The Best Tail Spend Management Strategies That Save Time and Money
By Hugo Britt | March 16, 2021
The thought of getting a handle on your organization’s tail spend can be an overwhelming prospect. So overwhelming, in fact, that you might be tempted to simply ignore your sprawling supplier base, dozens of product categories, and thousands of low-value transactions.
It’s understandable that procurement teams readily choose to dedicate the majority of their time to managing their preferred, critical or strategic suppliers – those that typically account for 80% of the organization’s spend volume. Professionals simply don’t have the time or capacity to comprehensively address tail spend thanks to the combination of insufficient technology, limited resources, and funding, or uncertainty about where and how to get started.
But tail spend optimization brings many benefits including cost savings, reduced risk, innovation, and better data management practices.
This article outlines three of the best tail spend management strategies to save your team time, money, and effort.
But first, let’s address the basics.
What is tail spend management?
Tail spend is described as the high-volume and low-value transactions that take place within an organization – typically accounting for 80% of the supply base, 20% of overall spend, and largely limited to indirect spending.
Examples of tail spend include fetching lunch for a team meeting, booking a taxi for an airport transfer during a business trip, and ordering a new desktop monitor. These are often one-off, unclassified, or uncatalogued transactions – completed via email, phone, or a third-party website. These purchases are hard to keep track of and end up being largely unmanaged by the profession, meaning that the likelihood of maverick spending is high.
Procurement may well outline processes, policies, guidelines, or systems for buyers to follow, known as a “set-it-and-forget-it” approach, but this still means losing out on a great deal of value and poor compliance across the organization.
How do you manage tail spend?
Three of the best tail spend management strategies
While low-value, expensed transactions of this kind sound trivial in isolation, addressing your organization’s tail spend can unlock previously unexplored savings opportunities.
In 2019, Gartner reported that procurement teams effectively managing their organization’s indirect spending achieved a savings rate of 6% and delivered a return on investment of 6.88%. Furthermore, it was found that managing predominantly indirect spend delivered higher ROI to the business than functions that managed direct or hybrid spend.
Ultimately, it’s best practice to manage your organization’s tail spend like you would any procurement category.
But that’s easier said than done…
Outsource tail spend management to a Group Purchasing Organization
With many procurement teams citing the lack of time and resources as the main barriers to tackling tail spend, enlisting the help of a Group Purchasing Organization (GPO) might just be the perfect solution. In this scenario, the GPO would act as an extension of your procurement team, providing a dedicated service to sort through and analyze your tail spend data.
Procurement leaders often engage GPOs to outsource specific categories such as travel, office supplies and logistics. Tail spend is simply another category that can be outsourced in this way, helping your team to consolidate your supply base and establish which vendors are the best fit for your business. This process would include identifying high-risk or high-cost areas within your tail-end supply base to establish which categories would most benefit from bulk purchasing-driven initiatives and pre-negotiated supplier contracts.
With tail spend management fully accounted for, your team will have the capacity to focus on other areas of strategic spend.
Outsource tail spend management to consultants
Another effective way to manage indirect spend is to enlist the help of experienced external consultants. These professionals can advise on how to integrate effective tail spend management processes into your organization’s overarching category strategies.
Implement technology solutions
Digitizing procurement processes with technologies like big data, artificial intelligence (AI) and automation has proved transformative for the profession in recent years, and not least in the area of tail spend.
Solution providers, including BidOps and Fairmarkit, can automate clunky processes to bring more of your organization’s tail spend under procurement management while requiring all buyers to purchase through a unified system.
Although costly, software like this can help your organization to achieve cost savings, drive increased visibility, monitor and flag unusual or high-risk spend patterns, funnel spending to preferred suppliers, and monitor your progress towards tail spend management KPIs.
According to Boston Consulting Group, for example, organizations that leverage digital data to manage tail spend can cut their annual expenditures by up to 10%.
Schedule a consultation with one of our expert Sourcing Advisors to learn how to unlock cost savings and other benefits through tail spend management.