Rising spend on non-core operations wipes out smaller company profits
A recent piece of research that SKS conducted revealed an alarming trend in the UK among AIM-listed companies. Since 2008, of the 134 random companies that SKS looked at, there has been a big increase in spending on non-core operations – an average of 40 per cent in just five years. More worryingly, the rising spend on non-core operations wiped out company profits, which fell from an average of £9.6 million to a loss of £0.8 million over the same period. Companies have a number of options to consider when addressing their non-core operation costs, including considering whether the company would benefit from a smarter use of outsourcing.
In the Oil & Gas sector, average general and administrative (G&A) costs went from £1.96 million in 2008 to £2.64 million in 2012, an increase of 35 per cent. Firms operating in alternative energy and chemicals spend the greatest portion of their revenue on G&A expenses, while food producers and construction companies have their non-core operational costs most in check.
Outsourcing has long been a part of major corporate thinking. By outsourcing services, companies can become leaner and more efficient, allowing them to concentrate on their core business objectives. Even in smaller companies, a rapid expansion of the business can mean that resources are consumed in functions such as finance and HR at the sacrifice of core operational quality. Outsourcing has also become an increasingly popular way of businesses reducing overheads and non-core costs. As the data from AIM-listed companies shows, high non-core costs can have an enormous impact on bottom-line profitability and therefore can deny a business crucial reinvestment when it may need it most (in its early growth stage).
Outsourcing non-core operations while retaining top-level UK expertise should be standard protocol across all types of companies in this day and age, but while many of the companies the AIM market research looked at are developing reputations for innovation in fields such as biotechnology, oil and gas exploration and technology, many are taking a traditional approach to managing their general and administrative costs. This includes a tendency to ignore cheaper, skilled labour in emerging markets and shared services business models. Smaller companies should realise the benefits of outsourcing that their larger corporate cousins enjoy. The future of business has outsourcing at its heart, allowing nimbler companies to adapt faster to changing market environments, without compromising on profitability or efficiency.
About the Author
Sanjay Swarup is a director at SKS Business Services Ltd.