Grab the tail by the horns - Why is tail spend so critical in today’s outsourced portfolio?
You may not be aware of it. It’s usually invisible, but in all likelihood, you’ve got tail spend. No, it’s not something your dog has; it’s essentially a high volume of (usually) low value supplier transactions in your spend portfolio.
Doesn’t sound like too much of an issue, does it – after all, the transactions are low value. But when you consider that this spend is usually considered as ‘maverick’, out of contract and unpredictable you start to see why this might be an issue. Even more so when the volume of suppliers which contribute to it could be as high as 80% and account for 20% of the overall spend of the business.
In larger corporates, a business may expect its procurement team to manage tail spend effectively. However, even with a sophisticated procurement team the nature of tail spend makes it difficult to analyse and therefore manage. Tail spend tends to be small value, unclassified and unknown to the procurement team. It’s the one-offs, the ‘I’ll just use my credit card for this’ or ‘I don’t have a PO so I’ll just …’ type of purchases.
However, a post-Covid working environment means that now, more than ever, businesses should be considering how to control their tail spend and better identify and implement opportunities for reducing transaction costs and increasing savings and ensuring staff are following the prescribed processes.
What are the benefits in managing tail spend?
Put simply, it reduces cost and risk to the business. If an organisation is capable of identifying tail spend, the procurement team can then manage it – or put a stop to it – and ensure that the business can capitalise on savings opportunities. But the benefits go beyond immediate savings. Managing tail spend reduces unnecessary spend, de-risks supply chains and increases compliance with procurement and contracting processes, meaning that a business can better manage its suppliers, ensure proper contractual protections are in place and also allows the contract team to manage contract renewals, increase costs efficiencies and so the cycle continues. It also means that the procurement team can focus on strategically important spend critical for core business functions.
So why do so many businesses not manage tail spend effectively? Tail spend attributes mean that it’s hard to analyse, difficult to control and so often falls into the ‘too hard basket’ of a procurement team who have larger, higher value, strategic purchases (often including lengthy tender processes and budget constraints) to dedicate their time to. Just the sheer volume of transactions can make tail spend management a mammoth task to undertake (while also performing the day job). It also might be that the procurement team simply don’t have the transaction data or the requisite systems to record or track it.
How to manage tail spend
The level of effort, expertise and time needed to initiate a project to properly analyse and manage tail spend means that implementing a digital solution is often seen as the quick fix. However, simply purchasing a digital tool doesn’t address all the challenges posed by tail spend. For example, a digital tool might solve the effort and time challenges but it doesn’t necessarily help with filling the expertise gap or future proofing the issue. In larger organisations with greater category variances, tail spend gets lost because the procurement team are focussed on larger, direct spend and therefore may not have the skill-set (or time) to understand indirect, ad hoc expenditure from a strategic perspective. This is when a third party with a user-friendly digital tool makes most sense. It’s often more cost efficient to engage a third party who can then offer this expertise, digital solution and best practice advice.
If a third-party specialist is not an option, one of the more cost-effective methods to reduce tail spend (albeit at a relatively glacial pace) is to implement or improve processes and policies. Even if a business does engage a digital tool – or a third-party – simple to follow but effective (and enforceable!) processes and policies will be needed as without these old habits can sneak back in to. To achieve best practice, organisations should ensure that spend is reviewed by the procurement function and the legal team are engaged to ensure contracts are in place for all spend. This frees up the procurement team to focus on their core function and can be the most cost-efficient way of ensuring tail spend is managed now and in the future.
If you would like more information on commercial and managing tale spend please contact Megan Paul or your usual Charles Russell Speechlys contact.