big table has arrived, and the research findings prove it. The procurement function has often been derided as little more than an administrative obstacle concerned only with lowering the price on a supply absent any real insight or consideration as to the value of that supply and how it is used within an organization. In many ways, the job of procurement has been to aid an organization’s financial success by cutting more while at the same time keeping suppliers at an arm’s distance.

Within the best organizations, that dynamic is changing, and so too must procurement more broadly. Today’s procurement teams will be expected to offer new thinking, ideas for different ways of operating and more of a business-oriented focus. It is an opportunity for procurement to move away from the laser like focus on savings-for-savings-sake and be a more thoughtful and substantive contributor to the organization.

The Corporate Virtualization trend shows no sign of abating. In the last three years, the companies analyzed in our study have increased their external spend by nearly four percent (as a percentage of revenue). We expect this number will only grow. The management of the supply chain will continue to become a more complex task requiring unique expertise and skill. It’s an opportunity procurement must seize.