Could tail spend be a gold mine for cost savings?

July 22, 2020

Even the leanest procurement department can find fat can be trimmed in their tail spend. But those savings can look small when you bring them to the finance department, and the perceived cost of chasing them down might not seem worth the cost relative to potential savings. So, how do you persuade management, your team, and other stakeholders that this tail is worth chasing?

Tail spend refers to payments you might not actively be managing but could be impacting your financial performance by raising your Selling, General, and Administrative (SG&A) expenditure or your Cost of Goods Sold (COGS) expenses. A large number of suppliers likely contribute to your tail spend even though it won’t be a considerable portion of any particular spend category—likely less than 20%.

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We’ve written before about the three ways you can define tail spend in your organization: You can identify vendors with an annual spend below a certain figure (say, $100k to $1 million, depending on your organization); you can use the classic 80/20 Rule—where 80% of total vendor count usually makes up 20% of total spend; or you can pinpoint vendors that aren’t being actively managed.

Whichever way you determine tail spend in your organization, once you’ve identified it there are several ways to find cost savings. You can: 

  • Eliminate maverick spend
  • Implement a competitive bidding policy
  • Consolidate spend with key vendors
  • Delete or block inactive vendors
  • Implement catalogs to increase compliance and spend visibility

Yet each of these strategies will typically require buy-in from senior management and procurement team members alike, so it’s important to have everyone on board, otherwise you will find yourself chasing your own tail instead of your tail spend.

Talking to management about tail spend

The first step when trying to convince management that you need to go after tail spend is to clearly show the impact that the outflows are having on your business. Last year’s Gartner Procurement Diagnostic Suite Survey found that procurement functions that managed predominantly indirect spend delivered higher ROI to the business in 2019 than functions that managed direct or hybrid spend. When tackled, these functions also delivered a higher savings rate to the business.

Procurement teams that successfully managed their organization’s indirect spending in 2019 delivered a return on investment of 6.88x and a savings rate of 6%, says Gartner. But teams managing only direct spend delivered a procurement ROI of 5.46x and savings rate of only 4%.

Additionally, companies that were able to use digital data to manage tail spend were able to cut annual expenditures by up to 10%, thinks Boston Consulting Group.

These cost savings can be enormous for an organization with procurement outflows in the millions or billions—a convincing argument for the financial department as it suggests there is a greater strategic value proposition for indirect procurement management than they might otherwise realize.

Finally, if you buy into the 80/20 tail spend management rule, then it’s hard to argue that leaving 20% of your budget unmanaged isn’t a substantial strain on the business’s capital and human resources. Even over the short term, roping in tail spend is unlikely to cost your organization 20% of its current expenditure. In the long term, the resource savings are considerable.

The argument for tackling tail spend gets easier for both management and procurement team members if you’re already making good use of your ERP and have your data digitized, because tail spend will be easier to identify. But even in a paper-based office, smart procurement professionals in your team are likely to see the advantages to their work of reducing tail spend.

Talking to your team about tail spend 

Whether you’re the CPO or a team member who cares about the department’s performance, tail spend is a place where you can make a real difference to your organization. And that’s something procurement professionals can get behind.

One idea for engaging the procurement team on tail spend is to start by asking team members which spend categories they’re presently deeply immersed in, and what are their strategies for their “less important” categories.

Buyers are often focused on the most important categories in their portfolios—those items that are completely non-negotiable at any moment in time—and can lack all but a reactionary strategy for other expenditures.

Providing a framework for dealing with tail spend can be seen as a way to help team members focus on their core areas of responsibility while reducing overall costs.

Reducing tail spend doesn’t have to be a prolonged affair or a complex project. It’s possible to keep it simple by taking a structured approach that doesn’t turn into a multi-step wave sourcing strategy. You can structure a tail spend cost savings project by:

  1. Identifying a business unit with an identifiable tail spend issue
  2. Rolling out a small-scope tail spend management program in that unit
  3. Increasing the scope in the target unit and begin looking at other business units for comparable savings
  4. Introduce automation
  5. Use your proven business case for a global roll out to all business units

Something to remember when addressing tail spend with both team members and management is that it’s actually a misnomer…The so-called tail can be massive and costly. It should not be ignored.

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