1% Drop in Operating Costs Could Unlock More Than £10 Billion in Profits for the FTSE-350, Proxima Study Finds

• Study finds that non-labour costs outstrip labour in the FTSE-350 by five times
• 1% reduction in non-labour costs can increase EBITDA by 3.6% while the same reduction in labour costs only boosts EBITDA by 0.8%

LONDON--(BUSINESS WIRE)--More than £10 billion in annual profits could be unlocked for FTSE-350 companies through just a one per cent reduction in operating costs, a study has found.

“The results of this research demonstrate, starkly, the scale of the opportunity facing finance leaders and the fact that it is manifestly being squandered by a good number of Britain’s blue-chip companies.”

Data gathered from the accounts of the constituents of the FTSE-350 between 2008 and 2011 shows that, on average, non-labour costs outstripped labour costs by a factor of more than five to one annually, averaging 68.3% of revenue in 2011 compared with 12.9% of revenue spent on labour.

The research, conducted by Proxima, Europe’s leading procurement services provider, highlights the changing nature of business’ cost base. In doing so, it identifies an untapped opportunity for finance leaders to unlock substantial enhancements to profitability through focusing on operational spend, rather than the traditional tendency to view headcount as the primary source of cost reduction.

The research introduces the Proxima Profit Enhancement Potential index (P-PEP), which provides a ratio by which finance leaders can assess where and how reductions in non-labour costs can influence profitability. The P-PEP index compares the ratio between labour and non-labour costs and determined that, between 2008-11, a one per cent reduction in operational spend across the FTSE-350 would produce an EBITDA uplift of £10.5 billion. In percentage terms, averaged across the index, this reduction produces a 3.6 per cent uplift in EBITDA, compared with a 0.8% increase resulting from a one per cent reduction in labour costs.

Some sectors inevitably offer greater opportunities than others. For the construction materials, chemicals and retail sectors, profits could be boosted by 17.2 per cent, 11 per cent and 11 per cent respectively in return for a one per cent reduction in non-labour costs. The equivalent labour cost reduction produces uplifts of 5 per cent, 0.9 per cent and 1.5 per cent respectively.

The research also polled 275 senior finance and procurement leaders on their attitudes towards cost management and to gauge overarching priorities. While 88% of finance leaders believe that their focus on cost savings has increased, 71% of them are seeing indirect (or non-core) costs growing.

Within an era of increased scrutiny and growing demand for financial responsibility, the research’s findings offer opportunities for finance leaders to set in place foundations for future growth, including enhanced shareholder value, an ability to preserve employee morale through fewer instances of headcount fluctuation in tougher conditions and long term improvements to the way that costs are managed. In turn, these factors enable greater reinvestment back into the business and lead to better prospects for the future.

Matthew Eatough, CEO of Proxima, said:

“The results of this research demonstrate, starkly, the scale of the opportunity facing finance leaders and the fact that it is manifestly being squandered by a good number of Britain’s blue-chip companies.

“Our experience shows that removal of excess costs produces deep and long term benefits to these businesses. And they are not just fiscal benefits – better buying behaviours, improved value and performance from suppliers, boosted employee morale and an increased ability to reinvest in the business, all result from bringing third party costs under control.”

To download a copy of the research, please visit: http://info.proximagroup.com/the-10billion-profit-opportunity

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