Mature procurement organizations drive category management strategies with a focus on the top tier strategic spend with large individual project value or larger, sometimes cumulative, strategic relationships.  Negotiating big deals, where the deal itself may have complexity and or importance, focuses Procurement’s attention on singular stakeholders and requirements that drive material outcomes and attract much visibility.  Introducing category strategies that service an acceptable level of Spend Under Management, enabled by e-sourcing and e-procurement applications to drive cost and resources efficiencies, tends to be where some companies transition from strategic management to a tactical or transactional approach.

What is Tail Spend?

Tail Spend is a term that is often defined as the bottom 20% of spend but encapsulates 80% of the supplier, although this ratio is often generic. The purpose of TSM is to identify areas of opportunity to standardize common items, connect dis-aggregated send, find consolidation opportunities and rationalize the supplier count. This can be an area of significant opportunity but tends to be neglected due to the volume of transactions, a lack of an efficient spend analysis solution and the supplier count. Tail spend should be of higher importance and is concealed in the long tail of low-value spend, lacking a well conceived approach. We have found sound investments in resources and technologies enable organisations to surface and analyze opportunities that increase managed spend and typically show cost reduction efforts in the 5% – 10% range.

How is Spend Profiled?

There is no “right or wrong” or one-size-fits-all definition for ”tail spend” across industries due to their unique spend profiles. What is considered tail spend in one category may not be the same in another and will vary.  The core goal of managing tail spend is to drive a competitive advantage, gain control and improve efficiency. We would recommend that organization invest the time to address ownership of spend, the types of tail spend then drive for targeted results.

Source: https://bell-pm.com/services/managing-tail-spend/what-is-tail-spend/

In an extended sense we too need to consider maverick spend, otherwise known as spend that would be considered non-compliant with policy or Procurement strategy. There is a belief that maverick spend resides only in the bottom 20% under the long tail, but what about those strategic suppliers with transactions that have been unmanaged?  This hidden tail spend once identified, combined with the long tail when managed properly, can accelerate savings even higher levels.  This spend is typically highly fragmented across multiple sites, business units, regions, suppliers, is of low individual values and is labor intensive to bring under management. 

Spend profiling will drive you to question, Does tail spend only include low-value transactions?  Are there lines to be drawn between Category Managers and Tail Spend Management? A highly trained team of Procurement professionals can focus on repeat tactical spend, spend consolidation and even high-value purchases to fuel bottom line performance.

A well defined and trained team backed with support and authority, can deliver big wins for the business as a whole.

How To Identify Tail Spend?

Due to the nature of this type of spend, it can be difficult to identify opportunities that will result in significant improvement in commercial conditions, increases in volume incentives or result in cost reduction. How can Procurement find Maverick spend? It’s like trying to find a needle in a haystack. 

Identifying opportunities for consolidation within the tail spend requires clear visibility of data across all source systems. This may include systems such as source-to-pay, spend analytics and core ERPs. We would recommend a dedicated, internal team, of specialized Procurement analysts, unifies, connects and distils the data from these systems together to provide actionable intelligence for Tail Spend Commodity Managers.

This example below illustrates on catalog (hosted and punch out) and off catalog spend (free text) by supplier and commodity. In minutes, Procurement can identify suppliers with Maverick spend or commodities with the highest number of transactions driving insights that could otherwise never be produced. 

A key enabler for this type of data insights is data cleansing. With cleaner data, a company gains better visibility top to bottom through the supply base. This is a critical step in the process for Maverick or free text spend. Quite simply, the people requesting goods or services do not always classify their purchases correctly. They are focused on getting what they need to do their job, not ensuring data quality at the highest level. Employing data analysts to extract and analyze data with technology to allow reclassification of spend to ensure consistency and accuracy is vital.

It’s critical to understand that having tools and technologies alone are worthless without robust training for users and experts to identify errors as they occur. Believing that transactions are classified properly without this quality assurance step can mislead organizations. Cross-checking information for potential opportunities with the internal stakeholders can enhance data quality, build solid relationships and ensure aligned outcomes.  

It is important to develop and foster a collaborative approach with key stakeholders at the onset of a project. Often times, savings are not realized if stakeholders do not support the decision or if Procurement does not drive the negotiated results in to catalogs for transactional control and enforcement of the sourcing decision.

In our opinion, taking the time, necessary, to cleanse data across all sources is a key investment in realizing the potential savings resident in your tail spend. This combined with robust training technology, analytics and insights will be yield dividends inn savings outcomes previously unattainable.

Why Is Tail Spend A Challenge For Some Organizations?

Even when these opportunities are identified they can be equally as difficult to convert to wins . Tail spend is extremely fragmented across non-strategic suppliers with less Procurement control and or oversight and, therefore, developing a good base for RFQs can be a time-consuming effort if people, process and technology are not considered. 

The tail spend team’s main approach to combating the fragmented nature of this spend is to cast a wider net on spend visibility and consolidate demand within a region or business unit. This decreases the overall time spent on RFQs and combines small, repetitive orders into larger negotiated contracts or catalogs. There are additional efficiency savings gained, through consolidation, by reducing administrative steps associated with the high volume of individual orders. Given the average time a company spends processing each order, the impact can be significant, not only on savings, but operational efficiency.

Even with the highest level of collaboration on a decision, end users may not be aware of the existence of negotiated contracts and catalogs for use. One final area for automation is to drive a guided buying strategy in collaboration with your Procure to Pay solution. Insights into maverick spend can not only lead to identification of unmanaged spend, but also managed spend the user did not clearly understand. Root cause analysis could lead to process automation that re-directs spend to an existing catalog or to a systemic review by procurement agents who can determine if the requester should be buying off catalog.

Without spend aggregation and deep analysis on new items not included in contracts, tail spend could be overlooked as insignificant, but it can, in reality,  represent a massive hidden opportunity that shouldn’t  be ignored. We recommend that target areas are carefully defined, spend is thoroughly analyzed, and invest in a dedicated team to drive changes and to lead negotiations.

Using Technology And Tail Spend To Drive Enhanced Negotiations And Benefits

As Procurement invests in technology, to manage the tail and increase spend under management, it should not be overlooked that catalog automation drives efficiencies both internally and externally with your supplier partners. Catalogs item descriptions, prices, part numbers, and commodities deliver incremental accuracy in order data, making it easier to do business with supply base partners. Incentivize internal users to utilize catalogs and supplier partners by contracting for volume incentives. Every transaction that is automated drives more system visibility to the partner, delivers consistency in order management, ease of use and widespread efficiencies. Catalog transactions should lead to incremental incentives and bottom line savings.

Tail Spend: Managed Internally or Outsourced?

There are BPO (Business Process Outsourcing) partners that possess the technology, expertise and resources to manage tail spend. While there are benefits to managing tail spend internally and externally, every company should weigh benefits to their overall goals and objectives. For some companies, there are less risk factors and greater benefits to having tail spend driven internally. Examples include internal knowledge on systems, sites and employee networks. An external partners may be able to offer new methods of managing tail, but would have to build up their systems knowledge, as well as cultivate a network with stakeholders without inherent relationships.

External partners may not have a solid understanding of localized business requirements, or local purchases in niche markets. This could prove to be a big challenge to an external consultant who will require significant guidance from internal stakeholders on local processes. Global organizations may have a challenge finding a partner with a broad scope, which then requires internal support to fill the gaps. If your organization has stable processes, is less complex and has a localized supplier base then partnering with external organization might be the best option. They can introduce new market insights, best practices and suppliers that might otherwise not be on the radar.

Change management is a critical function of any successful procurement program where source changes are involved. An internal team may well be positioned to provide strong support throughout the source change process. Introducing an outside team could perplex stakeholders while gaining less overall buy-in and alignment.

Communicate as much as possible. If you implement a team to manage tail spend, you have to be prepared for change. Share success stories and remove the barriers quickly. Gain stakeholder’s buy-in. Make them feel like they’re an active participant in the journey for shared  success!