OUR FINDINGS
Fortune 500
Our research finds that on average Fortune 500 companies spend 75% of their outgoings on supplier costs, with remaining 25% spent on employment costs. However, there are large disparities among Fortune 500 companies in terms of how they spend their money.
For example, labor costs typically make up at least 40% of total costs in service sector industries, which are generally very labor intensive. For instance, labor costs account for 38% and 45% in the technology and financial services sector, respectively. This reflects the significant wage & salary expenses associated with the employment of highly skilled workers in financial services firms and tech companies. Software companies such as Adobe and Oracle have a particularly high share of employment costs, due to reduced expenditures on physical inputs.
At the other end of the spectrum, relatively low wages in the wholesale & retail sectors mean that labor costs make up only a small share of total costs among Fortune 500 companies in the consumer sector. Meanwhile, very high capital costs in the mining sector mean that external supplier costs account for 82% of businesses’ total expenditures in the basic materials sector.
In between we have the industrials sector, labor costs account for 31% of total expenditures – slightly higher than the average across all industries. This is symptomatic of the relatively balanced mix that manufacturers strike between the use of labor and capital in their production.
The globally competitive business environment in which large companies typically operate means that, for many firms in the Fortune 500, margins are relatively tight. Indeed, on average across the companies analysed, earnings before interest, tax, depreciation and amortisation (EBITDA) stands at 20% of total operating revenue.
As a result, relatively small changes in companies’ costs can have a major impact on profitability.
Given that in most industries, external supplier costs make up the lion’s share of total expenditures, the largest gains can be realized through reductions in these outgoings. On average, Fortune 500 companies could expect a 32% surge in EBITDA from a 10% cut in their supplier costs. By comparison, a 10% reduction in labor costs would achieve just an 11% increase EBITDA.
This shows that, in most cases, businesses’ collective spending on external suppliers represents a far more significant expense than their internal workforce costs. It further highlights that the structure of arrangements with external suppliers is a critically important factor shaping the performance of the US’ largest companies.