3 new sources of profitability for Dutch businesses

This research, and our own experience, tells us that smarter supplier management is fundamental to this new way of operating. Indeed, for many companies where third-party costs dwarf in-house costs, supplier relationships start to define the construct of today’s Dutch business.Old vs new business constructIn particular, the economic situation since 2010 has seen Dutch business leaders shift their focus from growth to margin protection, resulting in a record number of profit improvement initiatives being announced.   The majority of these initiatives have focused on cutting headcount. However, as our study shows – in today’s complex business environment, there is a positive alternative and a far more proactive approach Dutch financial executives can take.The Dutch AEX25, on average, spends 9.6% of annual revenues on labor costs.  In contrast (and, to many, surprisingly) supplier and third-party costs consume 76.1% of annual revenues.  In short, third-party costs outweigh labor costs by a factor of five – labor costs have been largely externalized, what used to be a salary is now a supplier invoice. What does this all mean?The study further analyzed the impact of a 1% reduction in both labor and non-labor costs across the AEX25, based on the 2011 figures.  If all companies reduced labor costs by 1%, they would be able to raise EBITDA by 0.7%, which is in line with international counterparts.Reducing the non-labor costs by 1%, would result in an EBITDA by an incredible 5.4%. And that’s without factoring in the implicit strategic and operational benefits.The supply base is now a strategic issue and has implications for top and bottom line growth, risk, innovation, brand reputation and shareholder value.  However, the results of the study also identified that Dutch management practices surrounding this shifting cost base have not kept up with the trend of cost externalization and are simply not equipped to drive maximum value from their supply chains. Thus are forced to focus on labor as the primary means of profit enhancement – albeit delivering diminishing returns, dampening employee morale and reducing agility.A new approach is neededDutch business (and business globally) has already changed – the research is clear that the cost base has been largely externalized in the Dutch AEX25, as it has in the UK FTSE350, the US Fortune 500 and in other markets around the world.  Thanks to specialization and globalization, suppliers are frequently better placed to meet particular business needs than the company is itself.  They are more efficient, more productive, more agile, generate better innovation, and are more cost effective. However, the now deeper and broader supply base has made operations more complex. And yet it is not clear that businesses have the capabilities in place to manage these new ways of working effectively.Three immediate actions for any Dutch CFO are:1. View suppliers as assets and manage them as you do internal functionsProcurement teams often see suppliers as an opponent to be beaten.  Driving down on price with limited negotiating variables might deliver lower costs in the short-term.  But it’s potentially destructive, too. Suppliers should be viewed as an extension of the business.  They need to be communicated with, understood, managed, challenged, rewarded, valued and encouraged in much the same way internal staff are. On-going, active management of these commercial relationships makes a huge difference, not least in maintaining an understanding of evolving business needs. This thinking needs to be imbedded across the business, starting with the executive team.2. Drive cultural change across the companyCultural change starts with a change in behavior of the people employed within the organization.  They need to know how suppliers can and should align with strategic goals and operational performance – and welcome challenge around long-held beliefs and ways of working, improving policies and processes, allowing supplier led innovation into the business, encouraging cross-functional working, and so on.  Only then will your employees start thinking strategically about how the supply base can empower them – as well as delivering efficiencies and lower costs.3. Look for supportDutch executives need support to manage the cost base commercially; provide operational advisory services to the business; influence and change behaviors, ways of working and business rules; and execute sourcing and supplier management in a professional manner. From our experience, getting all of this internally is often a wishful nirvana rather than a reality, and one that is simply not cost effective should you wish to create everything you need in-house. Most often a combination of internal and external resources are required to effectively drive the maximum value out of your expanding supply base.Many management teams simply aren’t seeing the size of the opportunity, brought about by their changing cost base, just yet.  And that creates a tangible and significant potential advantage for those willing to embrace the changing nature of business and think differently about how costs are managed.Download the full research and receive:– In-depth analysis of the Dutch AEX25 cost structures- Key trends into changing corporate spending behaviors- Case studies highlighting opportunities in actionClick here to download the New Rules for Cost Management research paper