In the modern era of financial fine tuning, virtually every segment of business spend is under constant scrutiny for opportunities to improve and optimize them. No matter how precise or specific the category of spend is that a company is striving to improve, there is almost certainly a software product or service which is laser focused enough to isolate that area of spending and suggest the means for refining it.
Such is the case with procurement spend, and specifically tail spend - the collection of small-dollar purchase that amount to only 20 percent of a company’s overall spending, but which account for 80 percent of vendor interactions for that company’s procurement team. The aggregation of these otherwise unrelated purchases is captured within the tail spend category.
Despite what may seem to be glaring benefits to optimizing procurement spending within the tail spend category, many business leaders are reluctant to do so. The excuses for refusing to optimize tail spend are plentiful, but each excuse typically falls beneath the umbrella of one of five categories.
“I don’t really understand what tail spend is.”
Despite the growing frequency the term’s use, even some of the most prominent and successful business owners have never heard of “tail spend” and have no idea what it is. This is partially owed to the somewhat inexact nature of the term; what constitutes a tail spend purchase for one company may fall into a higher-dollar category for a different company.
Historically speaking, tail spend is born out of Pareto’s Principle, which is a concept developed by Joseph Juran, a Romanian born American who focused his career on quality management. The 80/20 rule Juran developed was a derivative of the findings of Italian economist Vilfredo Pareto, who noted in research published in 1896 that 80 percent of the land in Italy was owned by 20 percent of the population. After recording his own observations, Juran declared that 80 percent of all earthly effects, in a broad sense, are rooted in 20 percent of the causes. Or, simply stated, 20 percent of input results in 80 percent of output. Conversely, the remaining 80 percent of input is responsible for the final 20 percent of output.
In business, this dovetailed into the aforementioned detection of a tail-like pattern on spending charts. When placed into categories, the smaller purchases on a chart invariably produce what appears to be a tail, which is where the term “tail spend” originates. While this may have been plainly observable, the tail spend classification of these purchases was not official until 2010. Therefore, it should come as no surprise that even some business leaders with decades of experience under their belts would have no idea of what tail spend means.
Also, owners of successful businesses may be dismissive of the tail spend term due to their unfamiliarity with it, and also because these leaders view their organizations as already being as efficient as they are required to be. Since their operations are already running smoothly and earning money for them, why would these business owners bother to exert the energy to learn about a conceptual spending category? Rethinking their companies’ procurement processes is simply not high on the agenda for many people who already own profitable business entities.
Sadly, the intentional refusal to absorb pertinent information of any kind is a fatal flaw for many business owners. Even the most successful organizations can be weakened by the natural ebbs and flows of the global economy. Therefore, at a minimum, learning to reimagine, reorganize and optimize categories of spending allows business owners to maximize profits during the profitable years, and to minimize losses during the lean years. This is to say nothing of the variety of ways the savings from tail spend optimization can be reinvested into a company to acquire valuable new talent, or to jumpstart the development of new product lines.
“Tail spend can’t really be optimized.”
Even though tail spend is acknowledged as an observable occurrence by virtually everyone, the next question that needs to be answered is whether or not the aggregation of dissimilar categories is something that can be managed and optimized. After all, the idea of tail spend as a recognizable concept is only about one decade old, so whatever methods have been introduced to optimize it must be fairly rudimentary, right?
Despite the relative youthfulness of tail spend optimization as a category of procurement management, several reliable optimization solutions have been developed for its governance. This most recent decade brought us the maturation and universal availability of artificial intelligence (AI). Similarly, cloud storage and cloud computing have made it possible for tech-based companies to distribute their software and services (SaaS) through web-based means. These innovations fed directly into the capability of companies to access an assortment of previously unimaginable services for any purpose, including the optimization of tail spend.
Through the innovations brought to us by AI, SaaS solutions can integrate directly into companies’ existing procure-to-pay platforms. P2P systems allow companies to unify their purchasing departments with their accounts payable departments. Linking these procurement-focused SaaS solutions with P2P systems creates a seamless buying experience. From there, users can choose which requisitions they want to source and easily send their requests - in the form of RFx data - to whichever vendor is providing them with tail spend optimization services.
After importing the requisitions from their clients, modern service providers can utilize artificial intelligence to suggest pre-approved vendors to supply their clients with the goods or services they need. If clients are not impressed by the options presented by the pre-approved vendors, there will often be an option for clients to import other, non-registered vendors into the system. Once suitable vendors have been identified, companies can then finalize their requests to the service providers, who will then undertake the duty of soliciting and collecting bids.
Within 24 hours of soliciting vendor quotes, competitive service providers will have those quotes organized in a single location for their customers to review. From there, machine learning algorithms will make purchasing recommendations based on the responses received. Requests with multiple items should be offered the option to award a contract to one or more vendors, and that information will flow back into the customer’s enterprise resource management software (ERP), or P2P.
As complex as this process my sound, all of the complicated procedures are managed directly the software. Therefore, tail spend management is honestly a very simple process for any business in need of recovering every last dollar from their procurement processes.
“Optimizing tail spend won’t save me enough money.”
Now that we have established the capability of modern software to effectively monitor and optimize tail spend, we can explore another excuse commonly given for not engaging in tail spend optimization. Specifically, this excuse involves the belief that tail spend optimization practices will not reveal significant savings, and the process of attempting to optimize tail spend may cost organizations more money than it saves them.
Speaking procedurally, tail spend optimization software is designed so that as clients award requisitions over time, they will learn which suppliers are frequently active and provide competitive pricing to establish strategic partnerships. Software users will also be able to weed out vendors that are dormant or providing uncompetitive pricing. From there, those ineffective vendors can be removed from the supplier pool, and the software users can then move forward, soliciting bids from only the most competent vendors in the pool.
Now, the question to be answered is, does all of this technological wrangling with tail spend result in corporate savings that are worth the effort? In nearly every instance, the answer is “yes.” In terms of financial savings, there are real world examples of companies investing in tail spend solutions and realizing an average of eight percent savings on a per-bid basis, while generating savings of up to 40 percent for some of their individual bids.
For example, Fairmarkit engaged with the MDTA in a study that produced impressive results. The 13 customers involved with the study all saved between $505 and $154,932 on a per-RFQ basis, with eight of the 13 customers reducing their spending by more than $1,000 per RFQ. Based on these results, it is obvious that companies engaged in any number of tail spend procurement decisions, no matter how many there might be, can secure tremendous savings.
Even when taking the figure on the low end of the spectrum, the aggregation of $500-per-bid savings can produce an astronomical overall figure over the course of time, especially when considered on an annualized basis. Frankly, every executive team would welcome the recovery of funds numbering anywhere from tens of thousands to millions of dollars. The fact is clear that optimizing tail spend is well worth the effort, and it can help companies repurpose thousands of dollars toward more worthwhile projects.
“Optimizing tail spend isn’t that important to my business.”
Despite the overwhelming evidence that optimizing tail spend is likely to produce considerable savings for organizations, some business owners might still believe there are bigger fish to fry within their companies. Therefore, despite the diminutive effort tail spend optimization requires relative to the beneficial savings it is likely to produce for the companies embracing it, these owners still believe it not to be a worthy undertaking for their staff to engage in.
Obviously, this sort of mindset can be fatal to a company on multiple levels. First, the recovered financial resources, no matter how vast or tiny the sum, can be put to use addressing concerns that the firm would be unable to resolve without them. These options include hiring new team members, acquiring new equipment or software, starting new projects, or researching the creation of supplementary project lines. Clearly, the recovery of monetary assets has a way of reverberating throughout an organization and fueling future growth.
Another reason this mindset is problematic is because it detracts from the succeed-at-all-costs mentality that all business leaders are encouraged to embrace if they want their organizations to enjoy long-term success. Those with accounting orientations are often criticized for “stepping over dollars to pick up dimes.”
While that particular practice poses a different type of problem which should be corrected in its own right, businesses that knowingly, intentionally fail to adopt a course that maximizes profitability ultimately run the risk of fostering a relaxed business culture in which employees routinely ignore opportunities to improve the company because the owners obviously don’t care about the bottom line.
In all seriousness, business leaders that make it a point to optimize their tail spend communicate to their employees that every dollar matters, and every dollar is worth fighting for. This helps to breed a top-down winning mentality that will spread throughout the organization.
“Tail spend is someone else’s problem.”
Because tail spend management is linked with procurement, it traditionally falls under the ultimate oversight of the CFO and the accounting team. For many employees in any business, anything to do with the numbers of a business is regarded to be the sole responsibility of the designated members of the financial staff, and those non-financially-focused employees remain detached from any decisions pertaining to the spending or conservation of finances.
Sadly and surprisingly, this sometimes applies to the business owners and CEOs who are frequently happy to delegate all financial authority to the executives and employees that have been deemed the most competent when it comes to managing money. Conversely, even lower-level employees that see their responsibilities as being wholly disconnected from the spending decisions made at higher levels or within separate departments within the same company might be reluctant to speak up about wasted resources or lost opportunities.
Therefore, if the executives and employees within a business accept intradepartmental detachment as a tolerable trait within their companies, then suggestions and valuable information - including ideas that might save the company money - are unlikely to be shared between departments, passed up the chain of command, or communicated to the teams that can actually approve and incorporate the suggested procedures into new corporate regulations.
Over the short-term, these shortcomings in communication will result in organizations missing out on opportunities to acquire valuable new team members and explore new product lines. Over the long term, these sorts of corporate cultural failings will eventually accumulate and result in the total deterioration of the entire business if they proceed for long enough.
In reality, decisions not to engage in tail spend can be separated into two broad categories; those who do not understand that tail spend can be optimized, and those who know it can be optimized but opt not to engage in it. If you formerly fell into either of these categories, hopefully this document has educated you about the history of tail spend, the ease with which it can be optimized, and the benefits it can provide to any business. Even more importantly, if you are not in a leadership position at your company, you should also understand your responsibility to inform the leadership about the benefits of tail spend optimization, for the sake of the organization and everyone that works there.