Spend Analytics

Remembering and Capitalizing On Tail Spend Management

Managing tail spend is usually compared to searching for a needle in a chaotic haystack. Nevertheless, the openings that tail spend management offers for procurement opportunities lend themselves to a more positive comparison: a gold mine which, if worked properly, can unlock additional saving opportunities for your business.

Tail spend is generally defined as the business spend that makes up about 80% of the transactions but only 20% of the total spend value. Tail spend is also defined as that part of the total spending budget that is not actively managed or tracked by businesses. 

Business spend management must consider incorporating a strong tail spend management program to achieve significant savings. Prioritizing tail spend management in the shadow of a global recession should become the new mantra for CPOs to unlock new areas of value.

Tail Spend Challenges

Organizations classify their tail spend differently. Some consider ad hoc, maverick, non-contracted and miscellaneous commoditised spending as tail, while others define a clip level or a spend threshold to classify spend to be identified as tail.

Whatever the definition, properly managed tail spend plugs leakages and value erosion across the value chain. Procurement teams may secure good discounts or savings over contracts they finalize, but their efforts may not lead to savings if the supplier doesn’t adhere to the agreed details or if buyers lack visibility during the ordering process.

The tail end of spend, while lower in value, is associated in most cases with a large number of transactions, which add to the operational efforts, supplier base and, consequently, costs. Given the significant effort in managing this large transactional scope and an equally large number of suppliers, tail spend remains the most disorganized part of business expenses. Moreover, handling tail spend can further become a nightmare for CPOs, as such data is rife with poor visibility and depends on manual processes.

Some of the key challenges in managing tail spend are:

• Poor spend visibility and higher spend fragmentation across a long tail of suppliers. Non-contracted and off-contracted spend is hard to identify and track. Poor data integration between different systems can often lead to mismatches and data silos, making the process less transparent.
• Although spend value is low, the lack of correct spend classification across categories and several sub-categories, items and suppliers makes data hard to organize. Hence, it complicates spend analysis given that most tail spend data will be marked as “unclassified” and requires a deep dive to understand what was purchased.
• Much time and manual effort is involved in consolidating tail spend data, especially when done by separate groups of the same business. It creates unconnected data silos, making integration a time-consuming activity.

Tech and Data Analysis Change the Game

It is well known that, once implemented correctly, tail spend management solutions can drive valuable cost savings. Fortunately, with the advent of new technology, big data and AI solutions, managing spend analysis and data modeling has become more advanced. Most companies are now actively utilizing these options for gaining data insights.

Data analysis and classification through tail spend management solutions map purchasing spend to non-strategic suppliers and categories to build and track spend, once identified. It then becomes easier to segment the tail as the top, middle or lower end of tail. Procurement can then formulate strategies to address each part of the tail. 

The next step is to drive internal compliance, which requires process streamlining and creating preferred supplier lists. Investing in the right eSourcing technology with built-in features, such as guided buying, can direct users to make compliant purchases through automated buying channels.

A focused tail spend management program will lead to spend consolidation and effective cost management consistently over a period of time. 

Let’s delve further into the benefits that accrue as a result of these initiatives:

• Finding cost efficiencies in tail spend and creating solutions to reduce it is easier than cutting costs for strategic spends such as payroll.
• Optimizing tail spend management can streamline the supply chain and increase supply chain diversity.
• A centralized tail spend management solution can eliminate or cut down on transaction costs and reduce duplicate purchases.
• A rationalized supplier network also eliminates the chances of being associated with high-risk suppliers.
• Tail spend management increases sourcing transparency and implements saving strategies while sourcing.
• Increasing contract coverage and compliance with a TMS (Track Management System) can reduce business risks, as well as prevent maverick spending and fraud.
• Automated spend management and procurement solutions can save time, capture maximum data and improve accessibility to enable spend analysis.
• With accurate tail spend data, procurement and finance teams can also strategise better budgets, set cost controls and streamline purchase approvals.

Managing Tail Spend

The same challenges that make tail spend management complex provide opportunities to optimize it. Every business has unique needs and requires customized tail spend management solutions. However, here are some general guidelines on how to manage tail spend.

• Clean and classify spend data and conduct spend and frequency analysis on it. Categorizing the spends based on sourcing can help businesses get better insights into the procurement process and supplier network.
• Organizations must clearly define tail spend and compute the scope after classification. This helps the organization in data management with further classification and implementation of savings strategies.
• Identify opportunities for cost savings at both transactional and spend levels. Find ways to either reduce cost or avoid it.
• Develop strategies based on priorities and implement solutions such as e-procurement, automated PR/PO matching, consortium buying and e-marketplace. These solutions streamline both the sourcing and procurement processes.
• Solutions such as spend control towers examine business spending holistically and include tail spend management to ease decision-making and approval processes.
• Identify process and policy improvements. Monitor improvement in tail spend performance using metrics such as cost avoidance, reduction, data visibility and transaction costs.

A prolonged disregard towards managing tail spend can prove expensive, particularly in a volatile business environment. This may even impact savings, as tail spend can continue to grow if left unchecked.

Organizations that are privy to this, and which implement this understanding strategically in their business activities, will stay one step ahead of their competitors.

This article was first published on Nearshore Americas