Having a sound tail spend management strategy has never been more important than it is today. It’s a key differentiator – and competitive advantage – in a down economy in which cash is king and cutting costs is a high priority. Procurement teams can no longer rely on direct materials for savings—those costs have been negotiated to death.
Instead, they must turn to areas of indirect spend, which have been historically unexplored and unmanaged. Tail spend is finally getting its turn in the spotlight, but why has so much money been left on the table in the past?
The Real Definition of Tail Spend
Although tail spend can have different definitions (depending on how your organization defines it), a common way to define tail spend is known as the 80/20 rule or Pareto’s principle. Procurement departments always have more incentive to focus on large, multi-year contracts because of the larger savings realized. Yet this leads companies to basically ignore almost 20% of their spending. This unmanaged spend is a more traditional definition of tail spend and is typically considered the 80% of transactions that constitute 20% of a company’s spend.
Image Source: Fairmarkit Tail Spend Management Fundamentals e-book
However, this definition is misleading because it suggests that tail spend includes smaller, non-strategic purchases such as pencils, paper, small widgets—any purchases the procurement team doesn’t have time to manage and could theoretically purchase through a system like Amazon Business.
Yet SaaS solutions are tail spend. When you need someone to mow the lawn or wash the windows at the office campus, that is considered tail spend. In reality, tail spend includes a lot more than just small accessories.
It can range from pencils to services, labor, IT purchases, and even Maintence, Repair and Operational supplies (MRO), which is direct spend. And these items certainly cannot be sourced through Amazon Business.
The spend that people do not have to manage is what we define as tail spend. This tail spend or noncomplex spend actually makes up about 30% to 40% of a company’s total spend and about 90% to 95% of their total purchases, disproving the traditional 80/20 definition. So why isn’t it being addressed and why is so much money being left on the table?
Why Isn’t Tail Spend Being Addressed?
The reason tail spend isn’t being addressed is simple: lack of resources. Without enough people on your procurement team, you simply don’t have the human resources necessary to manage all of your vendors and spend. Incorporating catalogs (Amazon Business), data analytics or even outsourcing this problem with a BPO will not help to solve this problem. Why? Because it does not take the manual effort out of the process.
To effectively optimize and manage tail spend, companies need to leverage intelligent sourcing and structured data to transform the way buyers are sourcing, purchasing and optimizing tail spend. According to Boston Consulting Group, companies that used digital data to manage tail spend cut annual expenditures by up to 10%.
COVID-19 and Its Impact on Tail Spend
Companies are trying to augment and automate tail spend in a low-cost way because they don’t have the headcount to manage it. COVID-19 has constrained procurement resources even more. Procurement and supply chain leaders are under immense stress to keep their companies operational and help source vast quantities of restrained items like PPE.
As a result, COVID-19 has brought procurement front and center in the organization. They are getting more budget and resources for digitization, which will have an immediate impact on the organization’s overall bottom line. We are even seeing an increase in procurement and supply chain professionals becoming CEOs and COOs.
ServiceNow is a great example of a company that is outperforming its competitors and succeeding in the COVID-19 era by taking advantage of digitization to manage its tail spend and sourcing process. The procurement team was resource-constrained and bogged down with manual tasks. As a result, they responded by automating sourcing activities and allowed the procurement function to focus on more strategic projects or focus on sourcing PPE and other priorities.
The Risk of not Managing Tail Spend
Forward-thinking companies and CPOs are taking advantage of the opportunity tail spend presents and recognize the benefits beyond cost savings. This includes increased spend under management, reduced risk, improved data quality and reporting, improved SLA and compliance enforcement, and increased productivity per full-time employee.
But what are the risks if tail spend is not optimized?
Price risk: Buyers have no concern over getting the best price, so they take the easy way out. This is a huge missed cost-savings opportunity and can significantly impact your company’s bottom line.
Time risk: Without the use of technology and automation, procurement has no ability to track pricing or other important supplier data. This leads to a misuse of procurement’s time and resources because they cannot identify strategic suppliers or consolidate them efficiently.
Operational risk: Tail spend purchases can lead to an increase in risk if buyers abuse purchasing policies and procurement has no visibility into whether or not purchases meet compliance standards. This could also pose a liability or security risk to the company.
The time to develop a tail spend management strategy is now. When you think tail spend, don’t just think of the typical 80/20 rule. Tail spend can be defined as any spend that procurement tools or human beings do not have the time to manage. Begin leveraging automation and technology to collect the money that’s being left on the table.
