SI Review: August 2011

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Gross Margin Movement

I hear all the time that gross margins are declining. Is that true?

Dear Reader,
We looked at 25 large firms over a long period of time — from 1999-2010 — and, yes, there was a decline of two percentage points. But most of that decline occurred in the first half of that period, possibly reflecting the growth in vendor management systems. Don’t worry. Over the last five years, gross margins have been roughly stable.

Yes, margins did go down a bit again recently, but it is worth noting that gross margins go down during recessions and come back up when the economy improves.

However, the nature of gross margins is such that it’s never going to be constant. They will always move — up or down — depending on the economy.

Think of gross margins as a finder’s fee. When there is lots of unemployment, people are easy to find. A customer won’t feel the need to pay you a finder’s fee when it’s simple to find talent. When the economy is booming and people have multiple jobs to choose from, it’s harder to find talent. Then the customer is more willing to pay you a finder’s fee — that’s when gross margins go up.

In 2010, gross margins went up by 0.7 percent. So chin up.

Editors at SI Review

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