Tail Spend Management and Why it Matters
By Anthony Clervi | August 18, 2020
How can procurement take control of tail spend… and why bother?
In part one of this article, we examined the full context of tail spend, the reasons it is (usually) unmanaged by procurement, and associated concepts including the 80/20 rule.
In this article, we will discuss why procurement should take a more active role in managing tail spend and provide several strategies for doing so.
But first, let’s define “tail spend” once more:
Tail spend refers to the many high-volume, low-value transactions that take place in an organization and are typically unmanaged by procurement.
Why tail spend management?
Tail spend is messy. It’s often invisible (with transactions taking place via email and other channels), and there’s a lot of it.
In large organizations there can be thousands of low-value, high-volume transactions taking place across the business every day, ranging from purchasing stationery to hiring temporary staff.
For many CPOs, the thought of managing tail spend is enough to create a headache, predominantly because the task will first require a massive effort in gathering, sorting, and analyzing spend data.
However, the good news is that tail spend management is genuinely achievable with the help of modern procurement technology.
Unlock the benefits of tail spend management
To begin, let’s examine what the benefits of tail spend management are, along with some strategies for bringing it under control.
Visibility of total spend
First, in an era when data is king, no procurement team can’t claim to have total visibility if they can only see their organization’s spend with the top 20% of suppliers. Expanding visibility to include tail spend not only unlocks opportunities to cut costs and identify risk, it can also drive innovation.
How? Ultimately, the goal is to move all tail spend out of invisible channels (emails, phone calls, spreadsheets, and disparate procurement systems) and onto a centralized purchase-to-pay system. This will require change management at first, along with staff training, and plenty of patience, but gaining visibility of total spend enables spend analytics and its many associated benefits. Also, choose procurement software powered by artificial intelligence (AI) and machine learning (ML) that can learn how to group and categorize spend through advanced analytics and process automation.
There’s more to procurement than cutting costs, but this is undeniably the number-one motivator for getting tail spend under control. Digitizing tail spend by moving transactions onto a centralized system can cut costs by 5% to 10%, but you can’t save what you can’t see.
How? Analysis of the spend tail will reveal multiple ways to cut costs including:
- Ensuring you have clear policies and processes for buyers to follow. For example, all buyers could be required to source three quotes before making a purchasing decision.
- Creating online catalogs for categories such as stationery or business travel.
- Identifying and addressing maverick spend.
- Consolidating suppliers and deliveries to increase buying power and negotiate better deals.
- Reviewing purchasing requirements to reduce unnecessary spend and warehouse costs.
- Training and educating staff on effective purchasing to create a cost-conscious culture.
- Implementing reverse auctions to drive down costs.
- Outsourcing tail spend categories to a GPO to unlock bulk discounts (see below).
Identify and reduce risk
What sort of risky behavior is taking place in the spend tail? Even though a purchase may be below the spend threshold, it may still have a high risk profile. Without visibility, it’s impossible to keep track of unusual costs, potential ethical breaches, or procurement fraud.
How? Use procurement software to monitor and flag unusual spend patterns in real-time – for example, a product or service being purchased for a significantly higher or lower amount than usual. Some categories with a higher risk-profile may warrant an elevated level of monitoring. Look out for maverick spend that exposes the organization to additional risk.
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Unlock innovation in the spend tail
Small suppliers are more innovative than larger organizations. Because they can respond to requests more rapidly, pivot faster, and develop and implement new ideas quicker than established players, they have fewer hurdles (red tape) to clear. It’s entirely possible that an SME buried deep within your organization’s tail spend may be harboring a game-changing idea, but ideas will not be shared if the relationship is purely transactional. Tail spend also offers countless opportunities for socially-conscious procurement, like choosing a minority-owned supplier, for example.
How? Suppliers in categories such as IT hardware are (obviously) much more likely to be a source of innovation than, say, a stationery supplier. But keep in mind that innovation doesn’t always refer to the latest technology. It could simply involve making a small change in the way things are done to reduce costs, decrease risk, or increase efficiency. Identify potentially innovative suppliers in the spend tail, start a conversation, and encourage them to approach you with new ideas.
Tail spend management with a GPO
For most organizations, tail spend is too massive a challenge to tackle alone. Technology can help in terms of visibility and analytics, but another highly effective strategy to consider is to outsource difficult-to-manage categories to a Group Purchasing Organization.
At Una, we use our spend analytics tool to identify issues within our members’ tail spend and find categories that could benefit from access to our impressive bulk-purchasing-driven contracts to generate immediate savings. Outsourcing to a GPO also frees up the procurement team to focus on strategic initiatives.
Schedule a consultation with one of our expert Sourcing Advisors to learn how to unlock cost savings and other benefits through tail spend management.