3 Strategies for Outsourcing Tail Spend Management
By Hugo Britt | April 19, 2022
Benefits & challenges of tail spend management
Other advantages include reduced risk, lower maverick spend, better engagement with non-strategic suppliers, the potential for innovative ideas, better service delivery, and numerous advantages flowing from increased visibility of spend including supplier consolidation.
But it isn’t easy. The number-one challenge for many organizations is data visibility, with transactions taking place by phone, email, on third-party websites, or hidden in random spreadsheets throughout the organization.
Usually, tail spend is impossible to tackle without first implementing a centralized source of truth for purchasing data. Other challenges include fluctuating specifications and sporadic purchasing.
Overwhelmed in-house procurement teams
Most procurement teams don’t attempt to manage tail spend at all, apart from setting up processes, policies, or systems for decentralized buyers to follow and hope for the best. Instead, they focus on the big-picture sourcing exercises with strategic suppliers.
However, this is a false economy in many ways. While a sourcing professional might spend months haggling over a 2% discount with a major supplier, millions of dollars may be going out the door in low-value, high-volume transactions.
3 Strategies for outsourcing tail spend management
This is why there’s a strong case for outsourcing tail spend management. Below, we examine three methods for doing so: automation, Business Process Outsourcing (BPO), and partnering with a Group Purchasing Organization.
Writing for Spend Matters, GEP’s Jonathan Kinghan makes the point that available technology means the traditional thinking about tail spend being “not worth the hassle” is no longer valid.
The goal is to use technology to enhance control while minimizing human intervention in tail spend. This means, says Kinghan, “using technology to make it both easy for end users to make small purchases compliantly, and data to continuously refine the buying process and experience pushing more spend to preferred suppliers and channels.”
Typically, tail spend automation involves an AI/Machine Learning engine that classifies spend and consolidates requisitions then creates purchase orders. Advanced solutions will use proactive analytics to spot compliance issues and identify potential cost savings and opportunities for efficiency improvements.
However, Rich Young, writing for Procurement Foundry, believes that procurement technology must be supported with human know-how and ongoing supervision. “Technology alone is not the answer. What is needed is a high level of expertise that provides dedicated and vigilant auditing of management of tail spend”, he writes.
Procurement automation software solution providers include GEP, Fairmarkit, Basware, Planergy, and Simfoni. Sophisticated procurement systems costs can vary with most employing a per-user payment model.
Business Process Outsourcing (BPO)
Business Process Outsourcing in procurement means delegating one or more parts of the procurement process to an external provider. Businesses take advantage of BPO solutions because providers often have more resources, established processes leading to more efficiency, scalable solutions, and better technology. Combined, these advantages can deliver better results than may be achievable internally.
Using a BPO solution can decrease costs such as payroll and office space while enabling the internal team to concentrate on core competencies.
Challenges in using a BPO for tail spend management include:
- Security and trust: the provider will need sweeping access to spend data across the organization.
- Language barriers: BPO providers may be based offshore, leading to potential communication issues.
- Alignment: external teams will be less able to keep a finger on the pulse of business priorities.
- Cost: Organizations must ensure that the cost of a BPO solution does not outweigh the savings created by tail spend management.
- Non-strategic: There is a risk that procurement BPO decisions are made almost exclusively on cost, without taking other factors into account.
Procurement BPO is an emerging market compared with commonly outsourced processes such as HR, payroll, accounting, or travel, although there are some well-established providers such as Infosys. Fees vary widely, but BPO is considered an expensive option only leveraged by large companies.
Group Purchasing Organizations (GPOs)
Group purchasing organizations obtain volume discounts from suppliers by leveraging the collective buying power of its members. GPOs are strongest when it comes to indirect or non-strategic spend (like office supplies, travel, and logistics), making them a perfect fit for managing the spend tail.
At Una, we act as an extension of your procurement team by using a spend analytics tool to help you sort and analyze your tail spend data. This enables us to identify high-risk or high-cost areas within the tail that would benefit from volume-driven initiatives through immediate access to pre-negotiated supplier contracts. This generates immediate savings in tail spend categories.
What does this outsourcing strategy cost? The good news is that membership with Una is always free, there are no minimum purchasing requirements and you may cancel the GPO membership at any time.
Outsourcing some of the categories within your tail spend to a GPO is one of several ways to bring this issue under control, and should be used in conjunction with other strategies.
Ready to get your tail spend under control? Contact us to learn more about the strategies we use to implement effective tail spend management.
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Do you have questions about group purchasing? Wondering how a group purchasing organization works to save you money, time, and effort?
Una’s team of Sourcing Advisors is here to help. Contact us to learn more.