Cost optimisation is key to sustainable EBITDA improvement

13 October 2020 2 min. read
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Companies across the world have been buffeted by the impact of Covid-19. This has resulted in many businesses facing tough decisions and the need to cut costs. This is where procurement consultancies can help with cost-optimisation in supply chains, writes Gareth Evans, the chief executive of Proxima.

Millions of workers globally have been laid off, and many economists forecast increasing unemployment in the coming months. But as well as a being a cost, people are also often companies’ most valuable asset. So, where else can businesses look to deliver savings and put themselves in a position to grow in the coming years?

To find the answer, Proxima [a procurement consultancy in the UK] looked at the financial results of companies in the US’s Fortune 500 and the UK’s FTSE 350 as part of the new report ‘The State of Spend 2020’. What we’ve found is that for any company looking to boost EBITDA, there is only one place they should look – their external supplier costs.

FORTUNE 500 + FTSE 350

Our analysis has found that Fortune 500 companies spend 75% of their outgoings on suppliers, with the figure standing at 70% for the FTSE 350. It also showed that cutting supplier spend by 10% would generate a 32% surge in EBITDA for Fortune 500 companies. Similarly, FTSE 350 companies would get a 27% EBITDA boost from a 10% cut.

Furthermore, we looked at what the benefit to EBITDA would be from a 10% cut in workforce costs. Fortune 500 companies would see a comparatively meagre 11% increase in EBITDA from such a cut, while FTSE 350 companies would get an EBITDA rise of 12%. 

That conclusively shows that cutting supplier spend boosts EBITDA by over twice as much a cutting workforce costs – and for the Fortune 500 it’s nearly three times as much. If you are a business leader looking for sustainable EBITDA improvement, then supplier spend is really the only show in town.

FTSE 350

However, it’s important that bringing down supplier spend is done in a professional and structured manner. That over 70% of the average large company’s spend is on suppliers means that suppliers are also likely to be a key source of innovation and deliver key business outcomes. So, it is not as easy as simply cutting 10% – you need to identify who the suppliers are who are adding value and where the fat is that could be cut.

For those in the C-Suite this research also raises the question of whether you are viewing your approach to suppliers as the strategic business priority it should be. If 70% of everything you spend is going to suppliers then shouldn’t you have a comprehensive strategy for your suppliers that optimizes costs, mitigates risk and focuses investment in areas that will drive growth? Some businesses do, but many do not.