When talking about tail spend, the first thing you hear is the “Pareto Principle,” or the 80/20 rule. In the context of procurement, it means the 80% of transactions that make up only 20% of spend. For this reason, it usually goes unmanaged, or any optimization that is happening is very cost- and time-intensive. But there’s more to those tail spend transactions than meet the eye.
When we at Fairmarkit are talking to practitioners about their spend management and the possibility of leveraging Fairmarkit to autonomously source tail spend, it requires a more nuanced look at the purchases within the tail to understand where we fit into the greater picture.
Carving out the tail and the hidden tail
In the chart above, assume that we take strategic spend–the area denoted as (1) – out of the equation. This area of the most strategic purchases is where you’re putting your people resources and negotiated contracts in place. Everything outside of that, the non-strategic spend, is commonly referred to as tail spend. Let’s zoom in on those 80% of transactions / 20% of spend, and dissect it a bit further.
Breaking tail spend down further
Down the other end of the graph, in section (4) is the tail of the tail. For these very small purchases, catalogs or punchouts are likely already in place. You may even encourage use of marketplaces, such as Amazon Business, for the requesters to go in and purchase on their own. With dollar amounts so small and risk so low in the tail of the tail, little to no procurement resources are necessary.
Everything else – the “meat” of the tail – is where there is minimal procurement management happening today, but tons of upside opportunities. About 30–45% of indirect spend at organizations fall into this “meat of the tail.” This off-contract, off-catalog spend is typically not being sourced today.
Some organizations draw this line from a monetary threshold perspective (e.g. transactions under $500k), on a category by category basis, or via competitive bidding policies in place (e.g. 3 bids and a buy). Regardless of how the organization creates bounds about where procurement is spending their time, there is simply never enough resources to cover 100%.
Implications on sourcing
With this tactical, off-contract, off-catalog spend, there are a few challenges when it comes to sourcing it out for competitive quotes.
1. It's oftentimes free-text
Meaning it's quite hard to put these requests into a templated structure that other systems can ingest.
2. It requires a lot of effort
Which means a large team internally or a dedicated outsourcing team if an organization manages it at all. It takes hours per event to manually transfer the free text information over to systems, invite suppliers, and manage the process. Doing this at scale is too cumbersome.
3. It’s almost impossible to report and analyze.
Due to the unstructured nature of these events, reporting is surface level at best. Without human intervention, a PR description may not be interpreted by most symptoms in the most accurate way.
Where and how Fairmarkit plays
In short, our solution aims to help source spend not competitively managed today that, as described above, are considered "off contract" or "off-catalog" transactions. When a purchase requisition flows through your demand system, whether that’s SAP Ariba, Coupa, Oracle, etc, our integration can intercept it. Fairmarkit reads the free text using machine learning and artificial intelligence to understand what you're looking to purchase, and can understand what you're looking to buy. At that point, the platform dynamically recommends the right suppliers that can offer that good or service and runs a highly automated sourcing event. Because Fairmarkit does the structuring of data for you, that means immediate reporting and analytics, giving visibility into the tail that you never had before.
At scale, it’s hours of time save interpreting requisitions, finding suppliers, gathering quotes, and communicating with suppliers. Multiply that impact across the 30-45% of spend that is considered the “meat of the tail” and you have incredible cost savings and efficiency gains.
To learn more about how Fairmarkit helps enterprises automatically source their tail spend, request a demo.