An Expert Approach to Reducing Tail Spend without Affecting the Bottom Line

In business school, you learn that the best way to cut costs in tough times is to simply cut budgets. Traditionally, this meant eliminating inefficiencies in your supply chain. And for most of the time, that worked quite well.

But in the current economic climate, squeezing more from the supply chain is like trying to wring water from a dry towel. And slashing departmental budgets can limit your teams' ability to reach their goals.

So where can we find those elusive savings without playing the villain?

Unleash the power of tail spend: your significant source for savings

The answer may lie in tail spend. The origin of the term "tail spend" refers to the infamous Pareto Principle, according to which 80% of suppliers are responsible for 20% of spend.

It turns out that most companies spend much more money on items that are not directly related to your main product – think technology, marketing, facilities, real estate, and the like.

But why does tail spend fly under the radar? Mostly because it's fragmented and complex.

Is taming tail spend worth the effort?

Managing tail spend might feel like an uphill battle, but it's a challenge worth tackling for procurement teams serious about reining in costs. The potential rewards are too temting to ignore.

BCG reports that companies can reduce their annual spend by an average of 5-10% by using digital technologies. For global companies with billions of dollars in total spend, this is a real windfall.

"Firms that use digital to manage tail spend can cut their annual expenditures by 5% to 10%, on average." (BCG)

Mastering tail spend management with data

Thanks to remarkable advancements in technology and data tools, procurement teams can now dissect and manage tail spend with surgical precision.

Spend analysis software can unveil opportunities to reduce costs, eliminate waste, and boost overall efficiency—all without denting the bottom line.

With more than two decades of experience analysing spend data from complex organisations, we have honed our skills in identifying inefficiencies and untapped cost reduction opportunities within the purchase-to-pay (P2P) process.

Procurement expert Francesco Porpiglia , Ph.D., reveals three savvy tactics for using spend analysis to reduce your tail spend.

1. Reduce tail spend with efficient invoice handling

For some businesses, processing invoices feels like solving a jigsaw puzzle, while for others, it's a breezy walk in the park. The APQC database reveals that companies can spend anywhere from $2.07 to $10 just to process a single invoice.

Operating costs vary depending on factors such as industry, company size and complexity, maturity of automation, and, above all, data quality.

Since tail spend management often deals with a large number of smaller transactions, streamlining processes can significantly reduce costs.

Smart tactics to reduce invoice management costs:

1. Identify tail spend suppliers: Use spend analysis software to identify the extent of your tail spend and associated suppliers. Spend data analysis can reveal potential savings in areas such as price differences, contract terms, and invoicing performance.
2. Consolidate suppliers: Combine suppliers by bundling multiple low-value transactions into larger ones. For example, instead of making 12 transactions worth €1,000, make 4 transactions worth €3,000 each. This maneuver helps to reduce transaction costs and strengthen purchasing power.
3. Implement standardization: Introduce uniform processes and policies to ensure that employees follow procurement policies and procedures. This way you can avoid maverick spending, enforce compliance and keep your procurement ship on course.
4. Streamline contract management: Optimize contract management by regularly reviewing and renegotiating contracts. This will not only reduce costs but also promote healthy supplier relationships.

2. Reduce tail spend by mastering vendor reconciliation

Vendor consolidation is essential for managing procurement processes in large organizations where spend involves thousands of suppliers offering a wide range of products and services.

Spend analysis serves as a guide through this complexity by pinpointing the suppliers that contribute the most to the organization's tail spend. With this knowledge, you can take advantage of opportunities to reduce the number of suppliers and negotiate more favorable prices and terms.

How to consolidate vendors and secure better deals:

1. Identify tail spend: First, use spend analysis to get an overview of your tail spend landscape.
2. Analyze data: Data analysis can help you identify duplicate spend on different items or unnecessary vendors. Experienced buyers can automate this process using OCR software, which can detect minor differences in product specifications across millions of miscellaneous annual spend items. By scrutinizing supplier invoice details and specifications, the OCR algorithm can uncover hidden redundancies.
3. Negotiate better deals: Once you have identified the root causes of tail spend and areas for improvement, it is time to negotiate contracts and terms with existing or new suppliers. You are probably concerned about the time this step will take. Fortunately- mass tendering tools can handle large-scale RFIs and RFQs enabling you to communicate with thousands of suppliers simultaneously. By reducing manual work, minimizing errors, and shortening procurement cycles, these tools make the process a breeze.
4. Track progress: Keep a close eye on your negotiation efforts and the terms and prices of newly signed contracts. This vigilance will allow you to report on your savings and potentially assess the impact on working capital.

3. Reduce tail spend by taming maverick spend

Maverick spend is the sneaky culprit behind purchases made by employees or departments within an organization bypassing the established procurement process. These transactions often lack approval and don't play by the company's procurement rules.

Maverick spend includes purchases from non-preferred suppliers, non-contractual purchases or items not listed in the company's approved catalog. The result? Higher costs, lower efficiency, and compliance headaches.

Effectively managing maverick spending can result in improved compliance, stronger supplier relationships, increased efficiency, and cost savings.

How to effectively reduce maverick spend:

1. Consolidate Data: Collect data on all purchases made within the organization, including direct, indirect, and non-traditional transactions. Gather data from sources like purchase orders, invoices, and expense reports.
2. Identify maverick spending: Utilize data analytics tools to detect maverick spending by looking for indicators such as unapproved suppliers, transactions outside the procurement system, non-contractual purchases, or spending that exceeds budgets or lacks documentation.
3. Categorize maverick spending: Classify maverick spending into categories, such as non-compliant, off-contract, or unapproved purchases. This will help you uncover the root cause of this type of spending.
4. Develop strategies: Based on your analysis, create strategies to better manage maverick spending. Options include improving communication and training for staff, streamlining procurement processes, consolidating suppliers, or negotiating better contracts with preferred suppliers.
5. Monitor Progress: Regularly assess the effectiveness of your strategies by tracking spending patterns, analyzing compliance rates, and measuring cost savings. By keeping a close eye on progress, your organization can effectively control maverick spending and reduce tail spend.

Software is great, but it is not the solution to all problems

Although software can work wonders in streamlining procurement processes, it's not a one-size-fits-all solution. It's crucial to be aware of the limitations of software tools:

1. Handling exceptions and complexity: Software can automate much of the invoice processing but may have problems when it comes to exceptions or unique situations that require human intervention. In cases where an invoice contains unclear or incomplete information, the software may not be able to extract the required data. In this case, human review is needed, which can increase processing time and costs.

• Data quality challenges: Software analytics relies on high-quality data to provide accurate insights and automation. If the data used by the software is incomplete or inaccurate, the results may be less reliable. This is particularly problematic if you are working with data from different vendors or sources with different data formats and quality levels.
• Customization constraints: Software can be less effective if your organization has specific P2P requirements or processes for invoicing, and multiple legacy systems aren't connected.

In summary, software is an invaluable aid in managing procurement processes, but it is important to know its limitations and recognize that it cannot solve every problem on its own.

Ultimately, data quality is the cornerstone of achieving reliable results and making informed decisions in your procurement journey.

Curious about what it takes to reduce tail spend?

Reducing spend is no easy task, especially when your procurement teams have their hands full.

At Transparent , we help large companies optimise spend without compromising the bottom line. Our spend experts – Francesco Porpiglia Ph.D., and Wout Jansen – are ready to address the burning questions that most procurement leaders ponder:

• How to pinpoint and categorize spend with the highest potential for savings
• How various organizations successfully have reduced tail spend, and how you can adapt these lessons to your procurement process
• How to efficiently manage tail spend without sacrificing quality, efficiency, or damaging supplier relationships
• How to improve data quality and make informed decisions about reducing tail spend
• How to negotiate better pricing and terms on a large scale
• What digital solutions can help you reliably manage tail spend