PROACTIS contributed to a discussion and article on Tail Spend Management in this month's Institute of Finance & Management (IOFM), Controllers Report, Members Briefing.
Editors Extract (www.iofm.com):
When Finance Controllers look at minimizing costs, it’s natural to pay more attention to the core areas of spend—after all, that’s where the greatest savings can be achieved the most quickly. However, if finance were to apply the Pareto Principle, also known as the 80–20 rule, an assumption could be made that 80 percent of spend typically comes from 20 percent of suppliers.
“By focusing on this often-overlooked 20 percent portion of your spend, finance and procurement can deliver significant savings in terms of reduced unit prices and process improvements. This frees up cash as well as valuable resources for your organization,” says Simon Dadswell, Marketing Director, PROACTIS.
For a typical organization, a 5-percent savings on tail spend can be the equivalent of a 10-percent increase in net profit. Further, a 10 to 15 percent savings is achievable through managing tail-spend.
In addition to achieving measurable cost savings, tail-spend management can provide an organization with the following benefits:
- Clearer visibility into exactly where the organization is spending money;
- Significantly reduced maverick and off-contract buying;
- Substantially fewer invoices to process; and
- A reduction in the time needed to manage suppliers.
The percentage of total spend comprised by tail-spend, as well as the exact nature of purchases, varies between organizations. However, across most companies, tail spend displays the following common characteristics:
- A large number of categories, many of which are usually low value with high transaction volumes;
- A disproportionate level of spend from the farthest-flung areas of the organization;
- Suppliers that no one in procurement has ever heard of or worked with;
- Rampant noncompliant and maverick spend not covered by current contracts; and
- Emergency purchases (which may or may not be true emergencies).
As the spend in each category decreases, the end result is a long “tail” of small, disparate purchases (see exhibit, which illustrates what tail-spend looks like).
Real Costs and Potential Savings
“When finance allows an organization to spend that 20 percent ‘tail-end’ of total expenditure with little or no sourcing support - and with little focus on the large numbers of invoices involved—the organization will end up paying higher prices,” says Dadswell. “The organization will also incur higher risk and accounts payable will be burdened with a heavy invoice-handling workload.”
Indeed, the true cost of tail spend goes beyond the actual cost of the items purchased. Finance needs to add in the higher prices being paid for items because:
- There are no supplier controls in place for these purchases;
- There are labor costs involved in processing all the extraneous invoices; and
- There is exposure to risk.
“Lack of visibility into supplier performance results in exposure to potential risk factors such as contractors whose insurance certification has expired,” explains Dadswell.
Seven Strategies to Gain Control
Dadswell recommends the following ways to get your tail-spend under control:
- Analyze your tail-spend. Segregate and reclassify your tail-spend so that appropriate strategies can be employed for each category. Target the “low-hanging fruit” first.
- Implement spend control solutions. There are a number of solutions on the market designed to help organizations improve visibility into their spend, tighten spend controls, and reduce the cost of supplier spend.
- Provide procurement with the tools to become more efficient and “do more for less.”“According to analysts, 70 percent of a procurement manager’s time is spent in manual administration,” points out Dadswell.
- Reduce the volume of suppliers, orders, and invoices. Efficiently manage the remaining volume of suppliers, orders, and invoices associated with tail-spend.
- Utilize streamlined supplier management tools. Use an online supplier portal suitable for handling a high number of suppliers. Implement supplier self-registration, certification workflows, self-service, and catalog management.
- Use P2P tools such as a supplier catalog and punch-out capabilities. This will make it easy for employees to find and buy exactly what they need from the right supplier, even across many thousands of tail-end items.
- Team up with category supply partners. These suppliers specialize in ensuring the lowest prices and best value for various spend categories such as stationery, paper, lighting, print services, in-house print management, business machines, and office furniture. “One of the most common and easiest categories within tail-spend is stationery and other office supplies,” says Dadswell.
“Getting control of tail spend doesn’t happen overnight. But you might be surprised how quickly you can see results,” says Dadswell. “Many organizations see net ROI in less than a year, often within months.”