Businesses are missing out on multi-million pound savings by not challenging providers on the cost of outsourced services, such as IT, according to research.
The study from sourcing advisory firm Alsbridge said that managers are reluctant to question service providers because the multi-vendor ecosystems they have built are “too delicate to tamper with and too big to fail”.
Instead, businesses looking to cut costs are focusing “excessively” on in-house labour costs, Alsbridge said.
“Many organisations are looking in the wrong place for cost reductions. While cutting in-house labour costs may be the right thing to do in some cases, supplier cost management has the potential to deliver better results for the enterprise in terms of reducing absolute spend, enhancing productivity and improving EBITDA (earnings before interest, tax, depreciation and amortisation),” said Homan Haghighi, director at Alsbridge.
The sourcing advisory firm surveyed 2,000 companies of various sizes across multiple industry sectors. It found that spend on sourcing as a percentage of total revenue is growing at a rate of six percent annually, while the same spend on labour is falling at an annual rate of eight percent.
“The data further finds that a one percent improvement in supplier cost management has a six-time greater impact on profitability than does a similar one percent reduction in labour costs,” it said in its report.
Alsbridge claims that a one percent reduction in labour costs generates just 0.7 percent in improvement of EBITDA (earnings before interest, tax, depreciation and amortisation). In comparison, a one percent change in supplier spend would deliver a 4.1 percent improvement in EBITDA.
The problem of virtualisation
According to Alsbridge, the growth of virtualisation is one of the reasons why the supplier eco-system is becoming increasingly complex for businesses to manage, due to the associated contractual and governance arrangements.
“The growth in multiple contracts and multiple vendors, who are often direct competitors, on the same sites and within the same large and valued clients, has created multi-vendor ecosystems which are very fragile and yet are simply too big and too critical to fail,” Haghighi said.
“This means that governance and cost management issues are avoided or not addressed with enough confidence by purchasers.”
Comply or leave
In addition, Alsbridge believes that businesses need to make sure that all their suppliers understand and comply with the company’s governance protocols so that a multi-vendor ecosystem can operate efficiently, and to penalise those that refuse to co-operate.
“Problems can arise when a service provider, who was previously the sole strategic supplier, for example, is unable or unwilling to pass on crucial knowledge to other suppliers in a new multi-vendor environment. In some cases, we have seen bad behaviour when valued suppliers have been asked to collaborate, co-operate and play well with others in the supply chain. So we understand the cautious approach taken by many organisations in order to keep their systems running,” said Haghighi.
“But going slowly can end up creating more problems than a swift decisive move to re-sourcing, which in itself can change the power balance, improve the buyer’s negotiating stance, allow the right processes to be embedded and create value.”