Let's talk tail spend KPIs
The saying, ”In God we trust, all others must bring data” seems to resonate very well when we start talking about tail spend Key Performance Indicators (KPIs). However, most procurement leaders that I meet with have little to no KPIs for their tail spend (the 80% of their purchases that makes up 20% of their budget). The reason I referenced the above saying is because if tail spend is not tracked, measured, and reported against, the business is just “trusting” that status quo will continue working. I’d challenge this mentality on two fronts: First, just because you trust your employees doesn’t mean they don’t inadvertently invite risk into the organization with a lack of process, guidance, or tools to de-risk the 80% of products and services they buy. Second, as procurement continues to strive to be a trusted and valuable partner to the business, why should status quo be acceptable?
The forward thinking CPOs that we sit down with are operating with a healthy urgency to continue optimizing their service or offering to their internal and external stakeholders. Similar to other internal departments, they work to understand what knobs and levers they can pull to increase & maximize their efforts. Including, increasing employee productivity, decreasing time to procure, documenting cost savings, and continuing to de-risk potential fraud or cybersecurity vulnerabilities and product inconsistencies from vendors.
Once again, this brings us back to data. It’s impossible to report against any of the below KPIs if your tail spend process lacks structure, and falls within the category of “garbage in garbage out” for data. At Fairmarkit, we’ve proven through our customers’ data that tail spend is not inconsequential, and can actually be a powerful value driver to the business if automated and optimized. It doesn’t hurt that most CPOs are compensated on several of the below KPIs.
If you’re looking for new KPIs to add to your tail spend process here are a few suggestions. Also, it’s good to know where you are today, but more importantly you should track month-over-month or quarter-over-quarter trends to see what direction each KPI is heading in:
- Time (period of time) from requisition created to PO dispatched.
- Time (employee effort) from requisition created to PO dispatched.
- Total number of POs created per buyer, per category or department.
- Average lead time for product of service delivery.
- Documented cost savings against an internal benchmark or open market benchmark.
- Overall quarterly or annual cost savings targets.
- Average amount of bids solicited.
- Average quotes received per bid (can break our per category or size).
- Total Disadvantaged Businesses (DBEs) included, total POs awarded to DBEs (could also track by percentage).
- Percentage of tail spend through preferred suppliers and catalogs.
- Year-over-year supplier consolidation (by percentage).
- Percentage of spend under management.
- Percentage of purchases within compliance (your own policies).
As with any other major initiative it is important to develop KPIs, tail spend management is no different. As access to tail spend data and the proper analysis tools increase, it's critical that procurement organizations start developing KPIs of their own around tail spend.