The origin of "tail-spend" as a term lies in the well-known Pareto principle - that 80% of spend will come from 20% of suppliers; and that, conversely, 80% of suppliers will account for 20% of spend.
Tail-spend often falls outside the core spend categories where the savings are larger and Procurement is already doing a good job. In truth, the nature of tail-spend will vary but it normally displays a number of common characteristics:
- Large number of categories.
- High percentage of spend spread across multiple sites and locations.
- Suppliers that Procurement have never heard of before.
- High % of non-compliance and maverick spend leaving the company exposed to excess cost and risk.
- Low value indirect spend categories.
"Tail-spend management" refers to a variety of strategies to squeeze the last drop of savings from these areas.
What is the real cost and potential savings?
If you allow your organization to spend that 20% of total spend with little or no sourcing support and with little focus on the large number of invoices involved, clearly that will result in paying higher prices.
But if Procurement and Finance tackle the challenges together they can deliver significant savings in terms of both reduced unit prices and process improvements – both of which free up money and valuable time.
To put it in another way, if you were told you could drive a 10% increase in net profit and it would only take 5% savings on a largely untouched area of spend, would you be interested? Of course you would.
Why is it often ignored?
The strategic importance given to direct spend means that tail-spend is often ignored - or at least not closely managed.
The main causes of tail-spend
- There is a high volume of suppliers associated with tail-spend and the idea of tackling them can seem overwhelming.
- The amount of spend is often lower than core categories and so the return on investment for any strategic sourcing initiative will usually be lower.
- Data visibility is a particular issue. Many items are bought infrequently and classified inconsistently (or not at all) or assigned to GL Code "Other".
- Lack of effective controls and buying off-contract feeds the tail and because the amount of spend is low it is challenging to engage stakeholders.
Tail-spend has two root causes:
- Lack of compliance, and therefore spend visibility.
- Emergency purchases and/or those goods or services not covered by current contracts.
The absence of contractual terms, volume discounts or procurement assistance results in sub-optimal prices and payment terms.
Those one-time special deals that contribute increasingly to the number of suppliers being raised on the system to fire-fight an impending invoice require substantial administration effort.
Risk exposure can be high in tail-spend categories where there is a lack of control and visibility.
Things to consider
- Spend visibility - Figure out what is being bought, from whom, where, and for how much compared to market value. Without an effective eProcurement platform in place to capture spend at source, it can be difficult to extract meaningful and accurate data from the organization's Chart of Accounts.
- Increase your capacity for spend under management - Help your Procurement team to free up their time to apply professional processes ‘further down the tail’ of spend by streamlining and automating routine administrative processes.
- Filtering and reclassification - Focus on commodities that can be reclassified into a category that will have enough spend to be worthwhile. Once the category with the biggest opportunity has been identified, determine the right sourcing approach. You can accelerate the process with automation including standardized templates, RFX, and/or auctions.
- Address categories using the best method - Methods may include Quick-Quote for infrequent, higher value purchases, PCards for frequent, lower value ‘in the field’ categories, procurement-assisted buying, or even specialized managed service for infrequent, higher-value categories where expertise is not available in-house.
- Establish purchase controls - Drive as much spend onto a purchase-to-pay technology platform to simplify processes and increase financial control and visibility. Make it easy for staff to buy from preferred suppliers, contracts, and catalogs whilst ensuring compliance with authorization policies and other purchase controls.
- Automate invoice receipt and processing - Categorize suppliers in terms of invoice volume, invoice complexity and technology capability. Then reduce the percentage of invoices received in paper form and requiring manual entry by applying appropriate electronic invoice capture methods (PDF, XML, email, PO Flip, online entry, Intelligent Scanning etc.)
Yes – it’s a lot to do and it doesn’t happen overnight. But you might be surprised how quickly you can see results.
Download the Proactis white paper: Tail-Spend Management: How to squeeze savings from the most fragmented 20% of spend.