As I think back on my first 9 months as Fairmarkit CEO, I am reminded of the idiom “the devil is in the detail.” But why are we having a ‘tail spend,’ devil is in the detail discussion? Well let’s start by first defining what ‘tail spend’ is:
- Considered low priority
- Individually small dollar value transactions
- Generally, equates to 20% of your total spend across all categories
- With those transactions spread across 80% of your supply base
- The spend is typically unmanaged resulting in challenges with data clarity and integrity
Why is ‘tail spend’ important? Let’s do the math – I’ve spent 2017 on hundreds of conference calls and in-person meetings with CPOs, VPs of Procurement, Heads of Sourcing and Purchasing from large organizations with spend under management ranging from $2B-$80B annual spend. Using that as my baseline, if we consider 20% of the $2B in spend under management that would then represent a tail spend opportunity valued at $400M.
During my conversations the one question that I ask every time is ‘how do you currently manage your tail spend?’
I’ve identified 3 different profiles of answers. First, the CPO with minimal time who doesn’t really care: they’ve identified that anything under a specific threshold is too small to focus their time and the trivial purchase size will limit its risk to the business. Second, the CPO that knows it’s an important problem to address, but has no idea where to start. The procurement of these small purchases is decentralized, untracked, and spans across so many categories that it feels like trying to boil the ocean. Finally, the CPO that has established an initiative and is taking strategic, incremental steps to gain control and optimize unmanaged spend. The third type of CPO seems to always be looking for new innovative ways to challenge the status quo and has no problem shaking up legacy processes (it is no coincidence that most of them are also thought leaders within the procurement space).
Different for everyone
So, which executive is doing the right thing for their company? Should all CPOs care about tail spend purchases? Based off our meetings, the first question should actually be ‘what is considered a tail spend purchase?’ We’ve found that every company has their own policies and mindsets around what gets tossed into that bucket. For some companies, it’s anything under $1M, for some it’s under $100K, for others it’s under $5K. There’s one label that everyone agrees with, small to medium purchases make up a procurement department’s tail spend.
Bigger than IT spend
As I sit in some of these meetings and hear procurement leaders describe tail spend as an inconsequential area, it blows my mind. But I’m always eager to learn more about why and how people have acquired this mindset; looking at tail spend strictly from a business perspective, it doesn’t seem logical that teams would neglect to try and manage 20% of their budget. Trust me, I understand people’s initial smirks when you think about trying to better manage the procurement of a $10 stapler, but this tail spend can range from the $100 purchase of 10 staplers, to the $200K order of supplies for your facility.
Let’s look at it from a different angle, on average, large enterprises spend under 10% of their budget on IT. As you go further up the Fortune 500, that percentage declines. However, the 80/20 rule of managed versus unmanaged spend remains the exact same. So, the money in tail spend purchases adds up, the next hurdle is to understand what’s the impact of status quo to my business?
It boils down to risk. The current process to source tail spend purchases is typically informal, un-monitored, and lacks analysis, which allows people to make decisions at their own discretion. And if spend isn’t monitored, there are the dominant outcomes:
- People take the easy path to buy the product with little to no concern about getting the best price (Price Risk)
- The initial purchase may have reflected the best price but the business doesn’t track pricing, so no one in the organization knows how susceptible different products are to fluctuations in price (Time Risk)
- If the purchase is completed below the radar it may not have been properly vetted (Operational Risk)
The most obvious is the risk of overpaying for a product or service. Those familiar with the world of B2B selling or purchasing know that pricing is not standardized and tends to be more like the Wild West. It’s no secret that companies pay varying amounts for the exact same B2B products, and if they’re not intelligently sourced, the risk of overpaying dramatically increases. I fully agree that not all tail spend purchases fall victim to this, as there are some categories and vendors that do hold consistent price discounting levels, but, without tracking and reviewing the data, how can you even begin to identify your largest areas of risk?
Time is frequently viewed by a CPO as a team’s most valuable resource. Forget for a second trying to source tail spend purchases to many suppliers, even the current process to source small to medium purchases is to email or physically call 1-2 suppliers, explain the product or service being purchased, and then collect and organize the returning bids. This is a very, very manual process. Now fast forward that process across 10s of thousands to 100s of thousands of small purchases (depending on the size of the company) that are made every single year. If you do want to increase the number of suppliers participating to use competitive forces to drive pricing down, you’re just tacking on additional minutes, hours, days, months to your annual sourcing process.
Finally, in our meetings we’ve heard from several CPOs about the risk of fraud, playing favorites, supplier exclusion and cybersecurity. Whether you’re in the public or private sector, the door is always open to operational risks. These risks range from procurement fraud to showing favoritism and excluding qualified suppliers to potential cybersecurity concerns. If you’re not tracking or managing 80% of your purchases, how can you expect your buyers to intuitively know which businesses can supply what products at the best price, that mitigate the foregoing operational risks.
Addressing tail spend today
If I were to sum up the answers I receive when asking CPOs why tail spend purchases aren’t being managed, it would be ‘because it’s really hard.’ The tools and resources available are designed and built for the 20% of large purchases and 80% of spend. The CPOs that are bold enough to dip their toe into tail spend immediately face the massive challenge of identifying from their numerous purchases, what the starting point is to get at the low hanging fruit. Some individuals have taken the next step forward by using internal or external catalogs (Grainger, Amazon B2B, Staples…etc.), but they still are not encouraging true competition, guaranteeing the best price, or providing internal management of tail spend.
Listed above are reasons I’ve heard as to why CPOs aren’t focusing on tail spend and its impact, but I also wanted to share how the thought-leading CPOs are breaking down this procurement challenge, and influencing solutions in the marketplace.
Customer driven platform
At Fairmarkit, we’ve been asked to help quantify the problem by reviewing client data sets to help to determine areas of large savings opportunity and high-risk categories, products, and suppliers (accepting that not all tail spend is created equal and some areas will have to remain as is…for now). Next, those CPO thought leaders have emphasized the need to collect and standardize all the data associated with tail spend sourcing across their centralized or decentralized teams in a structured format. Most importantly, they’ve coached us on the need to bring benchmarking, analytics, and automation to ensure they can streamline the sourcing process from a large pool of qualified suppliers (3.5M suppliers in our database), benchmark internally and externally to ensure they’re getting the best price (10M transactions in our database), deliver predictive analytics and trending to ensure CPOs have the controls to influence buyer and supplier outcomes, and accomplish all this in less time than the current mode of operations.
That sums up our mission at Fairmarkit; we are addressing and continue to advance our platform every waking minute (our technical team doesn’t sleep). Based off our early findings, bringing innovation and intelligence to optimize the tail spend space has proven a 10x ROI. The ROI is seen through increased supplier competition, decreased purchase prices, 15% time savings across buyers, increased participation from SMBs and disadvantaged enterprises, and providing CPOs with the knobs and levels to de-risk the 80% of purchases that are not strategically managed today. Interestingly, after reviewing the data we’ve identified that the magic number for bidding most tail spend purchases is 5. If a requisition receives 5 unique bids, that purchase has over a 70% chance of achieving a lower price point than previously acquired, and less than a 10% chance of the price going up. If you’re in a procurement leadership role, I’d challenge you to think about how many bids your team typically receives for purchases under $50K or $100K (if you’re thinking 1, sometimes 2, and at the very highest 3, you’re not alone).
Forward thinking CPOs
To tie this all together, to many CPOs tail spend management feels like a black box that’s almost impossible to crack, and without taking the first step to manage it, it’ll never be flagged, contested, or deemed an urgent initiative because the positive or negative impact to the business can’t be measured. I fully understand that the status quo is undisputedly the path of least resistance; however, we’re excited at Fairmarkit.com to meet and work with procurement leaders that see the tail spend management challenge as a business opportunity that with the right technology and procurement perseverance can deliver value back to the organization.