Unlock the Hidden Value of Tail Spend

Value delivery has always been the top priority for procurement leaders. The process, however, involves finding new methods to negotiate, evaluate supplier performance, and improve agility. Amid these strategies, there is a certain overlooked area which holds the potential to deliver unique value: tail spend.?

Most companies categorise tail spend as the spend, not actively managed across categories, which impacts the company’s financial performance. Although tail spend comprises 10-20% of the total spend, it involves a large supplier base and causes a continuous management struggle for procurement managers. However, there are proven methods which can effectively increase a company’s bottom line.?

What is Tail Spend?

Tail spend refers to any unmanaged buying activity across categories which involves low value or high volume transactions. Such spends often occur when the purchased item is not sanctioned by the purchasing department and may involve high costs across multiple suppliers. Since much of this spend accounts for one-off purchases, chances are high that the organisation may end up paying a higher price for the goods/services procured.?

For example, the purchase of indirect goods/services for selected categories is often managed by individual departments, and finance teams are unaware of the true magnitude of the spend. When compiled, however, these expenses can account for a huge portion of the procurement budget.?

Here are some examples of tail spend:

1. Maverick Spend: Spend not included within a company’s formal purchasing guidelines, often taking place when individual departments purchase goods without the company’s approval.
2. Misclassified Spend: Comprises goods/services that were incorrectly coded and blinds the company’s understanding of total amount spent.?
3. Fragmented Spend: Occurs when items are procured individually and the buyer does not engage suppliers in any contractual agreements or standard rates.?
4. Low-Price, High-Frequency: Involves spend involving goods that are low in value but purchased frequently, often adding up to a significant amount.
5. Low-Price, Low-Volume: Involves spend involving items of low value, typically managed with a Statement of Work, but can add up to large amounts over time.?

Addressing the Challenges of Tail Spend

Problems caused by tail spend go beyond just lost savings; when buyers purchase goods or services outside of preferred vendors, the possibility of delivered items not being of the right quality often increases. In turn, such purchases can result in customer dissatisfaction, and thus pose unnecessary risks to the organisation. To properly manage tail spend, the following challenges need to be understood and addressed:

1. Limited Category Expertise: Identifying and managing tail spend involves an in-depth understanding of categories across the organisation that contribute to tail spend.
2. Lack of Resources: Many procurement teams still rely on manual/paper-based procurement processes which makes it difficult to identify and create effective strategies for curbing tail spend.
3. Inadequate Integrations: Organisations often suffer due to the lack of integration between systems leading to decentralised contracts and off-contracted data.?
4. Working in Silos: At most organisations, multiple business divisions work with decentralised policies and processes, thereby, causing difficulty in data consolidation.?

Manage Tail Spend like a Pro

An organisation’s approach for managing tail spend is largely dependent on its buyers, stakeholders, supplier network, and technological advancements. An effective tail spend management strategy involves a detailed understanding of overall organisational spend. Here are some steps that can help your organisation in gaining the most out of your tail spend:

1. Assessment of Tail Spend: While tail spend is a broad term, it’s imperative for procurement teams to categorise them into separate buckets such as - Hidden Tail (comprising of big-ticket spend), Head of the Tail (non-strategic spend accounting to up to $1 million a year), Middle of the Tail (smaller expenditure with ticket size up to $200,000), Tail of the Tail (fragmented, one-off purchases with small ticket size).
2. Optimising Internal Processes: By streamlining and optimising internal processes using digital technology, procurement teams can gain 100% spend visibility, manage supplier networks, and implement approval workflows. Utilising a smart procurement software can help companies fast-track spend analysis, lead hyper-productivity, and reduce procurement costs.

Conclusion

Effective tail spend management is instrumental in improving the efficiency of sourcing cycle, boosting profit margins, minimising unwanted risks, and fostering customer satisfaction. Incorporating built-in controls for such maverick spend can also drive compliance and long-term decision making.?

As India’s leading procurement software, Procol’s solution allows procurement teams to get end-to-end visibility of their spends and contracts. Our easy-to-use, customisable platform lets businesses improve profit margins with efficiency, transparency, and compliance. Schedule a demo today to explore Procol’s procurement software and tail spend management solution.?