Category management, spend analysis and contract management – all the processes that ensure spend is handled properly in an organisation. Risk is controlled, compliance is maintained and the organisation is delivering savings. But these activities don’t apply to 100% of a company’s spend. It accounts for about 80%, which is still a lot but not sufficient for best in class procurement standards.
That is why procurement came up with the notion of “tail spend” – because no spend should be left unmanaged.
What is tail spend?
Tail spend is the part of a company’s spend which is not managed through categories. This usually accounts for about 20% of the company’s spend and is too fragmented and low value to justify allocating resources to manage it. As such, procurement has little involvement and purchasing decisions are made on a decentralised basis.
However low value these purchases may be, they could very well account for 80% of a company’s suppliers. This is where things can get complicated and create problem because these purchases are usually not regulated by contracts and are not included in categories.
Understanding the issue
Can tail spend actually create issues? It only accounts for 20% of a company’s spend after all. How much space for improvement can really be generated?
20% is actually still a lot of spend, and as we noted above, it can include a lot of your suppliers – which means it can be a liability.
To better understand the issue that tail spend can generate, if not managed properly, we’ve divided it into 3 areas:
- The risk factor – the risk for your supply chain does not come from your strategic suppliers, but from your relationship with these ad-hoc suppliers that are not regulated through contracts.
- Compliance – as a result of the risk involved, if not managed properly tail spend can make it more difficult to ensure compliance in procurement processes, leaving the company open to an increased level of third party risk.
- Potential for savings – as these are not regulated categories, the potential for savings in tail spend is significantly higher. Almost any category that hasn’t been sourced has a potential for savings
However, this doesn’t mean that a significant amount of effort should be put into managing tail spend through the common procurement practices – but it should deserve more consideration as it can be an exponential risk factor whilst also having the potential to deliver savings once managed properly.
How to address it?
There are a number of aspects that procurement teams need to consider when managing their tail spend. It should be a combination of using the right tools, following the right processes, analysing the right data and being transparent about the whole process. We believe there are 4 areas that companies need to take into account when managing their tail spend:
Spend analytics – can help you perform an in-depth analysis of your maverick spend and help bring non contract regulated transactions under existing agreements, thus reducing the number of suppliers and making more use of your preferred suppliers.
Contract management – having a strong and efficient contract management workflow in place will help track expiration and identify opportunities early. The use of contracts should help bring down unit costs and maximise your buying power. Besides, efficient contract management can help companies identify gaps to address to reduce the tail spend.
Process and policy – having the appropriate procurement processes and policies in place can help reduce risk that can arise when dealing with suppliers and can avoid making tail spend a problem later down the line.
The technological factor – key to ensuring efficient spend management processes is having the appropriate systems in place. Whether we’re talking about tail spend or spend in general. Efficiently linking all systems involved in spend management can make tail spend more approachable. First, companies need to make sure they have visibility over their tail spend. Next, an efficient workflow for contract management should be in place. Lastly, companies need to make sure they have an appropriate supplier management programme and a clearly structured supplier repository, making sourcing events easier and more accessible.
Why are companies more and more interested in tail spend?
In recent years, tail spend has gotten more and more attention and companies are becoming more and more aware of its potential to deliver savings. However, knowing that there is value to it and actually capturing it are two different things.
Properly managing tail spend can provide a solution to the 3 issues we raised above – as it actually shouldn’t be a reason for concern, but an opportunity for improvement.
Tail spend management can achieve cost reduction between 5% and 20% and a significant increase in process efficiency.
Tackling tail spend can help ensure compliance over procurement processes and proper contract management. Maverick spending leaves companies vulnerable to third party risk, however, improving compliance combined with better use of spend analytics in tail spend can bring down the number of suppliers and make better use of your preferred suppliers, thus bringing more spend under management.
Don’t know where to start in managing your tail spend? Talk to one of our consultants, they’ll be happy to help.