Most procurement professionals would agree that if they could better manage their tail spend, they could find a deep well of savings. Yet many CPOs would also tell you that their current technology simply isn’t equipped to handle tail spend. They’re probably right, but the story doesn’t end there. Tail spend can be managed, you just need to rethink your procurement toolkit.
Enterprise Resource Planning (ERP) and Procure-to-Pay (P2P) systems are powerful tools for procurement professionals. Because of this, they could easily be forgiven for thinking they’re an all-in-one solution.
Good procurement technology acts as a single source of truth for the procurement team—one system of record, one taxonomy, and one dataset. Having a single source of truth helps provide greater visibility and control over spend, as well as a common point of entry for the people around the organization who need to make purchases.
Traditional ERPs and P2Ps purport to offer exactly this benefit, yet they can’t do everything, and there are crucial areas of spend that they miss.
Here’s why and what to do about it.
Getting the most out of your strategic spend certainly isn’t easy. Many procurement professionals spend their entire careers optimizing the spend on big ticket items, and searching for cost savings and value adds on direct spend categories. That’s understandable considering that the larger, aggregated amounts and complex spend are critical to the success of the business.
Yet the one thing that can be said about strategic spend is there is a tried-and-true path to getting it right. Manage your business relationships (internal as well with suppliers) and communicate constantly with them, keep spend transparent, implement purchasing processes that make the most of automation, and conduct regular spend analysis. Some procurement professionals refer to this as the trusted advisor role.
But not all spend is the same. Tail spend is different from strategic spend, because it involves relatively small value purchases that are often conducted outside of a contract and away from the eyes of the procurement team.
The Hackett Group (State of Tail Spend Study) recently found that while tail spend makes up a big part of a company’s budget and constitutes an overwhelming number of the supplier roster, using traditional tools like ERPs, P2Ps, and catalogs are not driving substantial savings. As a result, says Hackett, tail spend savings lag behind strategic spend savings.
Tail spend accounts for around 80% of the supply base, yet is about 20% of the total spend. It represents the non-complex and non-critical items like IT peripherals, office suppliers, maintenance, repairs and operating (MRO) suppliers, chemicals, and other lower value, routine services. While 20% is a significant portion of spend, the lower average commitment needed for each transaction, coupled with the disaggregated nature of each purchase, makes it harder to aggregate and consolidate.
So, by its very nature, indirect purchases—and tail spend generally—isn’t easily consolidated, and doesn’t fit easily into an ERP or P2P system.
As a result, most companies have simply resigned themselves to allowing a certain amount of chaos and inefficiency within their spend management. They understandably believe there isn’t much they can do about tail spend, and the dollar amounts are low.
Chief Procurement Officers also see the law of diminishing returns at play—a large quantity of smaller dollar value transactions requires much more effort. They calculate that the exertion and change management needed to bring tail spend under management just isn’t worth it. It’s an entirely reasonable conclusion when you contemplate trying to include tail spend into your existing sourcing process.
Yet, if you aggregate and consolidate tail spend, you would probably find that the spend would likely equate in total dollar value to many strategic spend categories. So, it’s incredibly important to an organization’s overall financial health to find the time and effort to curb tail spend.
It can be done. Now, more than ever before.
What if I told you that massive companies like global telecommunications company BT, energy giant BP, television network Univision, and the Massachusetts Bay Transportation Authority are saving hundreds of thousands (and often millions) a month in the very last place anyone would think to look—their tail spend? This is all thanks to the massive wave of digital disruption and transformation that is sweeping procurement.
As I’ve said before, it pays to stay curious as a Procurement leader (The Best CPOs Are Proactive). Tech advancements are happening at the speed of light, and today there are lean, best of breed solutions that address many things we may have stopped trying to resolve. It’s a time of empowerment for the procurement team—and technology and innovation are the facilitators.
Not only are the tools now there, but they are far easier to incorporate into your toolkit than they used to be.
These new and innovative tools now solve age-old procurement problems that many CPOs might have become accustomed to sweeping under the rug, or into the proverbial junk drawer. These modern technologies are built to implement in days, compared to months of old legacy PRP systems. They also come with valuable assistance in change management.
So, I’d like you to read the following list of benefits from using a dedicated tail spend management tool and ask yourself: How many of these things are you leaving on the table because you assumed there was just no way to shine a light on your indirect spend:
1. More savings
Every procurement team wants to find more savings for their organization—and the greater the better. On average, our customers find 11.4% savings on spend under management. Even by reviewing previously negotiated catalog spend, we can deliver on average 7-to-8% in incremental discounts.
2. Greater efficiencies
Imagine a 40% efficiency improvement of resources on your team. By leveraging machine learning and natural language processing, the efficiency improvement we have achieved allows procurement teams to scale, and deliver more with less.
3. Sustainable and responsible supplier relationships
When you implement a digital tail spend solution, you’re suddenly rich in data that was previously impossible to see without poring through reams of spreadsheets. This enables you to reach out to more suppliers on the one platform, and you are better able to compare the market and promote competition between suppliers. By enriching your supplier data and enabling more competition with diverse and sustainable suppliers, we can dramatically improve not only your overall spend, but also your year-over-year Corporate Social Responsibility results.
4. Improved spend compliance
When you can’t see your tail spend, it’s impossible to know if it’s compliant with your organization’s rules and regulations for purchasing. Intelligent, automated sourcing helps drive compliance with your purchasing policy. Spend can be sourced in accordance with your competitive bid threshold, and the data contained in the system can be used to report back to your compliance department.
A wealth of value is waiting
You don’t have to delve too deep into your own tail spend before you realize that there is a wealth of value that you otherwise didn’t know about. Yet, it’s likely that this value can’t be tapped by your existing ERP or P2P. Unlike traditional ERPs and P2Ps, Fairmarkit is easy, safe and quick to implement—from both a technical integration and change management perspective.
In these times we live in, companies are facing many challenges. As the pandemic wears on, workforces and customer bases continue to be distributed. As the Great Resignation takes hold, organizations search for ways to keep hold of the institutional knowledge of their employees. We are rising to these challenges. Companies are investing in digital transformation to optimize employee and customer journeys. They are finding ways to add value and mitigate risk in their supply chains by working smarter with suppliers. They are utilizing data to better understand their business processes. Procurement professionals have a vital role to play.
I invite you to ask yourself a simple question: How are you going to continue to deliver savings with the law of diminishing returns, the pressure on operating expenses, and perhaps an even smaller headcount? The answer could be easier than you think. Look to an intelligent, tail spend management platform that delivers more savings, greater efficiencies, a sustainable supply chain, and compliant purchases.