Presents
Tail spend management is a $1.8 trillion problem in the United States alone, and the conversation around tail spend has been building over the past few years. So, what makes tail spend so significant?
(please choose the answer that best fits your organization)
To get a handle on tail spend, start by defining it within the context of your organization. While there’s no one-size-fits all definition, let’s test your understanding of the common characteristics of tail spend. Is tail spend typically...
High
or
Low
priority?
Since tail spend typically consists of smaller purchases, such as laptops for new employees, it often falls to the bottom of a procurement team’s priority list. But, that doesn’t mean tail spend shouldn’t be a priority altogether.
Since tail spend typically consists of smaller purchases, such as laptops for new employees, it often falls to the bottom of a procurement team’s priority list. But, that doesn’t mean tail spend shouldn’t be a priority altogether.
“Tail spend comprises 20% of a business’ annual spend volume, but approximately 80% of the business’ transactions. Mismanaging this indirect spend can leave savings of up to 6% on the table.”
Strategic
or
Nonstrategic
?
Nonstrategic spend is somewhat of an umbrella term for the items that are not critical to an organization’s defined mission. Tail spend includes spend like individual or infrequent software purchases, professional service purchases and business purchases that fall outside of the typical large, ongoing purchases that organizations make.
Nonstrategic spend is somewhat of an umbrella term for the items that are not critical to an organization’s defined mission. Tail spend includes spend like individual or infrequent software purchases, professional service purchases and business purchases that fall outside of the typical large, ongoing purchases that organizations make.
“According to the Deloitte annual Global Chief Procurement Officer (CPO) survey as many as 65% of procurement leaders have limited or no visibility beyond their tier-one suppliers.”
Noncomplex
or
Highly complex
?
Tail spend purchases can range from pencils to services like landscaping, and are categorically less complex than something like a multi-year contract for direct materials needed for manufacturing. While tail spend is noncomplex, that doesn’t mean it should be ignored.
Tail spend purchases can range from pencils to services like landscaping, and are categorically less complex than something like a multi-year contract for direct materials needed for manufacturing. While tail spend is noncomplex, that doesn’t mean it should be ignored.
“It was pleasantly painless... I thought it was going to be a lot more time consuming but it actually was very fast and I didn’t get a lot of noise about it so it was very positive.” —David Zullo, Refinitiv’s Head of Global Sourcing
Low
or
High
volume?
While tail spend purchases are relatively lower spend amounts, there are significantly more of them. All of the “smaller” purchases that fall within tail spend actually add up to 80%, or more, of a company’s transactions throughout the year.
While tail spend purchases are relatively lower spend amounts, there are significantly more of them. All of the “smaller” purchases that fall within tail spend actually add up to 80%, or more, of a company’s transactions throughout the year.
“Data is a language. And if the procurement team is fluent in that language, they have a way of speaking to other departments across the business. It is a way of getting a seat at the table and earning the trust of the IT team, marketing team and the C-Suite.” — Nikesh Parekh
Unmanaged
or
Optimized
?
Many procurement teams lack the resources necessary to effectively manage and optimize their tail spend. Without enough people on your procurement team, you simply do not have enough human resources to manage all of your vendors and spend. This is where intelligent sourcing and structured data can be a huge value add and transform the way procurement teams source.
Many procurement teams lack the resources necessary to effectively manage and optimize their tail spend. Without enough people on your procurement team, you simply do not have enough human resources to manage all of your vendors and spend. This is where intelligent sourcing and structured data can be a huge value add and transform the way procurement teams source.
“If you found one quote for the year that hits your goal in March, imagine what you can do when you automate more processes. This helps you start developing people. And then your employees become more engaged, and this is a balloon of success. Not only do my savings grow, but the plants are happier, and the employees are happier. This is my big vision.” — David Yost, Buyer Supervisor
Data-driven
or
Lacking data
?
Unfortunately, the other characteristics of tail spend, such as being low priority yet high volume, compound into an overall lack of visibility for procurement teams. When procurement lacks visibility into tail spend, data integrity for effective decision-making is lost and opportunities for optimization are often missed.
Unfortunately, the other characteristics of tail spend, such as being low priority yet high volume, compound into an overall lack of visibility for procurement teams. When procurement lacks visibility into tail spend, data integrity for effective decision-making is lost and opportunities for optimization are often missed.
Nice work!
Now that you know the characteristics of tail spend, you can very simply define it as any supplier that is not being actively or strategically managed by procurement.
It doesn’t take a leap of the imagination to see that uncontrolled tail spend can lead to major headaches for a procurement team. Beware these dangers of an unmanaged tail:
Overrun Costs
Misuse of Human Resources
Security Risks
Abuse of Purchasing Policies
Lack of Visibility
To avoid an uncontrollable tail and actually start managing your tail spend, we recommend this four step process:
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You have a tail spend management plan in place. Awesome. What sort of benefits can you expect to see? By properly managing tail spend, some of your biggest cost and time savings can ultimately come from your smallest purchases. Utilizing digital technologies, such as intelligent sourcing, to source, track, and manage your tail spend, the result is greater cost savings, risk reduction, and efficiency.
Univision, an American Spanish-language television network, outsourced its tail spend purchasing to a prominent, business process outsourcing (BPO) company, but it did not yield the business process efficiencies or cost savings results they had anticipated. By implementing a technology-enabled tail spend management plan, Univision was able to eliminate its outsourced sourcing desk model for purchases under $100,000, and achieved an average cost savings of over 15% on every purchase pushed through the Fairmarkit platform.
Refinitiv is a market data and insights company that provides financial market information and technology to tens of thousands of companies worldwide, but was struggling with visibility into transactions less than $100,000. Refinitiv decided to tackle their tail spend, starting with all purchases below $25,000, then quickly scaled to $50,000 and finally $100,000 and less. Previously, all of these purchases were sent directly to payments. Now, these purchases are under management of the procurement department without additional manual effort.
If tail spend isn’t monitored, there are three dominant risks: price risk, time risk and operational risk. An effective tail spend management strategy limits the risks of overpaying for a product or service and losing time executing highly manual processes. By gaining sight into all purchases, active tail spend management can help procurement leaders understand which businesses can supply products at the best price, while also mitigating ongoing operational risks.
A recent Deloitte survey identified data visualization and predictive analytics as the top specific digital skills training needed for CPOs over the next year. Procurement now needs to turn towards innovation and value if it is to play a pivotal role in increasing supply chain transparency. That mind-shift requires agility, leadership, talent…and data. Embracing tail spend management allows procurement teams to centralize spend data for greater transparency and informed decision-making.
Every year, the Massachusetts Bay Transportation Authority (MBTA) makes around 15,000 purchases worth less than $50,000 each. Policy requires the MBTA to collect at least two vendors before finalizing an order for those types of purchases. By embracing tail spend management and leveraging automation to aid in the process, the MBTA transformed its sourcing process from a manual, paper-and-pencil one to a streamlined system with 100% compliance with bidding regulations.
Miterion, a global company specializing in high-performance advanced materials, identified tail spend management as an area ripe with opportunities for internal process improvements. Now, tail spend management is transforming the way Materion’s buyers are working. Buyers are spending less time on the manual and monotonous tasks of getting quotes approved, are much more engaged in their work, and are empowered to make more strategic decisions for the business.
With so many potential wins, perhaps it’s no surprise that 54% of CPOs are prioritizing tail spend management in 2021. New and innovative technology that leverages automation, artificial intelligence, machine learning, and structured data is transforming the way buyers are purchasing and optimizing tail spend. By having a sound tail spend management strategy, a procurement department can become a key competitive advantage for an organization and allow the company to beat out competitors lacking a tail spend management practice.
Tail spend can be a massive challenge, but managing and optimizing it can reap massive benefits. Check out our "The case for tail spend" eBook for a deeper dive into identifying and managing your tail spend.
